The Benetton Group Annual Report 1996

Management’s discussion and analysis of financial condition
and results of operations
Results of Operations
The following table sets forth certain items in billions of Lire and their respective percentages of total
revenue for the years indicated. Comparisons in this table and in the following sections are based upon
financial statement amounts derived under Italian GAAP and upon the international format financial
information presented in the Selected Financial Data and in appendix 3 of the Consolidated Financial
Statements.
Year Ended December 31,
1994 1995 1996
Total revenue 2,788 100% 2,939 100% 2,871 100%
Gross margin 1,149 41.2% 1,218 41.4% 1,155 40.2%
Selling, general and
administrative expenses 760 27.3% 774 26.3% 753 26.2%
Income from operations 389 13.9% 444 15.1% 402 14.0%
Net income 210 7.5% 220 7.5% 246 8.6%
Benetton's results are seasonal, with revenues from Fall/Winter season sales higher than those from
Spring/Summer season sales. During the 1994 to 1996 period, approximately 50% of Benetton's orders
related to Fall/Winter collections, 45% to Spring/Summer collections and 5% to "flash" collections.
1996 compared to 1995
Consolidated revenues of Lire 2,871 billion (Lire 2,939 billion in 1995) were influenced by the marked
appreciation of the lira against other major currencies (over 8% on average), as well as by the disposal
and consequent deconsolidation of certain businesses no longer considered strategic to the
optimization of the Group’s commercial and distribution systems.
A generalized improvement in the results reported by sales outlets was symptomatic of an increasingly
effective sales organization, combined with the timely delivery of merchandise responsive to market
trends. Inventory turnover accelerated, while end-of-season stocks declined.
In geographic terms, sales rose most significantly in Europe. The upswing was apparent in almost all
nations, including markets such as France and Germany, where growth was achieved despite weak
consumer demand overall. Increases were particularly marked in the cases of the '012' and 'Zerotondo'
childrenswear lines, thus confirming the validity of product and distribution policies developed in 1995.
Sales of jackets and other outerwear have also continued to grow, notably among the adult lines.
The reduction in revenues, despite a substantial 4% rise in sales volumes compared with 1995, was
caused by the appreciation of the lira against the principal foreign currencies used by the Group. The
resulting erosion of revenues was compounded by the translation into lire of the results reported by
foreign subsidiaries. This effect is clearly correlated with and offset by the net gain from currency
management, which reflects hedging arrangements designed to manage the Group’s exposure to
exchange rate volatility.
Other revenues in 1996 were Lire 168.4 billion against Lire 171.5 billion in 1995, and mainly derived from
sponsorship agreements related to the Formula I Championship and manufacturing sales and services
provided to third parties. Despite normal cost inflation, the cost of sales declined by Lire 4.7 billion in
1996.
Despite the appreciation of the lira, gross margin has remained at more than 40%, while operating
income was 14% of revenues.