BERLIN — The heat is turning up on Hugo Boss’ U.S. operations.PricewaterhouseCoopers in New York is currently overseeing an internal audit at Hugo Boss USA where, as reported, Marty Staff, chief executive officer, and Vincent Ottomanelli, chief financial officer, have been on a paid administrative leave since May 14.Retailers report they’ve heard that Staff is not coming back, and rumors continue to swirl around what Staff and Ottomanelli may have done to trigger an internal audit at the U.S. division.“They’re investigating every transaction that occurred,” said one source.One industry executive believes the problem lies in the fact that Staff and Ottomanelli may not have written down the inventory and reserved for markdowns. Another source heard that Staff may have had a deal with a group of jobbers, where he received pay-offs for selling excess inventory. Still, another surmised Staff may have advanced shipments at the end of last year against returns that he promised, but then never booked the returns. “He credited the shipments, pumped up his bonus and didn’t book the returns,” was one source’s hypothesis. Then there are others who believe it’s a “garden variety” contractual dispute. The source said what probably happened was Metzingen, Germany-based Hugo Boss AG wanted to terminate Staff, but didn’t want to pay him the amount of severance he wanted. He said the Germans sign off on all Boss’s financial data so that, before Staff closed his books, the German parent firm has to approve it. “I don’t think he’s done anything wrong,” said the source. “I think it’s so dirty. It’s sort of like Enron. They [Hugo Boss AG] loved him [Staff] on the way up; now that business is down, it’s not so good.” He said Staff may have shipped a lot of inventory into stores, and after Sept. 11, the merchandise didn’t sell. “Everything went wrong and he’s left holding the bag,” said the source.Meantime, Staff didn’t return phone calls seeking comment, and was reportedly spending time at his lake house in Canada.A replacement hasn’t been named, but in the interim, Tony Lucia, senior vice president of sales, was put in charge, and it’s “business as usual,” as reported. One source said they may not name a U.S. president to replace Staff, but rather a head of sales.Given ongoing speculation about irregularities in its American operations, lowered profit forecasts and a week of falling stock prices, Hugo Boss’s annual shareholders meeting in Stuttgart on Tuesday could have been a very heated affair.However, sources say that the shareholder’s meeting, which marked Bruno Sälzer’s official start as the new chief executive officer of Hugo Boss AG, was “no big deal. Shareholders were calm, especially after the company explained the 12 million euro [$11 million] shortfall in planned profits for 2002,” one source commented.And indeed, Boss shares closed at $19.48 in Frankfurt Tuesday, up 4.2 percent, after taking a cumulative 20 percent dive over the last five days.On Monday, Boss officially lowered its profit forecast for 2002 11.2 percent to $87.5 million from last year’s level of $98.6 million. Dollar figures are calculated from the euro at current exchange.On Tuesday, the firm broke down that figure in more detail. Philipp Wolff, a company spokesman, said the $11 million reduction included $5.5 million pertaining to the U.S. inventories, two-thirds “in insufficient reserves” and the remainder representing “inventory that was overvalued.” Two-thirds of the remaining $5.5 million shortfall can be attributed to Boss Woman, in the midst of a “transitional year,” according to Wolff, and the remaining amount, $1.8 million, to projected losses in U.S. sales this year.“This is only a forecast and the final results may turn out better, but business in the U.S. is definitely evolving in a less positive way than originally predicted,” Wolff said. The troubled women’s division is now expected to break even in the second half of 2003, and perform profitably over a whole year first in 2004.In terms of overall sales for 2002, Boss is projecting a “slight gain” for the year, compared to the 5 percent sales growth forecast earlier this month. Outside of the U.S., Boss is looking forward to increases in both sales and net income for the year. When the rumors began to fly last week, Wolff noted, “We’re a public company with legal obligations, and we have to abide by the laws.” Analysts suggested it was precisely those legal concerns that caused Boss to abruptly cancel an analysts’ conference call Monday. “I heard the lawyers called them back at the last moment, saying it was too risky,” one commented.“Hugo Boss usually strictly follows the rules. I don’t know the details about the U.S. operation — nobody does — and I think legal reasons are keeping them from saying much,” an analyst in Frankfurt said. “It’s a state-of-the-art company, and shareholder value is written in big letters. But they’re overburdened at the moment.”To turn the women’s business around, he suggested, Boss may have to be prepared to swallow more losses in the form of merchandise returns. “If Boss wants their clients to order [the women’s range] again, to give them a second chance, they can’t be too strict about having goods sent back. The more generous they are, the better their chances will be of making a second go of it.“Maybe it was a mistake to go to Milan with women’s, though I applauded it at the time,” the analyst acknowledged. “Boss is very professional in men’s, and part of this professionalism has to do with German know-how, which needs to be implemented in the women’s range. They have Hugo Woman, which is coordinated in Germany and is doing good business in the meantime. But Hugo also had problems in the beginning, so we still have high hopes they can turn women’s around.”As reported, women’s sales reached about $49 million last year, less than 5 percent of Hugo Boss net sales.Hugo Boss AG also claims to be optimistic. “What came out of the shareholder’s meeting today is that we’re in good shape and in good hands,” Wolff stated. “We’re doing quite well, considering that men’s wear worldwide is declining by 4 to 5 percent. We’re still one of the strongest.”

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