185000000 IT Holding Finance SA

the majority of our customers, combined with our high levels of customer service, has contributed to our customer
retention rates in excess of 90% in recent years.
By selling our products primarily on a wholesale basis and producing them mostly to order, we avoid certain of the
commercial risks faced by those of our competitors whose distribution strategy is based on selling to retail
customers through their own outlets. The most important of these risks is, we believe, the need to estimate
customer demand since making incorrect estimates could result in significant inventories of unsold finished goods
at the end of a season.
We also sell our apparel and accessories on a wholesale basis through a network of 102 franchised stores (including
corner shops inside department stores) located in Europe, Asia, North America and the Middle East and 29 directly
operated retail boutiques located in major cities and exclusive vacation resorts around the world, with most of these
points of sale consisting of single-brand Malo or Ferré boutiques that we acquired together with our purchase of
these brands.
In connection with our retail rationalization strategy, during 2004 we closed our directly operated Malo stores in
London, New York and Chicago, and intend to continue rationalizing our retail operations and are presently
evaluating opportunities to convert additional directly operated stores to franchised points of sale on a case-by-case
basis. Going forward, we expect to pursue future retail growth exclusively through franchising and similar
arrangements. In this way, we believe we can reduce the operating expenses and capital expenditures associated
with our directly operated retail stores, improve our profitability and increase our free cash flow.
To this end, in February 2005 we entered into an agreement with Arts, a leading Eastern Europe retailer of apparel
and accessories, pursuant to which Arts has committed to opening at least 16 new franchised multi-brand
accessories stores by the Spring-Summer 2006 season throughout Eastern Europe and Russia, with the possibility
of opening up to an additional 125 stores in this region by 2009 if certain conditions and financial targets are met.
In order to protect the distinctiveness and exclusive images of our product lines, we require that the stores
displaying our products adhere to stringent standards for decor, image and merchandising mix. Before and after
each season, we evaluate each of our customers on the basis of sales performance and the quality of its display and
promotion. Our credit department monitors the financial condition of our customers and has the capacity to
promptly cancel orders and suspend delivery of finished goods if it deems such action to be advisable. Similarly,
the design, product presentation and other key factors necessary to ensure that our branded products are properly
sold and marketed by our franchised stores are controlled by us and provided for in franchise agreements we enter
into with our franchisees. These agreements typically have a term of five years, provide for minimum purchase
requirements and give us control over shop design, advertising and other key factors in order to protect the image
and prestige of our owned and licensed brands.
We begin marketing our new collections to our customers in June and July of each year (for the following year’s
Spring-Summer collection) and in January and February (for the following year’s Fall-Winter collection). The
marketing phase of the product development cycle typically lasts approximately two months and principally
consists of showing sample items in our showrooms to selected customers. We currently operate 10 showrooms
located in Milan, Rome, Naples, Vicenza, Bari and Palermo in Italy, and in New York, Paris, Düsseldorf and Hong
Kong. In addition, we make use of 18 showrooms operated by third parties located in Bologna, Reggio Calabria
and Turin in Italy, and in Antwerp, Athens, Chippendale, Copenhagen, Guadalajara, Madrid, Mexico City, Munich,
Porto, Sydney, Tokyo, Seoul, Osaka, Toronto, Vienna and Zurich. Once our customers begin placing orders, we
generate sales projections for each garment or accessory in a collection, and we then continuously update these
projections as additional orders are received. We confirm orders only for those items whose sales projections
justify production; all other items are eliminated from the final collection.
We support the marketing of our products with extensive advertising designed to appeal to our target market of
youthful, fashion-conscious consumers. In addition, we benefit from brand-name advertising carried out by our
licensors. Our advertising expenditures totaled €30.6 million, €44.5 million and €36.3 million in 2002, 2003 and
2004, respectively, representing 4.6%, 6.6% and 5.1% of our net revenues in those years. We advertise principally
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