Statement of Financial Position and Statement of Cash Flows

Assets

At the end of December 2020, total assets were up 2% to € 21.053 billion versus € 20.680 billion in the prior year, as the increase in cash and cash equivalents more than offset the decrease in right-of-use assets from leasing agreements due to planned depreciation and amortization.

Total current assets increased 11% to € 12.154 billion at the end of December 2020 compared to € 10.934 billion in 2019. Cash and cash equivalents were up 80% to € 3.994 billion at the end of December 2020 from € 2.220 billion in the prior year with one main reason being the cash generated through the placement of bonds in the amount of € 1.500 billion. Currency effects had a negative impact on cash and cash equivalents in an amount of € 75 million. Inventories increased 8% to € 4.397 billion at the end of December 2020 from € 4.085 billion in 2019. SEE NOTE 09

Inventories € in millions

On a currency-neutral basis, inventories increased 14%, reflecting the inevitably lower-than-expected product sell-through caused by the temporary broad-based store closures as well as traffic remaining below prior year levels after stores reopened temporarily. Accounts receivable decreased 26% to € 1.952 billion at the end of December 2020 (2019: € 2.625 billion), reflecting fewer product shipments, the company’s efforts to focus on cash collection during the coronavirus pandemic and higher bad debt allowances. On a currency-neutral basis, receivables were down 21%. Other current financial assets increased to € 702 million (2019: € 544 million), mainly due to an increase in custom claims and short-term deposits. Other current assets were down 7% to € 999 million at the end of December 2020 (2019: € 1.076 billion). SEE NOTE 07 SEE NOTE 08 See Note 10

Accounts receivable € in millions

Total non-current assets decreased 9% to € 8.899 billion at the end of December 2020 from € 9.746 billion in 2019, mainly related to lower right-of-use assets from leasing agreements as well as other intangible assets. Fixed assets decreased 12% to € 7.149 billion at the end of December 2020 versus € 8.100 billion in 2019, as right-of-use assets decreased 17% to € 2.430 billion (2019: € 2.931 billion) due to depreciation, as well as impairment losses and negative currency effects. Other non-current financial assets decreased 8% to € 414 million from € 450 million at the end of 2019. Deferred tax assets were up 13% to € 1.233 billion from € 1.093 billion in 2019, due to the recognition of deferred tax assets on tax losses and movements in taxable and deductible temporary differences. See Note 36

Liabilities and equity

Total current liabilities increased 1% to € 8.827 billion at the end of December 2020 from € 8.754 billion in 2019. Short-term borrowings increased to € 686 million at the end of December 2020 (2019: € 43 million), mainly reflecting the reclassification of a eurobond (nominal value € 600 million) due to its maturity in 2021. Accounts payable were down 12% to € 2.390 billion at the end of December 2020 versus € 2.703 billion in 2019, mainly reflecting the company’s effective cost control measures as total operating expenses decreased. On a currency-neutral basis, accounts payable decreased 10%. Current lease liabilities decreased 23% to € 563 million at the end of December 2020 versus € 733 million in 2019, due to currency effects and temporary broad-based store closures. Other current financial liabilities were up 90% to € 446 million from € 235 million in 2019, mainly as a result of an increase in the fair value of financial instruments. Other current provisions increased 11% to € 1.609 billion at the end of December 2020 versus € 1.446 billion in 2019, mainly due to an increase in the provision for returns. Current accrued liabilities were down 11% to € 2.172 billion at the end of December 2020 from € 2.437 billion in 2019, mainly as a result of reduced accruals for personnel costs as well as outstanding invoices. Other current liabilities were down 26% to € 398 million at the end of December 2020 from € 538 million in 2019. See Note 22 See Note 23

Accounts payable € in millions

Total non-current liabilities increased 14% to € 5.535 billion at the end of December 2020 from € 4.868 billion in the prior year, reflecting various bond placements in the second half of the year. Consequently, long-term borrowings were up 56% to € 2.482 billion at the end of December 2020 from € 1.595 billion in the prior year. Non-current lease liabilities decreased 10% to € 2.159 billion at the end of December 2020 from € 2.399 billion in the prior year, due to temporary store closures as well as currency effects. Other non-current financial liabilities were up 24% to € 115 million at the end of December 2020 from € 92 million in the prior year. Other non-current provisions decreased 11% to € 229 million at the end of December 2020 from € 257 million in the prior year, mainly as a result of reduced provisions for personnel. SEE NOTE 24

Shareholders’ equity decreased 5% to € 6.454 billion at the end of December 2020 versus € 6.796 billion in 2019, mainly due to the share repurchases at the beginning of the year. Consequently, the equity ratio decreased to 30.7% compared to 32.9% in the prior year. See Note 27

Equity ratio^{1, 2} in %

Operating working capital

Operating working capital decreased 1% to € 3.960 billion at the end of December 2020 compared to € 4.007 billion in 2019. On a currency-neutral basis, operating working capital was up 8%. Average operating working capital as a percentage of sales increased 5.4 percentage points to 23.5% (2019: 18.1%), as a result of temporary store closures which led to a revenue decline and corresponding higher inventory.

Average operating working capital¹ in % of net sales

Investment analysis

Capital expenditure is defined as the total cash expenditure for the purchase of tangible and intangible assets (excluding acquisitions and right-of-use assets according to IFRS 16). Capital expenditure decreased 38% to € 442 million (2019: € 711 million). Capital expenditure for property, plant and equipment was down 37% to € 378 million compared to € 599 million in the prior year. The company invested € 64 million in intangible assets, representing a 43% decrease compared to the prior year (2019: € 112 million). Depreciation and amortization, excluding impairment losses and reversal of impairment losses of tangible and intangible assets, increased 10% to € 561 million in 2020 (2019: € 511 million).

Controlled space initiatives, which comprise investments in new or remodeled own-retail and franchise stores as well as in shop-in-shop presentations of our brands and products in our customers’ stores, accounted for 42% of total capital expenditure (2019: 47%). Expenditure for IT and logistics represented 14% and 8%, respectively (2019: 13% and 6%, respectively). In addition, expenditure for administration accounted for 4% (2019: 7%). Other investments mainly reflected the further development of our corporate facilities in Portland. These represented 31% of total capital expenditure (2019: 26%). From a segmental perspective, the majority of the capital expenditure was recorded centrally at headquarter level, which accounted for 49% (2019: 44%). In addition, capital expenditure in Asia-Pacific accounted for 29% (2019: 24%) of the total capital expenditure, followed by North America with 8% (2019: 9%), Europe with 7% (2019: 12%), Emerging Markets with 3% (2019: 3%) as well as Latin America with 2% (2019: 5%) and Russia/CIS with 1% (2019: 2%).

Capital expenditure by type in % of total CAPEX

Capital expenditure by segments in % of total CAPEX

Liquidity analysis

In 2020, net cash generated from operating activities decreased to € 1.486 billion (2019: € 2.819 billion). Net cash generated from continuing operating activities decreased to € 1.489 billion (2019: € 2.828 billion). This decrease was due to significantly lower income before taxes as a result of the coronavirus pandemic.

Net cash used in investing activities and net cash used in continuing investing activities decreased to € 115 million each (2019: € 925 million). This development was mainly due to reduced investing activities in 2020 related to expenditures for property, plant and equipment, such as investments in controlled space initiatives and IT systems, and proceeds from the sale of short-term financial assets in 2020 compared to investments in 2019. Net cash generated from financing activities and net cash generated from continuing financing activities amounted to € 479 million each (2019: € 2.273 billion net cash used). This development was mainly due to the placement of two bonds in an amount of € 500 million each, the placement of a sustainability bond in an amount of € 500 million and the suspension of both the dividend payment and the share buyback program in 2020.

Exchange rate effects negatively impacted the company’s cash position by € 75 million (2019: € 30 million).

As a result of all these developments, cash and cash equivalents increased by € 1.774 billion to € 3.994 billion at the end of December 2020 compared to € 2.220 billion at the end of December 2019.

Adjusted net borrowings at December 31, 2020 amounted to € 3.148 billion, compared to € 4.173 billion in 2019. The company’s ratio of adjusted net borrowings over EBITDA amounted to 1.5 at the end of December 2020 (2019: 1.1). In 2020, the definition of the ratio net borrowings over EBITDA was changed to adjusted net borrowings over EBITDA to reflect changes in the company’s Financial Policy. The most significant difference between the previous net debt definition and the new adjusted net borrowing definition is the inclusion of the present value of future lease and pension liabilities. See Treasury

Change in cash and cash equivalents € in millions

Adjusted net borrowings/EBITDA^{1, 2} € in millions

Off-balance-sheet items

The company’s most significant off-balance-sheet items are commitments for promotion and advertising as well as other contracts. These contracts are related to short-term leases as well as leases for offices and warehouses, which are not yet considered according to IFRS 16. Minimum future payments for other contracts were € 323 million at December 31, 2020, compared to € 318 million at the end of December 2019, representing an increase of 2%. At the end of December 2020, financial commitments for promotion and advertising decreased 13% to € 5.948 billion in 2020 (2019: € 6.808 billion). See Note 39 See Note 40