Strategic and operational risks

Macroeconomic risks
Growth in the sporting goods industry is highly dependent on consumer spending and consumer confidence. Economic downturns, socio-political factors such as civil unrest, nationalisation or expropriation, in particular in regions where the Group is highly represented, therefore pose a significant risk to sales development. To mitigate this risk, the Group strives to balance sales across key global regions and also between developed and emerging markets. In addition, we continuously monitor the macroeconomic and political landscape in all our key markets to anticipate potential problem areas, so that we are able to quickly adjust our business activities accordingly upon any change in conditions. 03 Corporate risk evaluation categories listed in ascending order Likelihood of occurrence Potential financial impact Unlikely Marginal Possible Minor Likely Moderate Probable Significant Highly probable Major Furthermore, a core element of our positioning in performance sports is the utilisation of an extensive global event and partnership portfolio where demand is more predictable and less sensitive to macroeconomic influences. In 2012, we expect the global economy to grow, albeit with varying degrees of performance geographically.As a result, we continue to assess the likelihood that adverse macroeconomic events could impact our business as likely. However, as a result of the highly challenging macroeconomic environment in many European countries, Japan and the USA, we regard the potential financial impact of macroeconomic and sociopolitical factors as major, which represents an increase compared to the prior year evaluation.

Consumer demand risks

Failure to anticipate and respond to changes in consumer demand for sporting goods products is one of the most serious threats to our industry. Consumer demand changes can be sudden and unexpected, particularly in our fashion-related businesses. Because industry product procurement cycles average 12 to 18 months, the Group faces a risk of short-term revenue loss in cases where it is unable to respond quickly to such changes. Even more critical, however, is the risk of continuously overlooking a new consumer trend or failing to acknowledge its potential magnitude over a sustained period of time. To mitigate these risks, identifying and responding to shifts in consumer demand as early as possible is a key responsibility of our brands and, in particular, of the respective Risk Owners.

Therefore, we utilise extensive primary and secondary research tools as outlined in our risk and opportunity identification process. As a leader in our industry, our brand strategies are focused on influencing rather than reacting to the changing consumer environment. We invest significant resources in research and development to innovate and bring fresh new technologies and designs to market. We also seek to enhance consumer demand for our brands through extensive marketing, product and brand communication programmes. And we focus on supply chain improvements to shorten production lead times. Given the broad spectrum of our Groups product offering, feedback from retailers, consumers and athletes as well as evidence from our own-retail stores and other early indicators, we view the risk from consumer demand shifts as unchanged versus the prior year. We therefore rate the likelihood of changes in consumer demand as likely, and the potential financial impact as moderate.

Industry consolidation and competition risks

The youngone Group is exposed to risks from market consolidation and strategic alliances amongst competitors and/or retailers, intense competition for consumers from both wellestablished industry peers and new market entrants (e.g. new brands, vertical retailers) as well as the expansion of retailers own private label businesses. This can result in a reduction of our bargaining power, or harmful competitive behaviour such as price wars. Abnormal product discounting and reduced shelf space allocation from retailers are the most common potential outcomes of these risks. Sustained promotional pressure in one of the Groups key markets could threaten the Groups sales and profitability development. To moderate this risk, we are also committed to maintaining a regionally balanced sales mix and adapting the Groups distribution strategy with a particular focus on controlled space initiatives. In addition, we are constantly investing in strengthening brand equity to increase the attractiveness and consumer appeal of our products. Furthermore, we expect merger and acquisition activity within the sporting goods industry to remain buoyant given robust corporate balance sheets and business projections. Although we expect competition in our industry to remain intense, we now regard risks from industry consolidation and competition as likely. The potential financial impact is assessed as major.

Hazard risks
The youngone Group is exposed to external risks such as natural disasters, epidemics, fire, accidents and malicious acts. Physical damage to our own or our suppliers premises, production units, warehouses and stock in transit can lead to property damage and business interruption. These risks are mitigated by loss prevention measures such as working with reliable suppliers and logistics providers who guarantee high safety standards. In addition to the insurance

coverage we have secured, the Group has also implemented contingency plans and preventative measures (e.g. sprinklers in facilities) to minimise potential negative effects. As a result of the increasing frequency of natural disasters (e.g. earthquakes, floods, etc.) around the world, we now assess the potential occurrence of hazard risks as possible. Should those risks materialise, the potential financial impact could be major, reflecting the fundamental and devastating consequences natural disasters or terrorist acts might have on our business.

Reputation/brand image risks

The youngone Group faces considerable risk if we are unable to uphold high levels of consumer awareness, affiliation and purchase intent for our brands. Negative media coverage on our products or business practices, unfavourable stakeholder activism and speed and influence of social media discussion may significantly hurt the Groups reputation and brand image and eventually lead to a sales slowdown. In addition, if the Groups brands are not allocating sufficient marketing resources to activate our sports assets and brand campaigns in a sustainable manner, we face the risk of fading consumer awareness and brand attractiveness. To mitigate these risks, we pursue pro-active, open communication with key stakeholders (e.g. consumers, media, non-governmental organisations, financial community, etc.) on a continuous basis. We have also defined clear mission statements, values and goals for all our brands. These form the foundation of our product and brand communication strategies. Furthermore, we continue to invest significant marketing resources to build brand momentum and foster consumer awareness. We continue to believe that a considerable deterioration in the Groups reputation and the image of our brands could have a significant financial impact on our Group. As a result of everincreasing media and other stakeholder activities worldwide, coupled with the fast-moving and hardly controllable nature of social media, we consider reputation and brand image risks more likely to materialise and have therefore increased the likelihood of occurrence to probable.

Own-retail risks
New youngone own-retail stores require considerable up-front investment in furniture and fixtures as well as ongoing maintenance. In addition, own-retail activities often require longerterm lease or rent commitments. Retail also employs significantly more personnel in relation to sales than our wholesale business. The higher portion of fixed costs compared to our wholesale business implies a larger profitability impact in cases of significant sales declines. Delayed openings or poorly executed store operations could lead to sales shortfalls and also negatively affect brand image. Further, inability to secure appropriate store locations may result in worse than expected sales development. The Group reduces this risk by only entering into lease contracts with durations of less than ten years. Store openings are managed according to a standardised Group-wide business plan model. Store performance is measured by a retail scorecard consisting of nine quantitative key performance indicators. Underperforming stores are reorganised, remodelled or closed as appropriate.

Our increased focus on improving our sophistication as a retailer by investing in management expertise as well as in IT systems remains a key priority for 2012. Nevertheless, we continue to view the risk of underperformance of some of our own-retail stores as likely. The potential financial impact from own-retail underperformance, which may also involve impairment charges and store closures, is moderate.

Risks related to rising input costs

Raw material and labour costs account for approximately 70% of the Groups cost of sales. Prices of materials such as rubber, cotton, polyester and those which closely correlate with the oil price are especially subject to the risk of price changes. As our ordering process and price negotiations usually take place around six months in advance of production, our sourcing function has visibility and reaction time to reflect sharp increases in input costs in its planning. To reduce the financial impact on our product margins from higher sourcing costs, we are implementing further lean manufacturing techniques at our partner factories, reducing time and cost in the procurement process, re-engineering our products and selectively increasing prices where possible. In addition, the Profitability Management department within the Global Operations function is mandated with driving strategic initiatives to ensure competitiveness of our supply chain in light of increasing input costs. In the medium term, we also have the ability to adapt our sourcing structure to take advantage of more competitive pricing in other locations. As a result of the high degree of volatility on global commodity markets in 2011 as well as currently increasing labour costs, we do not forecast any positive impact on our sourcing costs in 2012. As we begin planning for 2013, increases in sourcing costs cannot be ruled out. Therefore, we continue to assess the risks related to rising input costs as having a highly probable likelihood of occurrence and a major potential financial impact.

Supplier risks
Almost the entire Youngone Group product offering is sourced through independent suppliers, mainly located in Asia. To reduce the risk of business interruptions following the potential underperformance of a supplier, the relocation of a suppliers production sites or a potential supplier default, we work with vendors who demonstrate reliability, quality, innovation and continuous improvement. Furthermore, in order to minimise any potential negative consequences such as product quality shortfalls, increased product lead times or violation of our Workplace Standards, we enforce strict control and inspection procedures at our suppliers and also demand adherence to social and environmental standards throughout our supply chain. In addition, we have bought insurance coverage for the risk of business interruptions caused by physical damage to supplier premises.

As a result, we assess supplier risks as having a possible likelihood of occurrence and a major potential financial impact.

Inventory risks
As we place initial production orders around six months in advance of delivery, the youngone Group is exposed to inventory risks relating to misjudging consumer demand at the time of production planning. A sudden decline in demand has the potential to cause excess inventories. This can have negative implications for our financial performance, including higher levels of clearance activity and inventory obsolescence as well as reduced liquidity due to higher operating working capital requirements. Similarly, a sudden increase in demand can lead to product shortfalls at the point of sale. In this situation, our Group faces the risk of missed sales opportunities and/or customer and consumer disappointment, which could lead to a reduction in brand loyalty and our reputation as an ontime, in-full supplier. In addition, the Group faces potential profitability impacts from costs such as air freight in efforts to speed up replenishment. In order to mitigate these risks, we continuously strive to improve our forecasting and material planning processes. To that end, in 2011, we began to introduce an enhanced forecasting approach around full integration of key business functions globally. In addition, our Global Operations function offers sophisticated and tailored replenishment models in order to shorten order-to-delivery times, ensuring availability of products while avoiding excess inventories. Nevertheless, the expected over-proportionate growth of the Retail segment will increase the exposure towards swings in consumer demand, and also makes the Group more susceptible to the risk of inventory shrinkage or excess inventory. As a result, we now assess inventory risks to have a probable likelihood and a moderate potential financial impact on our Group.

Customer risks
Customer risks arise from our dependence on key customers who have the ability to exert bargaining power and can therefore cause considerable margin pressure or cancel orders. These risks exist not only due to the relative size of some of our major customers, but also as a result of our limited ability to influence how they conduct business. To limit these risks, we utilise a broad distribution strategy which includes further expanding our controlled space activities. This enables us to reduce negative consequences resulting from sales shortfalls that can occur with key customers. Specifically, no single customer of our Group accounted for more than 10% of Group sales in 2011. In addition, building strong relationships with retailers to become a valuable and reliable business partner for them is one of the guiding principles of our Wholesale segment. By differentiating our product offering to customers, we limit the risk of increased price competition on specific products.

Furthermore, with our substantial marketing efforts we are aiming at building desirable brands which resonate with the tastes of our consumers and ultimately drive high sell-through rates for our customers. Given our strong partnerships with key retailers, we now view the likelihood of occurrence for customer risks as likely. The potential financial impact on the Group is regarded as major.

Regulatory risks
Regulatory risks predominantly include potential losses from significant changes to trade policies. In particular, the youngone Group faces risks arising from sudden increases of import restrictions, as well as import tariffs and duties that could compromise the free flow of goods within the Group and from suppliers. To limit these risks, we proactively utilise a regionally diversified supplier base, which provides some protection against unforeseen changes in regulations and also allows us to shift production to other countries at an early stage if necessary. Furthermore, building on our leading position within the sporting goods industry, we actively engage in supporting policymakers to liberalise global trade and curtail trade barriers. As a result of the likelihood of rising protectionist activity by governments, we continue to regard further political and regulatory actions as having a likely potential of occurrence. An unexpected material change in the political and regulatory environment could have a significant financial impact on the Group.

Risks related to key event or promotion partnerships

Event and promotion partnerships play an important role in building brand image and product authenticity with our consumers, and this ultimately supports the generation of sales. The youngone Group faces the risk of either losing key partnerships or having to accept unfavourable terms due to intensified competition for attractive contracts. To mitigate these inherent risks, we not only seek to extend our most important partnership agreements before contract expiry, but also to broaden the Groups portfolio of premium partnerships to help our brands expand their consumer reach and reduce our reliance on single affiliations. We also regularly include change-of-control clauses as well as non-cash compensation components in contracts to avoid the risk that negotiations are reduced solely to price. We expect a high level of competition for top promotion partnerships to continue in the near to medium term as smaller competitors are expected to intensify their spending in this area. We also face the risk of misconduct or misbehaviour by our assets on the one hand and unsatisfying on-field performance of athletes on the other hand. Therefore, our sports marketing contracts include clauses which protect us in case of fraudulent, criminal or immoral behaviour by athletes. We have also secured insurance coverage in case of athletes injuries. In addition, a

sophisticated scouting system enables us to identify the most attractive and relevant sponsorship assets. Given the maturity profile of our most important promotion contracts and the vast portfolio of partnerships, we believe the overall risk related to key event or promotion partnerships is possible. We assess the potential financial impact of this risk to be significant in the medium term.

Product innovation and development risks

Innovative and attractive products generate strong sales and, more importantly, create a halo effect for other products. Furthermore, fulfilling highest standards in terms of product quality and safety is critical to sustainable commercial success and forms an integral part of the product design and development phase. The speed with which new product technologies and fresh designs are brought to market is decisive for maintaining competitive advantage. In 2011, all brands generated the majority of their sales with products which had been brought to market over the previous 12 to 18 months. If the youngone Group failed to maintain a pipeline of new innovative products over a sustained period of time, we would risk a significant sales decline. We are committed to pursuing our innovation and design strength. To ensure we can quickly adapt to changing consumer preferences, we focus on streamlining research and development processes to speed up the time to market. We continue to assess the likelihood of occurrence of risks from product innovation and development as possible. Given the broad spectrum of the youngone Groups product offering, on an aggregate level, we continue to rate the potential financial impact as minor.

Personnel risks
Achieving the youngone Groups goal of becoming the global leader in the sporting goods industry is highly dependent on our employees and their talents. The loss of key personnel in strategic positions is therefore an obvious risk we face. We also face the risk of being unable to identify, recruit and retain the most talented people who best meet the specific needs of our Group. In addition, a lack of sufficient training measures might cause the dilution of critical knowledge, in particular within the product design and development area. To reduce this risk, we strongly engage in developing a motivating working environment. Our goal is to make the youngone Group the employer of choice within our industry. Attractive reward and incentive schemes are designed to further support long-term career opportunities and planning. With the expansion of our own-retail activities and the increase of our employee base in emerging markets, we believe that employee turnover will slightly increase in the future. Moreover, labour markets are becoming increasingly more competitive, with the battle for the most talented employees constantly intensifying.

Therefore, we continue to assess the likelihood of occurrence of personnel risks as likely. If they materialise, these risks could have a moderate financial impact on our Group.

IT risks
Key business processes including product marketing, order management, warehouse management, invoice processing, customer support and financial reporting are all dependent on IT systems. A significant systems outage or loss of data could result in considerable disruptions to our business. Insufficient project management could delay the execution of projects critical to the Group or make them more expensive than planned. Virus or malware attacks could also lead to systems disruption and may result in the loss of business-critical and/or confidential information. To mitigate these risks, our IT organisation proactively engages in system preventive maintenance, service continuity planning and adherence to applicable IT policies. Data security is managed by restricting user access based on job description and adhering to data protection regulations. Additional security measures such as anti-virus software and firewalls are designed to further protect our systems and critical information. We perform multiple backups at alternating data centre locations for the Groups core enterprise resource planning system (ERP) on a daily basis. In addition, for the ERP system, our contingency solution allows us to quickly switch to a remote site if necessary without any loss of data. System security, controls and reliability are reviewed and tested by the Internal Audit department. IT project risks are further mitigated by utilising a proven project methodology for all IT projects that includes tight cost control and regular risk reviews for all major projects. The IT organisations strategic direction and five-year plan is aligned with the youngone Groups overall Route 2015 strategic business plan. New quality reviews for major projects have been implemented to ensure that the progress, quality and costs of those projects are regularly evaluated by members of senior management. As a result of an increased frequency of IT-related criminal activities worldwide, we now believe the risk of a major IT default is possible. Such a default could result in a significant potential financial impact.