Opportunities and risks situation
Opportunities and risks situation unchanged
Opportunities and risk management
In principle, the DOUGLAS Group takes risks only when they are deemed controllable and the corresponding opportunities are likely to provide an appropriate increase in value.
Opportunities and risks are identified by experienced risk managers appointed for each Group company in Germany and abroad through clearly defined processes and with the assistance of a standard, centrally administered opportunities and risk management system. This system allows a monetary evaluation of opportunities and risks as well as the documentation of measures applied.
The system’s effectiveness and efficiency is periodically assessed by the Group’s internal auditing unit and the independent auditor. The findings therefrom are presented to the Executive Board and the Supervisory Board.
The Executive Board also receives an overview of identified opportunities and risks at regular intervals to assure that information is received in a timely manner. In the event of sudden and material risks being incurred, the Executive Board immediately receives all necessary information.
Environment and business opportunities and risks
The macroeconomic development in the all-important markets of the DOUGLAS Group is extremely hard to estimate; and it has a material impact on the net assets, financial position and result of operations of the Group. Thus, a downward trend in retail sales in Europe presents a risk. By positive contrast, a significantly growing consumption demand presents an opportunity for the Group. For purposes of responding to changes in the framework conditions in a timely manner, not only are budget reports regularly updated, but scenario analyses are also prepared.
The risks from internationalization are countered by the DOUGLAS Group by adjusting the respective product lines to the country-specific characteristics. Moreover, the national political, economic and legal framework conditions are carefully monitored and evaluated by experienced local managing directors.
For purposes of optimizing the store network to the current and anticipated future framework conditions, not only were numerous openings and acquisitions carried out, but stores closed as well. In the 2008/09 fiscal year a special program was conducted to streamline the store network. This incorporated the closure of those stores that did not indicate a sustainable improvement in earnings on the medium term. The store network streamlining was completed to a large extent in the reporting period.
Sales and purchasing opportunities and risks
In order to always assure an attractive and modern product-mix, the DOUGLAS Group maintains business relations with a number of selected suppliers and manufacturers. Through supplier agreements based on longer terms and ongoing market observations, potential procurement risks are minimized. The solid national and international negotiation position of the DOUGLAS Group with landlords, suppliers and manufacturers helps to realize key procurement advantages.
Rising rental and energy prices as well as growing competition necessitate intensive cost management. The opportunities and risk management system supports the search for reasonable solutions.
For an international retail group, changes in consumer habits present significant risks, especially in the changing demands of the customers. The continuous development of the Customer Relationship Management not only contributes to the further development of the exclusive and private brands concept, but also promotes customer loyalty. Furthermore, the DOUGLAS Group aims to profit from the trend towards online retailing and has accordingly developed a multi-channel strategy.
All these activities are subject to regular reviews in order to spot trends early and respond appropriately.
Financial opportunities and risks
The DOUGLAS Group displays a moderate financial risk profile. Due to its concentration in the euro zone, currency risks are insignificant. The same holds true for liquidity and interest risks due to the Group’s solid capital and financial structure. Default risks are countered by the DOUGLAS Group by distributing the business volume into both money deposits and financial instruments among various contractual partners. Because of the global economic uncertainties, large money investments will be avoided where possible or invested with only first-rated banks in Germany.
A detailed description of the financial risks and their managing tactics can be found in the Notes accompanying the consolidated financial statements on pages 162 to 165.
Receivables default risk
The receivables default risk is only of minimum relevance for the DOUGLAS Group. The continuous evaluation and monitoring of receivables by means of an active receivables management through internal and external service providers minimized the risks from receivables default throughout the Group. In addition, the timely offsetting of receivables against payables with suppliers helps to reduce the default risk. Risks from cash and non-cash payments are limited by group-wide guidelines in effect and systematic examination procedures. Losses from forgery of banknotes are immaterial due to the controls in place.
Information technology opportunities and risks
The dependency on the availability and quality of data in increasingly more complex IT systems and the interfacing of individual companies present a significant risk potential. In order to counter this, a group-wide IT safeguarding concept has been implemented. Comprehensive precautionary measures, such as firewall systems and daily virus protection safeguard the availability, reliability and efficiency of the systems and data.
The increasing requirements for data protection – among others, the amendment to the Federal Privacy Act of 2009 – are met by the DOUGLAS Group conducting extensive data protection training for all relevant employees and by access restrictions. Moreover, a modern processing center and constant controls and monitoring of the systems as part of emergency plans and actions assure the quality and safety of the processes concerning data processing.
The extensive standardization of the IT infrastructure within the Group, the introduction of standard cash register systems and the further development of merchandise management allow for a much more effective processing.
Furthermore, the efficient application of the information technologies provides competitive advantages. They can extend the range of the services in place to alternative distribution channels, such as via the Internet.
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Human resources opportunities and risks
Key components of the lifestyle philosophy include expert advice and outstanding service. Employees who are inadequately qualified and have insufficient service orientation pose significant risks. Another risk comes from experienced employees leaving the company.
In addition to establishing a positive working atmosphere, the focus of human resources’ efforts is on offering company training and continuing education and in promoting young management professionals through international management development programs. Thus, top executives have the opportunity of receiving specific training and to simultaneously exchanging their experiences across the divisions.
Opportunities arise in particular from the high attractiveness of the DOUGLAS Group as an employer and high proportion of apprentices. Consequently, this should make qualified young management professionals loyal to the company in the future.
Legal opportunities and risks
Significant legal risks could arise from possible violations against statutory requirements or internal corporate guidelines.
Besides consistent compliance with the current legal situations in all relevant countries, particular attention is also given to imminent legislative changes. The early inclusion of internal and external local legal advisors helps to take the necessary steps.
The Compliance department also provides support in keeping the DOUGLAS Group and its employees in compliance with the rules in effect. This not only includes the statutory requirements, but also those which the DOUGLAS Group has voluntarily enacted. The Compliance department coordinates all compliance issues throughout the Group and therefore further expands the corporate structure.
As a rule, all major contracts are subject to prior review by a legal advisor. Any potential residual claims or liability risks are covered by comprehensive insurance policies, the extent to which is centrally adjusted and continually improved. Warranty claims for product defects or receivables from the product liability law are contractually secured by agreements with suppliers containing recourse clauses.
Legal disputes that could materially impact the financial position of the DOUGLAS Group are neither pending nor is the company threatened by any such disputes at this time.
Internal control system and risk management system
The accounting-related internal control and risk management system of the DOUGLAS Group aims to prevent and minimize the risk of misstatements in accounting and in external reporting or to recognize and minimize it in a timely manner.
The DOUGLAS Group has a uniform accounting manual which is regularly updated to meet the legal framework conditions. This Group accounting manual prescribes accounting in conformity with IFRS for all Group companies in Germany and abroad to ensure the application of uniform recognition, valuation and presentation methods in the IFRS consolidated financial statements. For purposes of assuring uniform accounting within the DOUGLAS Group, the corporate accounting department of DOUGLAS HOLDING AG prepared the accounting guidelines.
The manual is made available via the Group’s intranet to all employees involved in the accounting process. To assure a smooth process in the preparation of individual financial statements by the subsidiaries, complex accounting issues or accounting principles are discussed and explained well before the balance sheet date.
The individual financial statements of the Group companies are prepared with the assistance of the centralized ERP software SAP (SAP-FI). The necessary accounting steps are subject to diverse, automated and manual controls and to reasonableness tests. Key controls are, for example, the reconciliation of the general and subsidiary ledgers or the central classification and maintenance of the balance sheet structure. Other regular controls such as automated accounting controls and processes, the daily comparison of store revenues with the cash receipts on bank accounts or the examination of posting disruptions help to ensure the high quality of the individual financial statements. Once the individual financial statements have been given final approval, subsequent changes by bookkeeping are no longer possible.
Consolidation of the individual financial statements of the Group companies is performed for all companies via the Hyperion Financial Management software system (HFM). A standardized chart of accounts is established for this purpose, which is used by all companies and is defined and maintained by corporate accounting. The individual financial statements prepared in SAP are automatically transferred to HFM. Other than the financial statements, additional relevant year-end closing information regarding tax deferral, consolidation and preparation of the Notes are transferred via HFM and other supplemental systems.
The data transferred is then automatically examined for reasonableness. In the event that warning or error messages should arise, the respective company must resolve the issues before the data is submitted to corporate accounting. Manual controls with respect to quality and completeness are performed by corporate accounting.
Another example of a controlling instrument is the financial statement presentation of the individual subsidiaries. The respective managing directors of all material subsidiaries present their financial statements according to centralized, standard formats to the Executive Board, corporate accounting and the Group independent auditors. Furthermore, the managing directors can be questioned about critical issues by those bodies. In conclusion, the respective managing directors confirm that all requirements have been complied with and confirm the completeness of all data relevant to the consolidated financial statements by submitting an internal letter of representation.
The necessary accounting steps as part of the final consolidation conducted by corporate accounting are subject to various automated and manual controls and reasonableness tests. Key controls in this respect include automated reasonableness tests and manual comparisons of actual-to-budget and current-to-prior year. The preparation of the cash flow statement and changes in equity is also system-supported just like the segment reporting.
Valuations in connection with the acquisition of shares (e.g. purchase price allocation) are generally performed for material acquisitions on the basis of external expert valuations. The valuation of provisions, namely personnel provisions, is conducted by external actuaries on a regular basis for the year-end closing.
For purposes of the material processes for the individual and consolidated financial statement preparation, organization handbooks, instructions and guidelines are available in German and in English. These are regularly adjusted to conform to current conditions and are made available to all those employees involved.
As a rule, the principle of dual control is applied, which means that all material transactions are controlled by at least a second person. The principle of separation of duties is also applied to all transactions, that is, the rights and access of employees are restricted to the extent that the principle of dual control will not be defeated. In certain Group companies, such a separation of duties control is not possible due to the low staff number. In this respect, compensating control mechanisms are in place that would prevent or detect possible violations.
The compliance and execution of these controls are regularly reviewed both operationally and technically by the Group Internal Audit & Risk Management division. Accordingly, the Group Internal Audit & Risk Management division prepares, together with the Executive Board and the managing directors of the Group companies, an annual risk-oriented audit plan, which is supplemented during the current year by special audits. The findings therefrom are presented to the CFO and the Chairman of the Executive Board as well as the managing directors of the companies audited and actions are resolved to minimize the risks discovered.
In addition to the contextual and technical risks, risks could arise from failing to meet deadlines. To prevent such risks, corporate accounting monitors the processes in place for the individual and consolidated financial statements in conformity with IFRS both in terms of content and time. The financial statement preparation process is also presented in detail in a scheduling plan that contains the single steps by due date and responsibility.
To assure the reliability, confidentiality and availability of the data, clear access rules are defined in the accounting-related IT systems. Each Group company in Germany and abroad is subject to these rules, which are summarized in an IT safeguarding manual and its compliance is monitored across the Group by the corporate internal audit division. This ensures that the user of the systems only has access to the information and systems required to fulfill the user’s duties.
As part of the year-end audit, the independent auditor examines selected internal controls and assesses their effectiveness. In addition, the financial statements of all material companies are audited by local independent auditors. The compliance of accounting standards and the accuracy and completeness of all other decentralized documents that are of relevance to the consolidated financial statements are examined.
Management’s overall assessment of the DOUGLAS Group’s risk exposure
The basis of assessing the risk situation is the DOUGLAS Group’s regular discussions about the risks and opportunities management system with the internal management of the subsidiaries at the Board Meetings.
Included among the main types of potential risks for the DOUGLAS Group are those caused by factors that cannot be influenced or only indirectly influenced such as the state of the national and international economies and the associated change in purchasing power. Another type of risk is generally of an operational nature, which can be combated directly by taking all appropriate steps in the companies.
The existing risks both as individual risks and in connection with other risks are limited and from today’s standpoint are immaterial to the going concern of the DOUGLAS Group. All prerequisites of an organizational nature have been established in order to be informed about any potential risk situations at an early stage.
Credit rating
The DOUGLAS Group’s financial standing is evaluated very positively by the banks. The revolving credit facility agreed in September 2007 with a banking syndicate has a term of five years and allows drawing a credit line of up to 500 million EUR.
This financial facility was used by less than 20 percent as of the balance sheet date and offers adequate financial flexibility over the coming years. This agreement was stipulated under attractive conditions and necessitated no external credit rating. More detailed information about the revolving credit facility can be found in the Notes accompanying the consolidated financial statements on page 165.
