Corporate News

Chearles Vögele Group: Investments in Eastern Eurpope proceed

In a hard-fought market, clothing retailer Charles Vögele Group consolidated or expanded its share of the most important markets in the first half of 2008. Net sales were up by 1% despite a difficult operating environment, mainly thanks to contributions from the Sales Organizations in Germany, Belgium and Eastern Europe. Increased operating expenses and the set-up costs required for expansion led to a temporary fall in earnings.

Economic conditions and weather dampen results
Charles Vögele Group increased net sales in the first half of this year by 1% – or 2% after adjusting for currency movements – to CHF 676 (previous year CHF 672 million). This sales growth was achieved despite poor weather conditions that hurt the whole clothing industry badly in March, April and the first half of June. In our most important markets – Germany, Switzerland and Austria – the overall clothing retail market shrank by between 2% and 4%. In spite of the difficult environment, Charles Vögele Group consolidated or expanded its market share in these key markets, by performing better than the total market. Like-for-like sales across the whole group went down by 1% after adjusting for currency movements.

Gross profit for the period under review fell from CHF 428 million a year ago to CHF 422 million. This resulted in a gross profit margin of 62.4% (previous year 63.6%). The 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. The cost of premises, personnel and logistics went up in all markets, partly because of expansion, meaning that total operating expenses in the first half of 2008 were 3.6% higher than in the same period last year. If expansion markets are excluded, operating expenses rose by 1.7% as a result of the factors mentioned above. Overall operating earnings before depreciation (EBITDA) came in at CHF 49 million (previous year CHF 67 million), giving an EBITDA margin of 7% (previous year 10%). After deducting depreciation, which rose by more than 5%, operating earnings (EBIT) were CHF 18 million (previous year CHF 38 million). Net profit for the first half of 2008 was CHF 6 million (previous year 23 million).

Performances vary between Sales Organizations
Switzerland – The Switzerland Sales Organization generated net sales of CHF 216 million in the first six months of 2008 (previous year CHF 222 million) representing a reduction of 2.5%. This was in line with the overall market trend, so the Swiss Sales Organization was able to maintain its market share. The store portfolio in Switzerland was increased by two stores during the period under review and currently stands at 165 stores. Operating earnings before depreciation and amortization (EBITDA) reached CHF 21 million (previous year CHF 32 million).

Germany – Despite the negative influence of the long winter and the significant fall in the size of the overall clothing market (-3%), the Germany Sales Organization increased its net sales by 1% to CHF 221 million (previous year CHF 218 million). This slight growth was achieved with fewer stores than last year – 321 compared with 323 at end-June 2007 – and led to gains in market share. Owing to the set-up costs incurred for six new stores that were opened during the first half-year and for those scheduled for opening in the second half, and because of higher logistics costs and greater advertising activities, the interim operational loss before depreciation and amortization (EBITDA) went up from CHF 2 million a year ago to CHF 5 million. While the number of stores was temporarily lower at the half-year cut-off date, by the end of the year there will be a net increase in the number for the first time since 2003.

Austria – The Austria Sales Organization achieved net sales of CHF 122 million, a fall of 3% on the previous year's CHF 126 million. This meant that the Austria Sales Organization also managed to perform better than the national clothing market as a whole, which shrank by 4%. The company thus managed to further strengthen its market position in Austria too. The Austrian store portfolio was increased by three stores during the period under review and currently stands at 152 stores. It should be noted that two of these new outlets were opened in shopping centres near Vienna and Graz, underlining Charles Vögele's desire to strengthen its presence in the conurbations around big cities. Operating earnings before depreciation and amortization (EBITDA) fell from CHF 4 million a year ago to CHF 2 million.

Belgium/Netherlands – While sales in Belgium went up significantly despite tougher competition and the closure of one store, the Netherlands posted a slight fall in sales. Belgium managed to increase its market share slightly and the Netherlands maintained its share at the same level. Taken together the two Sales Organizations, with their total of 159 stores, generated net sales of CHF 89 million, just under the CHF 90 million achieved in the previous year. Operational loss for the first half at EBITDA level was the same as a year ago at CHF 4 million.

Eastern Europe – The Eastern European Sales Organizations, which cover the expansion markets of Slovenia, Hungary and Poland, as well as the pilot market of Czech Republic, increased sales to CHF 29 million in the first half of 2008 (previous year CHF 15 million). These Sales Organizations are already generating 4% of group sales (previous year 2%). This increase is due partly to the six new stores opened in Hungary, and partly to the increase in sales. There was another significant rise in sales in Hungary, but owing to the difficult economic conditions in the country the budgeted figures were not achieved. By contrast, sales growth in Poland, the Czech Republic and Slovenia was on target. Operating loss at the EBITDA level came to CHF 2 million at the mid-point of 2008 (previous year CHF 0.3 million). 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. As at June 30, 2008, Charles Vögele Group had a total of 37 branches in these markets (same time last year: 20 branches).

Inventories reduced again
Inventories were reduced significantly over the year from CHF 293 million in June 2007 to CHF 280 million on June 30, 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 December 31, 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 December 31, 2007 to CHF 144 million by the middle of 2008. At end-June 2007 net debt stood at CHF 179 million.

Chairman Bernd H.J. Bothe: "We are investing in the future"
"Expansion in our existing markets and into Eastern Europe continues to represent a crucial investment in our company's future. We will press ahead with these efforts as planned. Despite the difficult operating conditions and tough competition, we have been able to consolidate and expand our market position. This gives us a solid basis for Charles Vögele Group's further growth."

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.

Charles Vögele Holding AG
Charles Vögele Holding AG is a leading independent European clothing retailer with 834 sales outlets in Switzerland, Germany, Austria, Belgium, the Netherlands, Slovenia, Hungary, Poland and the Czech Republic. In the first half of 2008 it employed a total of 7,715 people. Charles Vögele Holding AG’s shares are quoted on the SWX Swiss Exchange (ticker: VCH; Bloomberg VCH SW; Reuters VCHZ.S).

Pfäffikon, August 26, 2008

Group Key Operating Figures

(1) Calculated on the basis of average m2 sales area per month
(2) Excluding apprentices