Trendspotting and Pricing
The TOM TAILOR GROUP rapidly identifies and implements current trends and distributes them promptly to the points of sale. If the Group is unsuccessful in rapidly identifying current trends and catering to the tastes of its target groups in the target markets it supplies, in pricing its products appropriately, or in successfully developing and launching new products, this could have a negative effect on the TOM TAILOR GROUP’s competitive position, growth opportunities and profitability. Market scouts are deployed in product development for the purpose of understanding trends and translating them into products. Since the TOM TAILOR GROUP does not itself set trends, the risk of missing the mark with a trend is lower. Feedback from end customers at the point of sale is also analysed and incorporated into future product development. We classify this risk as medium.
Long-term Positioning and Brand Image
Among other things, the Group’s economic success is based on its brand image and on the long-term strong positioning of the TOM TAILOR and BONITA umbrella brands. Deteriora- tion in the image of the brands and the market positioning of the TOM TAILOR GROUP could negatively impact the growth opportunities of the Group in the long term. Reputation risks, including even minor negative headlines, can quickly spread far, particularly through social media, and damage our brand image. In order to react as quickly as possible, social media screening and other steps are taken. Moreover, the TOM TAILOR GROUP focuses its marketing on channels including points of sale, advertising, print and online media, and social media. We classify this risk as medium.
Investment and Cost Risks
Investments in new product lines or new markets offer the TOM TAILOR GROUP many growth opportunities. However, as with all investments, there are also risks that the expected success will not be achieved to the extent expected, or at all. In order to minimise these risks, business plans are prepared and closely coordinated with project management, control- ling and the operating departments, then regularly reviewed and adjusted. We therefore classify this risk as medium. The wholesale and TOM TAILOR retail segments must be efficiently coordinated using a detailed expansion plan. If this is unsuccessful, the expansion could be delayed, or the whole- sale business could suffer losses. We classify this risk as medium. Avoiding this risk requires the expansion plans to be reworked regularly and aligned with both segments.
Investment and cost risks in the wholesale segment for set- ting up shop-in-shop spaces, for example, are classified as low. However, if franchise partners were to withdraw and these franchises were to be taken over by the TOM TAILOR GROUP, profitability could be affected negatively. This is why profitability and site analyses are conducted in advance. This
Expansion in the retail segments is increasing investment and cost risks due to the investments being made in expanding stores, long-term rental agreements and the inevitable asso- ciated rise in fixed costs. At the same time, delayed store openings or other changes in the expansion plan could result in lost revenue. Investment decisions are carefully analysed in advance with a view to risk and profitability and coordinated with various departments in an approval process to minimise these risks. This risk is classified as medium.
FinanCial risKs
Liquidity Risks
Managing liquidity risks is one of the core tasks performed by the Group’s Finance department. Liquidity risk is the risk that payment obligations cannot be met or cannot be met on time because insufficient cash funds are available. The TOM TAILOR GROUP must also meet financial covenants as a result of its loan agreements and the borrower’s note loans it has issued. In order to ensure both the Company’s ability to pay and its financial flexibility, a revolving liquidity plan and daily liquid- ity reports are generated to document cash inflows and out- flows in both the short and medium term. In the past, the management also exploited opportunities that arose to lock in existing financing for the long term and to negotiate the underlying conditions to the Group’s advantage. If existing credit lines and loans cannot be extended or new ones can- not be entered into, the losses from this risk would be severe. As a result of the successful implementation of several meas- ures, the probability of occurrence is regarded as very low. We classify this risk as medium.
Currency Risks
Currency risks in the TOM TAILOR GROUP are the result of the international focus of the Group’s business activities in con- nection with the procurement and distribution of merchan- dise in different currencies. This means that risks may arise as a result of exchange rate fluctuations. Currency risk arising from the US dollar and the ruble is classified as medium. Cur- rency risks arising from other currencies is currently regarded as low and is therefore not explained in more detail.
The majority of items procured by the TOM TAILOR GROUP are invoiced in US dollars. The US dollar/euro exchange rate is subject to considerable fluctuations at times. Unfavourable developments in the exchange rate between foreign curren- cies and the euro, particularly a substantial (and potentially rapid) increase in the value of the US dollar compared with the euro could have a significantly negative impact on the net as- sets, financial position and results of operations of the TOM TAILOR GROUP. The TOM TAILOR GROUP entered into cur- rency forwards in financial year 2014 and for 2015 in order to cover the risk posed by exchange rate fluctuations. A large part of the risk arising from exchange rate fluctuations can be minimised using these currency forwards. We classify this risk as medium.
The ruble’s devaluation against the euro reduces the purchas- ing power of TOM TAILOR customers in Russia. This applies to our wholesale as well as our retail activities. The market is being carefully monitored, and there is close cooperation with customers. We classify this risk as medium.
Credit Risks
Currently, credit risks exist only with respect to key accounts in the wholesale segment, due to the granting of payment terms and with regard to the associated counterparty credit risk. In order to reduce this credit risk in the operating busi- ness, outstanding amounts are monitored centrally on an on- going basis. The TOM TAILOR GROUP only does business with third parties with good credit ratings. Credit checks are run on all customers wanting to do business with the Group on a credit basis. In addition, the risk is mitigated by taking out credit insurance policies and obtaining collateral. We classify this risk as medium.
Interest Rate Risks
The Group is mainly subject to interest rate risks in the euro area. Interest rate risk arises as a result of fluctuations in in- terest rates due to market-related factors. On the one hand, these affect the TOM TAILOR GROUP’s interest expenses and, on the other hand, they influence the fair value of financial instruments. Substantial interest rate changes may there- fore have an impact on the Group’s profitability, liquidity and financial position. A large amount of the loans taken out by the TOM TAILOR GROUP, particularly the syndicated loan facilities, are pegged to reference interest rates and there- fore incur variable interest, and have short fixed interest rate periods. This means that the loans are particularly vulnerable to interest rate risk and represent a cash flow risk. The inter- est rate risk for some of the existing bank loans (amounting to around EUR 50 million) has been hedged until the end of 2016 using an interest rate swap. The probability of interest rates rising is assessed as very low due to the current low interest rate policy in the euro area and the extent of losses is considered to be moderate. We classify this risk as low.