Charles Vögele Group: Letter to shareholders

– Gross sales at previous year’s level after adjusting for currency movements (–1%)
– Like-for-like gross sales 4% below previous year (after currency adjustment)
– Stocks streamlined and reduced by CHF 43 million, or 15% compared with 30.6.2008
– Operating expenses cut by over CHF 30 million thanks to savings measures
– EBITDA at CHF 38 million despite dismantling of old stocks (18% down on prior-year figure)
– Free cash flow up CHF 29 million in the first half to CHF 38 million
– Net debt reduced by CHF 38 million to record low of CHF 114 million
– Equity ratio increased to 60%

In a recessionary environment, Charles Vögele Group managed to maintain currency-adjusted gross sales at the year-back level. Before adjusting for currencies, gross sales declined by CHF 49 million (6%), or 4% after adjusting for both currency movements and changes in retail area (like-for-like). Overall, gross sales came to CHF 743 million. The fact that EBITDA fell by only CHF 8 million (18%) to CHF 38 million, despite an exceptional major overhaul of old stocks, can be attributed to the cost reduction programme. Net profit slipped from the previous year's CHF 3 million to CHF – 2 million.

Currency-adjusted gross sales at previous year’s level
Activity in the real economy cooled significantly in the second half of 2008, and as this trend worsened in early 2009 it began to have an effect on consumer sentiment. The spending patterns of Charles Vögele Group's customers are heavily influenced by their needs and by the weather. Bearing this in mind, it was pleasing to see that after adjusting for currency movements sales only fell 1% during the high-margin months despite worsening consumer sentiment and unfavourable weather conditions. Owing to the weak euro and the fall in the value of various Eastern European currencies, gross sales before currency adjustments fell by CHF 49 million, or 6%, to CHF 743 million. The store portfolio was increased slightly.

Major exceptional restructuring of old stocks initiated
A major exceptional restructuring of old stocks was initiated at the start of April 2009 for the next twelve months, and has already begun to bear fruit. At CHF 237 million (30.5 million items), inventories were down by CHF 43 million (5.6 million items), or 15%, compared with end-June 2008. Although this large reduction in stocks was achieved by means of deep discounting, the gross profit margin at the end of June this year was still high at 62.6%. The Group's declared aim is to clear out all items that are more than 18 months old by the end of March 2010.

Cost-cutting measures initiated early
Cost-cutting measures were introduced as the economic downturn gathered pace. These helped to ensure that operating expenses were reduced by CHF 31 million, or 8%, from CHF 388 million to CHF 357 million. After currency adjustments, the cost reduction was CHF 14 million, or 4%. Currency effects on sales and costs thus more or less cancelled each other out. Following successful renegotiations of existing rental contracts, rental costs only increased slightly, even though more stores were in operation than in the prior-year period. All other expense positions were reduced, in some cases substantially. Because the Group was not involved in any major promotional events and because it adjusted its marketing mix, advertising and promotion expenses were down CHF 16 million, or 26%, on the year-back figure. Personnel expenses fell 6% thanks to process changes and Group-wide cost saving measures. These targeted measures also account for the fact that EBITDA came to CHF 38 million, which is only CHF 8 million, or 18%, lower than a year ago. The EBITDA margin was 6%, compared with 6.8% in 2008. After deducting depreciation, EBIT came in at CHF 7 million, a fall of 58%. Financial expense was reduced by a half. At CHF – 2 million net profit was lower than the yearback figure of CHF 3 million.

High free cash flow, low net debt
Cash flow was CHF 20 million higher than for the same period of the previous year at CHF 65 million, mainly because of the streamlining of old stocks. With investment activities CHF 9 million lower, free cash flow was up CHF 29 million to CHF 38 million.
There was a further reduction in net debt: at CHF 114 million this item was lower than at any time since the company was listed on the stock market. The CHF 250 million credit facility to mid-2012 is available in full. With a high equity ratio of 60%, the Group's balance sheet is in very good shape.

Asia procurement in own hands
On 1 November 2009, Charles Vögele Group is taking its procurement operations in India and Bangladesh into its own hands. For the last 15 years, purchasing in these countries has been handled through agents of the Singapore-based Texline Associates Pte. Ltd. Purchasing activities in Hong Kong and Shanghai were brought in house two years ago. By integrating purchasing into its own organization, Charles Vögele Group now manages and controls another part of the value chain, which constitutes a very important competitive advantage for a vertically structured company – not least because it means it can react quickly to changing customer requirements. 75% of goods made in Asia are now sourced by Charles Vögele's
own purchasing offices.

RFID project successfully completed
The RFID project started in mid-2008 in Slovenia was concluded successfully. Thanks to its close cooperation with external logistics and technology providers, Charles Vögele Group can now track the flow of individual goods along the whole value chain without gaps and at close to real time. It is the first company in the global clothing industry to achieve this feat. The main motivation for initiating the project was the desire for complete control of the flow of goods. This new technology also provided insights about how to manage the flow more precisely. The significance of this success was reflected in the award for "Best RFID Implementation" that Charles Vögele Group won from the prestigious American RFID Journal. Once the optimization potential has been evaluated, the new technology will be rolled out in other countries.

Changes to the Board of Directors and Group Management
The Chairman of the Board of Directors, Bernd H. J. Bothe, as well as Vice Chairman Dr. Felix R. Ehrat and the two Board members Carlo Vögele and Daniel Sauter did not make themselves available for re-election to the Board of Directors at the AGM on 1 April 2009. The newly constituted Board of Directors consists of the previous members Alain Caparros, Hans Ziegler, Jan C. Berger and Prof. Peter Littmann. The new Chairman is Alain Caparros. He is also Chairman of the Managing Board of REWE Group, one of Germany's leading retail businesses. Hans Ziegler is Vice Chairman of the Board.
The composition of Group Management has also changed: on 16 February, André Maeder took over as CEO from Bernd H. J. Bothe, who had been managing the company on an interim basis since mid-August 2008. Mr. Maeder is an internationally experienced brand and fashion specialist. He was previously a member of the Managing Board of Hugo Boss and S. Oliver, and for six years he was COO at Harrods in London. He has already been employed by Charles Vögele Group before, working in purchasing between 1989 and 1995. The Board of Directors has also appointed Markus Voegeli as the new Chief Financial Officer. Voegeli was previously an independent consultant in the financial sector, and before that he was CFO of the listed Valora Group for four years. He will take up his position at Charles Vögele Group on 1 October 2009. Voegeli succeeds Dr. Felix Thöni who is leaving the company as previously announced.

Reduction in par value implemented
The reduction in the par value of Charles Vögele Holding AG shares from CHF 4.00 to CHF 3.50 per share, as proposed by the Board of Directors, was approved by the Annual General Meeting of Shareholders on 1 April 2009 and implemented on 3 July 2009 with a repayment of CHF 0.50 per bearer share. The share capital now comes to CHF 30 800 000 and is made up of 8 800 000 shares with a par value of CHF 3.50 each.

Major change at all levels
Charles Vögele Group is set to change its organizational structures and processes significantly, especially with regard to collections, purchasing and stock control. The rhythm of collections is being doubled, the speed with which collections are produced is being increased. The Group's strong position in up-to-the-minute, price-conscious fashion is being further expanded and focused on the demographically attractive target group of people in their prime middle years. A new and more self-confident visual image is being ushered in by means of a new store concept and a more emotion-based advertising campaign highlighting the Group's own brands – especially the trend-oriented Casablanca brand.

Potential-oriented expansion
The branch portfolio is being reviewed as part of the new, potential-oriented expansion strategy. The aim is to achieve a denser branch network in the main markets.

E-commerce as a new sales channel
Online shopping is currently generating the highest growth rates in Europe. Charles Vögele Group will be exploiting the potential of this additional sales channel.

New format strategy
The existing store portfolio, which only included formats larger than 800 m2, is being augmented by stores offering smaller floorspace. This opens up potential for carrying gender-specific or brand-specific ranges.

Growth in line with market expected for financial year as a whole
Charles Vögele Group believes that in terms of like-for-like sales it will outperform the shrinking general market. The urgently required streamlining of old stock is likely to affect results in the second half-year by CHF 20–30 million. Charles Vögele Group is confident that in the medium-term the measures taken will have a positive effect on both the income and cost sides. Concrete action is also being formulated to implement the findings of the Strategic Review carried out by the Board of Directors in collaboration with Group Management.

In the name of the Board of Directors and Group Management we would like to thank our shareholders for their trust and confidence.


Yours sincerely

Alain Caparros                                                             André Maeder
Chairman of the Board of Directors                        Chief Executive Officer