Outlook

Economy and consumer spending in 2007 and 2008

Germany – robust development despite VAT increase

The German Council of Economic Experts and the OECD are forecasting continued dynamic economic growth in 2007, albeit slightly more reserved in comparison to 2006. Although the 3 percent increase in sales tax to 19 percent on January 1, 2007, and the reduction of other tax benefits will somewhat dampen prospects, Germany’s economy is starting the new year with healthy order books and positive business forecasts. On the whole, the German Council of Economic Experts predicts the gross domestic product in Germany will rise by 1.8 percent; the OECD is forecasting growth of 1.7 percent. The experts predict that German exports will again experience a noticeable increase in 2007, even if the global economy weakens somewhat on the whole.

The improvement of the German labor market in 2006 is expected to continue in 2007. Although the reduction in unemployment figures will start to slow down, the number of employees for whom social security contributions are mandatory will continue to increase. According to the Council of Economic Experts, even though the number of registered unemployed will fall to an average of 4.3 million, it will remain high in the foreseeable future. The unemployment rate is expected to drop during the year to 10.2 percent on average and to fall below the 10 percent mark in the second half of the year.

Inflation should average around 2.3 percent in 2007.

Private consumption will initially experience a decrease because many German consumers will likely have purchased certain consumer goods ahead of time in 2006 in advance of the VAT increase on January 1, 2007. Even graver than this advanced buying, however, is the weakening of spending power caused by higher prices. It is therefore expected that private spending will only increase again in the second half of 2007 when employment figures rise; with an increase of only 0.3 percent, it will not notably support economic growth in 2007.

Next to the extended store opening hours, the main topics in German retailing in 2007 also include the impact of the VAT increase on consumer behavior. In addition, growth in retail revenues will be dampened by the continued high unemployment rates, stagnating real income, and the reduction of further tax benefits. In view of this generally uncertain economic climate in Germany, no retail association, neither BAG nor HDE, was prepared at the time this report went to press to make revenue forecasts for the German retail industry in 2007 or 2008.

According to the OECD’s forecast, the German economy will pick up again in 2008. The experts believe that the GDP will increase by 2.4 percent in real terms in 2008. They presume that the global economy will continue to grow dynamically, and that this will have a positive impact on German exports and investments. The number of unemployed will drop even further, and private consumption will increase by a substantial 1.8 percent. Inflation in 2008 is forecast at around 1.0 percent. The experts see an appreciation of the Euro as the main risk for the German economy in the years ahead.

Europe on track for further growth

The economy in the 16 countries of the European economic and monetary union (Eurozone) will remain robust in 2007; it will only start to weaken somewhat at the end of 2007. In total, the German Council of Economic Experts expects gross domestic product to increase by around 2.4 percent in real terms, while the OECD is forecasting growth of 2.3 percent. The expected slowdown of the rise of the GDP compared to calendar year 2006 can largely be ascribed to the VAT increase in Germany, which discourages both private consumption and exports from other European countries to Germany. This development will be accompanied in the Eurozone by a substantial upswing in employment and a strong increase in private consumer spending.

The OECD is forecasting real growth in GDP of 2.3 percent for 2008.

Economic growth in the new EU member states is predicted to be even more dynamic. The 11 central and eastern European countries benefit from EU-funded economic assistance and increasingly from theirslef-powered integration into the common market. The German Council of Economic Experts predicts that the economies of these countries will grow by 5.0 percent in 2007. Because of a rise in employment and the accompanying rise in real income, a material increase in private consumption is being forecast. At the time this annual report went to press, there were no reliable forecasts for economic growth in 2008 in respect to the new EU member states.

The DOUGLAS Group – focal points in 2006/07 and 2007/08
The DOUGLAS Group is well equipped for the future. Overall, the first quarter of fiscal year 2006/07 – containing the DOUGLAS Group’s allimportant Christmas business – proved gratifying. Like for like, all of the divisions made gains. In some cities, the new store opening hours on work days, which were approved in some German federal states starting in November 2006, contributed to this positive trend. The DOUGLAS Group has extended its opening hours at some stores in prime downtown locations and shopping centers, and reaped initial rewards during the 2006 holiday season. It remains to be seen whether the extended opening times positively impact all quarterly and annual sales, given the increase in salary costs that they generate.

The DOUGLAS Group aims to generate further value-oriented growth in 2006/07 and 2007/08. It also plans to further expand its status as the leading European lifestyle group in the retail segment. To power this growth, a total investment volume of 160 million EUR has been earmarked for the Group for fiscal year 2006/07. At the current time, an investment budget of at least the same amount is expected be available for fiscal year 2007/08.

The focal point of investments continues to be the Douglas Perfumeries division; investments totaling around 90 million EUR are expected in fiscal year 2006/07 to power their European growth. Douglas will continue to extend its position as a leading European lifestyle brand by opening at least 50 new perfumeries each year and by increasing fl oor space and modernizing existing perfumeries. Douglas will also expand further by acquiring perfume companies, provided that they can be purchased at market conditions. Expansion activities will remain focused on eastern and southern Europe. Douglas plans to drive earnings-oriented growth especially in Russia and Poland, the goal here being the reinforcement and expansion of its market positions. It completed its move into the Turkish perfumeries market in 2006; activities here are moving at a rapid pace. In southern Europe, Douglas will mainly be leveraging existing growth potential in Italy and Spain in order to cement its good market position in these countries. Preparations for entering new markets such as Greece and the Baltic countries are also under way. Entry into rapidly growing markets outside of Europe such as China, India, and the United Arab Emirates is also being considered. This unwavering dynamic makes Douglas increasingly independent of the German market. In the foreseeable future, the Perfumeries division will record 50 percent of its revenues outside of Germany.

Douglas will also continue to grow on its home market in Germany, both in terms of quantity and quality. Opportunities for expansion in Germany are found primarily in small and medium-sized cities that have strong buying power in their outlying areas and where Douglas is not yet located. The number of perfumeries in Germany is planned to increase to around 500 over the next three years. The dynamic rate of global expansion means that the 1000th Douglas perfumery is within easy reach.

As market leader and trendsetter in the perfumery business, Douglas is continuously developing innovative retail and service concepts. These products or services, for example “Douglas Hairdesign,” “Douglas Day Spas,” and the Douglas premium perfumeries, will be the subject of further expansion in the coming years. The Douglas premium perfumeries, which are generally located in prime city centers, are especially appealing to avid consumers who are particularly interested in an exclusive range of products. There are currently 23 premium perfumeries in Germany. DOUGLAS sees further potential for this exclusive format in the coming years. The product range will be refined even more by new, attractive, and exclusive premium and trend brands that are only available in DOUGLAS stores, and by a top quality range of accessories. This will set the Group apart from its competitors, and underscore the company’s leadership in the perfumery market. The aim is to set new standards in the perfumery sector in the future as well by offering new service departments and innovative and exclusive brands.

The Douglas Card will continue to be a key marketing instrument in future, one of the most successful customer cards in German retailing. There are now more than 6.0 million card holders across Europe, and this figure is rising. The range of services linked to the DOUGLAS Card is to be consistently expanded and supplemented in the coming years, thus continuing to strengthen the already high degree of customer loyalty and satisfaction.

In the Books division, the focus remains on expanding the Thalia Group’s excellent position on the German, Austrian and Swiss markets. The 18 Grüttefien locations and the traditional Wagner’sche bookstores will contribute to this. The Thalia Group acquired participating interests in these companies as of October 1, 2006. Around 20 new stores are also due to open their doors in fi scal year 2006/07. Expansion opportunities also exist in the acquisition of well-established local or regional bookstores that meet Thalia’s high quality standards.

In addition to expanding sales space, the Thalia Group also sees solid prospects for growth in the further extension of its ancillary lines such as audio books and paper articles (paper, stationery, and gift articles related to books). The expansion of “Thalia” to a strong umbrella brand has top priority in fiscal years 2006/07 and 2007/08. In marketing, the media mix will be extended to include radio advertising. The Thalia gift card, which can also be used for Internet orders, is enjoying increasing popularity and is to be further promoted. The multi-channel concept will also be further expanded; a competent Internet presence is an increasingly significant growth-promoting factor in book retailing. For this reason, the stationary book retailing is to be linked more closely to Internet book sales.

In the Jewelry division, the focal point continues to be the expansion of the Christ brand. The goal is to further extend its market leadership in Germany and to firmly establish Christ as the most popular source of fashionable jewelry and attractive watches in the medium to upper price ranges. As a result, Christ will hone its market profile through a stronger diversification of its store concepts; it will also improve the suitability of its products and store layouts to meet the desires of its local customers. Feature showcases are being planned to improve the visual presentation of the goods in the stores. Stores will be given a more open design, enticing customers to stay and look around. Christ is planning to open five to ten new stores each year in 2006/07 and 2007/08. A large number of Christ jewelry stores will also be outfitted with a new, contemporary look.

Christ is gearing its products to the customer’s increasing orientation to brand names. For this reason, modern top-brand watches and jewelry are being incorporated into the product ranges. Numerous new, exclusive products will underscore Christ’s competence in the jewelry, diamonds and watch segments. Younger target groups are being addressed by the inclusion of new impulse gift articles. Christ will continue its advertising partnership with top model Claudia Schiffer in the 2006/07 fi scal year, thus further boosting awareness of the Christ brand.

Christ will be introducing a new materials planning system in the second half of 2007 which will make a significant contribution to improving its earnings. The most important suppliers will be integrated directly into the new system. More efficient reporting structures will allow Christ to optimize its entire value chain and further increase warehouse turnover.

After concluding its consolidation program, René Kern will be present with high quality jewelry stores in top locations in Hamburg, Berlin, Düsseldorf, and Frankfurt. René Kern will continue to benefit from the strong demand for luxury products and will generate sales growth in fiscal years 2006/07 and 2007/08. This will be enhanced by exclusive local events and an attractive range of high-quality jewelry and luxury watches. The goal is to head the ranks of top jewelers in these cities.

In the Fashion division, Appelrath-Cüpper will continue to hone its profile in fiscal year 2006/07 by further expanding its range of attractive premium brands and modern accessories such as purses and shoes. The presentation of these brands in so-called shop-in-shop solutions will also be actively pursued. In fiscal years 2006/07 and 2007/08, modernizing existing fashion stores will also have top priority. A variety of stores will be remodeled and modernized, and some will be reopened with a larger sales area in a contemporary, attractive environment.

The menswear provider Pohland will continue its reorientation as a lifestyle retailer in the next two fiscal years. The plan is to remodel and modernize additional stores. A new store will also be opened in March 2007 in a shopping mall in Braunschweig, while the Bonn store will close its doors in April 2007. In the ongoing fiscal year, work on Pohland’s fashion competence is continuing at full throttle. In this regard, Pohland is extending its range of contemporary, international and attractive top brands for its target group. The range of house-brand products is also due to be extended further. The aim is to establish Pohland as a competent provider of top-of-the-range menswear. This is to be accomplished by improving customer advice and service and through attractively designed merchandise displays. Together with consistent, efficient cost management, Pohland’s earning potential will be improved.

The Confectionery division is generating growth again. Hussel will further modernize its store network and increase its earnings by opening new venues. Ten new stores are planned for fiscal year 2006/07, five each in Germany and Austria. Hussel grew substantially when it acquired 86 Susi confectionery stores on November 1, 2006; this bolstered its leadership in the German confectionery segment. The Susi group stores will be circumspectly integrated into the Hussel store network, and the various product ranges incorporated into special location solutions. Hussel now enjoys a share of more than 10 percent of Germany’s confectionery retailing market. With perfectly coordinated product ranges, true top-quality innovations, pioneering house brands and licensed products, Hussel has created a unique culture of indulgence in its confectionery stores. Hussel’s satisfying growth rate in Germany and the enormous potential in Austria encourage optimism that this time-honored company will enjoy earningsoriented growth in future.

The DOUGLAS Group firmly believes in the future of its specialty stores. All sales subsidiaries continue to place their faith in friendly and professional service and are remaining true to their lifestyle strategy: excellent customer support, first-class product ranges and a sophisticated shopping ambiance all build consumer confidence – and all at fair prices. In view of the value-oriented growth policy, the DOUGLAS Group will also create new jobs throughout Europe in fiscal years 2006/07 and 2007/08. The DOUGLAS Group has undertaken to train young people, and will create a large number of new apprenticeships in both fiscal years. Individually-configured training and development programs will further enhance the employees’ commitment to customer service.

Sales and earnings forecasts for fiscal years 2006/07 and 2007 /08

Given the general economic uncertainties and the difficulty of predicting the impact of the VAT increase on January 1, 2007 , on German retail, it is difficult to accurately forecast DOUGLAS HOLDING AG’s performance in fiscal years 2006/07 and 2007 /08. However, based on the gratifying holiday season sales in 2006, DOUGLAS HOLDING AG’s Executive Board anticipates that sales in the fiscal year 2006/07 will grow by between seven and nine percent. Pre-tax earnings should increase to between 135 million EUR and 138 million EUR. The DOUGLAS Group is also confident that it can further increase its corporate value based on the DVA concept, thus enabling it to maintain the shareholder-friendly dividend policy pursued in recent years. Shareholders are to be afforded adequate participation in the growth of the DOUGLAS Group’s business. A disbursement ratio of approximately 50 percent of the Group’s net income remains the goal for the future as well.

The Executive Board also believes that the DOUGLAS Group will remain on track for value-oriented growth in fiscal year 2007 /08, and thus expects further sales and earnings growth.

General statement by the Executive Board on the economic situation and the DOUGLAS Group’s forecasted growth

DOUGLAS HOLDING AG’s Executive Board continues to assess the DOUGLAS Group’s economic situation as positive. As a result of its solid financial position and the results of operations, the Group is well situated to maintain its success even if consumer spending levels remain muted. Each division will sustainably expand its respective market position. The DOUGLAS Group will continue to attach great value to customer and service orientation.

The motto chosen for the year 2007 by the DOUGLAS Group is “Keep it simple!” The following main areas are to be developed in this context: Reducing unnecessary complexity while simultaneously maximizing customer orientation, and improving the exploitation of DOUGLAS’ own strengths.

Our existing structures will be kept under regular review with an eye to potential improvement; new concepts and sales channels will also be analyzed and reviewed on an ongoing basis. Additional earnings potential will be leveraged within a context of systematic and efficient cost management. Should consumer sentiment improve even more, the DOUGLAS Group’s specialty stores are wellequipped to reap above-average rewards in the shape of even better revenues and earnings.

Hagen, December 2006
DOUGLAS HOLDING AG
The Executive Board

Dr. Henning Kreke  Claus Mingers  Dr. Burkhard Bamberger  Gabriele Traude-Stopka