Charles Vögele Group`s half-year report

For Charles Vögele Group the main developments during the 2008 financial year were as follows:

- The overall clothing markets in Switzerland, Germany and Austria – Charles Vögele Group's most important markets – shrank by between 2% and 4% owing to declining consumer sentiment.
- Net sales slightly increased by 1% – or 2% after adjusting for currency movements – to CHF 676 million.
- Because of our aggressive pricing policy and intensified advertising activities, as well as the expansion driven increase in operating expenses, operating earnings (EBITDA) fell from CHF 67 million a year ago to CHF 49 million.
- Inventories were reduced to CHF 280 million (previous year CHF 293 million).
- Net debt was reduced to CHF 144 million (previous year CHF 179 million).
- Net profit dropped to CHF 6 million (previous year CHF 23 million).
- Sales increases in our new markets in Eastern Europe did not meet expectations.
- There was a net increase of 9 stores, bringing the total to 834.
- The client retention program was successfully introduced and expanded.

Operating conditions
The current turmoil on the financial markets and the associated slowdown in economic growth had a negative effect on consumer sentiment in the markets where Charles Vögele Group operates. This trend was reinforced by the rising price of food and fuel.

In addition to the operating environment described above, long periods of cold weather in March, April and the first half of June also had a negative effect on sales and earnings power within the clothing industry. The overall size of the clothing markets in Switzerland, Germany and Austria, which are very important to Charles Vögele Group, fell sharply by between 2% and 4%.

Sales increase higher than market develpoment despite difficult environment
During the period under review, Charles Vögele Group slightly increased its net sales from the previous year’s CHF 672 million to CHF 676 million, a rise of 1%, or 2% after adjusting for currency movements. After adjusting for exchange rates and the increase in floorspace, net sales fell by 1%. Performances varied between individual Sales Organizations, but in general – according to data gathered by the GfK market research institution – they performed better than the market as a whole despite the poor weather and difficult economic conditions. While Switzerland, the Netherlands and Austria suffered most from the poor weather, our Sales Organizations in Germany and Belgium, as well as all the markets covered by the Eastern Europe Sales Organization, achieved higher sales. In Eastern Europe in particular, further improvements in the ranges boosted sales figures. As a result, Charles Vögele Group was able to strengthen its market share in all markets and extend it in some.

Aggressive pricing policy benefits inventory reduction but burdens gross profit margin
Gross profit fell slightly during the period under review from CHF 428 million in the previous year to CHF 422 million, giving a lower gross profit margin of 62.4% (previous year 63.6%). This lower gross profit can be explained by the shift in sales from full-margin months to months in which sale prices were offered, as well as by the discounting campaigns used to clear targeted inventories. Operating expenditure increased by 3.6%, from CHF 360 million a year ago to CHF 373 million in the first half-year of 2008. This rise was a result of higher property, personnel and logistics costs in all markets, partly driven by expansion. If expansion markets are excluded, operating expenses rose by 1.7% as a result of the factors mentioned above. Consequently, operating earnings before depreciation and amortization (EBITDA) came in at CHF 49 million (previous year CHF 67 million), giving an EBITDA margin of 7%. After deducting depreciation, which rose by more than 5%, operating earnings (EBIT) were CHF 18 million (previous year CHF 38 million). Financing costs fell slightly during the year under review because of the renewal of the syndicated loan agreement in June 2007 and the consequent improvement in conditions. As a result of all this, net profit for the first half of 2008 dropped to CHF 6 million (previous year 23 million).

Expansion continued
Seventeen more new stores opened in the first six months of 2008 in line with the defined expansion strategy. The pace of store openings is again being increased significantly in the second half of the year. Expansion activities will be concentrated mainly on the German, Hungarian, Slovenian and Polish markets, with more than 30 new stores opening in total. Meanwhile, about 10 store closures are planned around the Group.

Marketing and advertising activities expanded
Charles Vögele Group significantly strengthened its marketing and advertising activities. For example, the "Switzerland meets Europe" customer competition launched in all markets expanded the potential use of the customer card while generating around 300 000 new customer addresses. The customer card, successfully introduced in 2007, led to good client retention and an increase in sales per purchase. We continue to push this positive trend forward. In addition, the use of existing communications tools, like fashion brochures and posters has been expanded in all markets.

To highlight our fashion expertise more clearly, the CasaBlanca label was no longer displayed in the shops by product group but in stylish combinations. Results from the pilot stores have been very encouraging. We expect the roll-out across the whole Sales Organization, which has already begun, to be completed by the middle of 2009.

Varying performance by Sales Organizations
Switzerland - The Switzerland Sales Organization generated net sales of CHF 216 million during the period under review, a decline of about 2.5% from the CHF 222 million posted a year ago. This performance matched the general market trend, meaning that the Switzerland Sales Organization was able to maintain its market share. Operating profit before depreciation and amortization (EBITDA) reached CHF 21 million (previous year CHF 32 million). As part of our expansion plans, we opened two new stores in the first half-year, leaving a total portfolio of 165 stores. The city centre store in Lucerne was completely renovated over the summer and is due to open its doors on 10 September. At 5 000 m2, this is set to be the largest fashion store in Central Switzerland and the Group's largest branch.

Germany – Despite a tough competitive environment and poor weather, the Germany Sales Organization increased sales to CHF 221 million, which is a 1% improvement on the CHF 218 million of the previous year; the increase was twice as large in local currency terms. This improvement is all the more welcome given that it was achieved with fewer stores and in a clothing market that shrank by 3% overall. At the end of June 2008 there were 321 stores in Germany compared with 323 a year before. With the German clothing market as a whole performing badly, the Group was able to increase its market share. Because of set-up costs incurred during the first half-year for the new store openings planned for the second half, and because of higher logistics costs and greater advertising activities, the operational loss before depreciation and amortization (EBITDA) went up from CHF 2 million a year ago to CHF 5 million. Expansion activities led to the opening of six new stores, while six closed as part of the streamlining of the portfolio. Marketing activities were further expanded in Germany during the period under review, with posters used in new regions and a national competition launched to coincide with the European football championships.

Austria – Although Austria continued to post positive economic growth during the first half of 2008 and although the unemployment figures continued to fall, private consumption persisted at a low level. Under the pressure of the worsening economic climate, net sales by the Austria Sales Organization fell to CHF 122 million (previous year CHF 126 million). The Austrian Sales Organization also managed to perform better than the Austrian clothing market as a whole, which shrank by 4%. The company thus managed to strengthen its market position in Austria. Operating earnings before depreciation and amortization (EBITDA) fell from CHF 4 million a year ago to CHF 2 million. Three new stores were opened in Austria in the first half of 2008, leaving a total portfolio of 152 stores. Two of these new outlets were opened in the suburban shopping centres of Vienna North and Graz West, underlining Charles Vögele Group's desire to strengthen its presence in the conurbations around Austria's big cities.

Belgium/The Netherlands – In Belgium, price pressure continued to rise in the clothing market. The trend towards a market shake-out is continuing as a result, and competitive structures are changing all the time. After further strengthening its marketing activities this year, the Belgium Sales Organization increased its sales by more than 5% on the year-back figure. Belgium thus significantly outperformed the market as a whole in terms of growth. One store was closed during the first six months of the year, leaving Charles Vögele with 46 outlets in Belgium.

In the Netherlands, consumer sentiment declined despite continuing economic growth, falling to its lowest level since 2005. This led to more intense competition than a year ago. Charles Vögele Group saw sales fall by 3%, but it was able to maintain its market position. The store portfolio in the Netherlands remained unchanged in the first half of 2008 with 113 outlets.

Taken together, the two Sales Organization's maintained their sales at just about the same level as a year ago, posting CHF 89 million (previous year CHF 90 million). Operational loss at EBITDA level was the same as a year ago at CHF 4 million.

Eastern Europe – Although the positive performance and the sales growth posted in all Eastern European markets during the first half of the year confirms the wisdom of our chosen expansion strategy, not all markets performed to the desired standard. Poland and Slovenia were on target, but Hungary, despite posting positive sales growth, did not meet our expectations in terms of either sales or earnings.
During the first half-year, Charles Vögele Group completed the organizational and staffing infrastructure for the Eastern European Sales Organization. Approximately 20 more store openings are planned in this region for the second half of the year. In some markets the retail trade still has to cope with lengthy approval procedures by the local authorities, which can make it difficult to open new stores on schedule.

Expansion Market Slovenia – The Slovenian market also felt the effects of the worldwide slowdown in economic growth which, together with rising inflation in the first half year, led to a slightly negative economic performance. This had a direct impact on consumer sentiment and on retail sales in general. Nevertheless, Charles Vögele Group's four stores posted good sales and earnings performances. The authorities did not give approvals at new shopping centres in the first half-year, so no new stores were opened. The plan now is to open three new stores in the second half of 2008.

Expansion Market Hungary – Hungary's economy is still in the stagnation phase that began last year in reaction to the government's rigorous savings drive. Employment fell again as a result, though forecasters are predicting that the economic climate will brighten again at the start of 2009. Sales growth was good again, though it failed to meet our expectations owing to the difficult operating environment described above. Six new locations were opened during the period under review, leaving a network of 23 stores at the end of June. Another eight new store openings are planned for the second half of the year.

Expansion Market Poland – The positive economic trend continued in the first half of 2008, though forecasts suggest that growth is now likely to slow. The health of the economy led to a further fall in unemployment, serving to stimulate consumption even more. Charles Vögele Group's five existing stores benefited from this, with like-for-like sales going up significantly. As already announced, preparations for expanding the store network were made in the first half-year, and at least three new stores should open in the second six months.

Pilot Market Czech Republic – The Czech economy continued to grow this year, though here too there was a slowdown owing to the general cooling trend in Europe. However, consumption was boosted by an increase in real wages at the beginning of the year and continues to rise. Charles Vögele Group's five existing stores increased their sales significantly.

Pilot Market Romania – Charles Vögele Group carried out a detailed analysis of potential store locations in Romania, which was designated as a pilot market at the beginning of the year. The start of the market test is however being postponed for the time being because an overheated real estate market has pushed rents up to exorbitant levels.

Altogether, the Eastern European Sales Organizations and their total of 37 stores generated net sales of CHF 29 million in the first half of 2008 (previous year CHF 15 million), meaning that they are already contributing 4% of Group sales (previous year 2%). These Sales Organizations posted an operating loss at the EBITDA level of CHF 2 million for the first half of 2008 (previous year CHF 0.3 million operating loss). This loss was caused mainly by the cost of building up organizational and staffing infrastructure for the Eastern Europe Sales Organization, as well as by costs incurred in the run-up to new store openings, and by lower-than-expected sales growth in Hungary.

Inventories reduced again
Inventories were reduced significantly over the year from CHF 293 million in June 2007 to CHF 280 million on 30 June 2008. The latest figure includes new items from the coming 2008 autumn/winter season worth CHF 52 million (previous year CHF 51 million). Current inventories as at end-June 2008 have thus also fallen compared to the figure on 31 December 2007 (CHF 289 million).

Increased cash flow
During the period under review Charles Vögele Group reduced net investments to CHF 36 million (previous year CHF 39 million). Operating cash flow came to CHF 45 million (previous year CHF 24 million). After deducting investments, free cash flow came to a positive CHF 9 million (previous year minus CHF 15 million).

Net debt reduced
Net debt fell from CHF 156 million on 31 December 2007 to CHF 144 million by the middle of 2008. At end-June 2007 net debt stood at CHF 179 million.

Reduction in par value implemented
The reduction in the par value of Charles Vögele Holding AG shares from CHF 6 to CHF 4 per share, as proposed by the Board of Directors, was approved by the Annual General Meeting of Shareholders on 16 April 2008 and implemented on 4 July 2008 with a repayment of CHF 2 per bearer share. The share capital now comes to CHF 35 200 000 and is made up of 8 800 000 shares with a par value of CHF 4 each.

Reins handed over within Group Management
Dr. Dirk Seifert, Member of Group Management, took over responsibility for Sales, Marketing and Store Construction from Daniel Reinhard at the end of June 2008.

RFID test launched in Slovenia
Charles Vögele Group launched the first test of RFID (radio frequency identification) technology in the first half of 2008. This is being used – in Slovenia first of all – to investigate potential improvements in the whole process chain from production to sales. The price labels on each item contain a chip that can be read by a scanner. This has sped up and simplified the recording of individual items throughout the whole logistics process. In addition, we can identify the location of each individual item in the store at any time, allowing us to manage our selling capacity. Stocktaking in the stores, which previously took up a lot of time, can be done quickly and without getting in the way of selling. The result is overall efficiency gains in our processes and in the management of our floorspace.

Operational outlook for the second half of 2008
The highly volatile operating environment makes it extremely difficult to make any forecasts for the second half of 2008, but given the current turmoil on the financial markets and the associated slowdown in economic growth Charles Vögele Group believes that consumer sentiment in its markets will deteriorate. For the year as a whole, the company expects sales to trend in line with or better than the market as a whole. The company expects its margin at the level of operating earnings before depreciation (EBITDA) to be between 8% and 11% for the 2008 financial year. In the medium term, the company is sticking to the margin range forecast it originally announced, i.e. 11% –13%.

Charles Vögele Group's activities will concentrate on increasing productivity in its core markets and on accelerating expansion in all its markets, especially Germany. At the same time, market penetration in the expansion markets of Slovenia, Hungary and Poland will be stepped up in order to exploit economies of scale and thus improve the earnings situation. The branch portfolio will grow substantially in the second half of the year, with more than 30 new openings.

Thank you to our employees
In the name of the Board of Directors and Group Management we would like to thank all employees of Charles Vögele Group for their high degree of motivation and for their commitment to the success of Charles Vögele Group in this challenging competitive environment.


Bernd H. J. Bothe                                                  Daniel Reinhard
Chairman of the Board of Directors                  Chief Executive Officer