2004 annual report en

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Benetton GroupAnnual Repor t 2004


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Benetton Group S.p.A.

Villa Minelli

Ponzano Veneto [Treviso] - Italy

Share Capital: Euro 236,026,454.30 fully paid

Tax ID/Treviso Company register: 0 0193320264

Benetton GroupAnnual Report 2004


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INDEX

The Benetton Group

5 Directors and other officers

7 Letter to Shareholders from the Chairman and Founder

of the Benetton Group, Luciano Benetton

8 Financial highlights

11 Directors report

Markets, trademarks and licenses

12 Production organization

14 Human resources

Information Technology

15 Accounting, tax and corporate organization

Investor Relations

16 Communications

17 Corporate Governance

25 Supplementary informationBenetton shares and shareholdings

27 Performance of Benetton shares

29 Relationships between the parent company,

its subsidiaries and other related parties

Management of financial risks

30 Privacy and the protection of personal data

31 Directors

Principal organizational and corporate changes

32 Significant events since year-end

Outlook for 2005

33 Group consolidated results

Consolidated statement of income

35 Performance by activit y

37 Financial situation - highlights

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42 Impact of introducing IAS/IFRS

Development of the relative regulatory framework

IAS/IFRS conversion process for the Benetton Group

47 Consolidated financial statements

48 Consolidated balance sheet reclassified accordingto financial criteria

50 Consolidated statement of income with revenues

and cost of sales reclassified

52 Consolidated balance sheet Assets

54 Consolidated balance sheet Liabilities, Shareholders

equity and Memorandum accounts

56 Consolidated statement of income

58 Statement of changes in Shareholders equity

59 Statement of changes in minority interests

60 Consolidated statement of cash flow

62 Companies and groups included in the consolidation

as of December 31, 2004

65 Notes to the consolidated financial statements

Activities of the Group

Form and content of the consolidated financial statements

66 Principles of consolidation

67 Accounting principles and valuation criteria

70 Supplementary information

73 Comments on principal asset items

82 Comments on principal liability and equity items

90 Memorandum accounts

91 Comments on principal items in the statement of income

100 Auditors report

101 Glossary

107 2005 financial calendar

INDEX

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Main consolidated companies as of December 31, 2004

Benetton Group SpAPonzano Veneto [Tv]

100%0%Benind SpAPonzano Veneto [ Tv]

100%Benetton Retail Italia SrlPonzano Veneto [ Tv]

100%Bentec SpAPonzano Veneto [Tv]

100%Olimpias SpAPonzano Veneto [ Tv]

100%Benair SpAPonzano Veneto [Tv]

50%Filatura di Vittorio Veneto SpAVittorio Veneto [Tv]

100%Bencom SrlPonzano Veneto [Tv]

100%SIGI SrlPonzano Veneto [ Tv]

100%Buenos Aires 2000 SrlPonzano Veneto [ Tv]

100%Fabrica SpAPonzano Veneto [ Tv]

100%Colors Magazine SrlPonzano Veneto [ Tv]

100%Benetton International SALuxembourg

3%Benetton Real Estate AustriaGmbH,Wien

100%Benetton Retail Ungheria KftNagykallo

100%Benetton 2 Retail Comrciode Produtos Txteis SA, Maia[Portugal]

100%Benetton Asia Pacific LtdHong Kong

100%Benetton Retail DeutschlandGmbH, Mnchen

51%New Ben GmbHFrankfurt am Main

100%Benetton InternationalProperty NV SA,Amsterdam

100%Benetton Realty Spain SLBarcelona

100%Benetton Realty PortugalImobiliaria SA, Maia [Portugal]

100%Benetton Real EstateInternational SA, Luxembourg

97%Benetton Real Estate AustriaGmbH, Wien

100%Benetton France SrlParis

100%Benetton Realty Russia OOOMoscow

100%Benetton Deutschland GmbHMnchen

100%Benetton USA Corp.

Wilmington

100%Benetton Australia Pty LtdSydney

100%Benetton Holding InternationalNV SA,Amster dam

100%Benetton Argentina SABuenos Aires

100%Benetton Austria GmbHSalzburg

100%DCM Benetton India LtdNew Delhi

100%

Benetton Ungheria KftNagykallo

100%

United Colors Communication SALugano

100%

Benetton Trading USA IncLawrenceville

100%

United Colors of BenettonDo Brasil Ltda, Curitiba

100%Benetton ManufacturingHolding NV, Amsterdam

100%Benetton Croatia dooOsijek

100%Benetton Slovakia sroDolny Kubin

100%Benetton ManufacturingTunisia Srl, Sahline

100%Benetton Japan Co LtdTokyo

50%Benetton Korea IncSeoul

100%Benetton Retailing Japan Co LtdTokyo

100%Benetton Txtil - Confecode Txteis SA, Maia [Portugal]

100%Benetton Finance SALuxembourg

100%Benetton Societ di Servizi SALugano

100%Lairb Property LtdDublin

100%Benetton Tunisia SrlSahline

100%Benetton Trading SrlSahline

100%Benetton Real Estate Spain SLBarcelona

100%Benetton Real EstateBelgique SA, Bruxelles

100%Benetton Retail Spain SLBarcelona

100%Benetton Realty France SAParis

100%Benetton Retail [1988] LtdLondon

100%Denware LtdLondon


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5

Directors and other officers

Board of Directors

Luciano Benetton [1] Chairman

Carlo Benetton Deputy Chairman

Silvano Cassano [2] Managing Director

Giuliana Benetton Directors

Gilberto Benetton

Alessandro Benetton

Reginald Bartholomew

Luigi Arturo Bianchi

Sergio De Simoi

Gianni Mion

Ulrich Weiss

Pierluigi Bortolussi Secretary to the Board

Board of Statutory Auditors

Angelo Cas Chairman

Filippo Duodo Auditors

Dino Sesani

Antonio Cor tellazzo Alternate Auditors

Marco Leotta

Independent Auditors

PricewaterhouseCoopers S.p.A.

DIRECTORSANDO

TH

ER

OFFICERS

Powers granted

[1]Company representation and power to carry out

any action that is consistent with the Companys

purposes, except for those expressly reserved

by law to the Board of Directors and to the

Shareholders Meeting, with limitation on some

categories of action.

[2] Power to carry out any action relating to the

ordinary administration of the Company as well

as certain acts of extraordinary administration

subject to limits on values.


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7

LETTER

TOS

HAREHOLDERS

Letter to Shareholders from the Chairman and Founder of the Benetton Group,

Luciano Benetton

Dear Shareholders,

2004 closes with the distribution of dividends totaling 50% of net income [which was higher

than forecasted], demonstrating the policy of the Benetton Group to create value for the

shareholders and the market.

During the year, we confirmed our talent for exporting, making 50% of total sales abroad. Having

always adopted the practice of thinking and planning with a long-term entrepreneurial mentality,

we intend to stay ahead of the competition, concentrating on emerging markets like China and

India, where we are already among the principal western players in the clothing sector. In the

Chinese market, we distribute our products; and India, where we produce and distribute, is our

bridgehead to entry into other Asian countries.

In fact, we are convinced that being entrepreneurs means believing in the future and in our abilities,

taking advantage of difficult times in the market to become more competitive. And to invest more in

the distribution network as well as in pricing policies that are more attractive to the customer.

In 2005, in particular, we intend to increase our commitment, earmarking resources of more than

200 million euro for development: with investments directed at restyling stores and new openings,

as well as at the product, in order to achieve an even more excellent quality-price ratio, and at style

and service to the network.

These are important commitments that we take on with conviction and optimism because we

believe in our network distribution model a widespread presence in the world, in large capitals

as well as in smaller towns in cooperation with partners who, in turn, believe and invest in our

common development plan.

And these are responsible choices, directed towards future growth, which can be achieved only

by those with substantial economic strength and constantly reducing financial position.

Luciano Benetton

Chairman of the Benetton Group


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Financial highlights

Key operating data [millions of euro] 2004 % 2003 % 2002 % 2001 % 2000 %

Revenues 1,686 100.0 1,859 100.0 1,992 100.0 2,098 100.0 2,018 100.0

Cost of sales 929 55.1 1,049 56 .4 1,124 56.4 1,189 56.7 1,138 56.4

Gross operating income 757 44.9 810 43.6 868 43.6 909 43.3 880 43.6

Contribution margin 653 38.7 696 37.4 744 37.3 776 37.0 740 36.7

EBITDA 317 18.8 335 18.0 376 18.8 398 19.0 400 19.8

Income from operations 217 12.9 232 12.5 243 12.2 286 13.6 309 15.3

Net income/[loss] for the year 123 7.3 108 5.8 [10] [0.5] 148 7.1 243 12.1

Key financial data [millions of euro] 2004 2003 2002 2001 2000

Working capital 688 729 798 811 772

Asset s due to be sold 8 8 114 - -

Net capital employed 1,668 1,655 1,768 1,896 1,723

Net financial position 431 468 613 640 536

Shareholders equity 1,230 1,174 1,141 1, 241 1,175

Self-financing 312 327 349 374 311

Investments in tangible

and intangible fixed assets 152 151 169 311 305

Purchase of equity investments 22 19 1 - 7

Financial ratios [in %] 2004 2003 2002 2001 2000

Return on equity [ROE] 10.0 9.2 [0.9] 11.9 20.7

Return on investments [ROI] 13.0 14.0 13.7 15.1 17.9

EBITDA 18.8 18.0 18.8 19.0 19.8

Return on sales [ROS] 12.9 12.5 12.2 13.6 15.3

Net income [loss]/Revenues 7.3 5.8 [0.5] 7.1 12.1

Share and market data 2004 2003 2002 2001 2000

Earnings/[Loss] per share [euro] [1] 0.68 0.59 [0.05] 0.82 1.35

Shareholders equity per share [euro] [1] 6.77 6.47 6.29 6.86 6.50

Dividend per share [euro] [1] 0.34 0.38 0.35 0.41 0.46

Pay out ratio [%] 50 64 n.a. 50 37

Dividend yield 3.9 3.8 4.8 3.6 4.8

Share price: December 31 [euro] 9.74 9.11 8.50 12.72 22.01

Screen-based market: high [euro] 10.18 11.30 15.90 22.44 24.20

Screen-based market: low [euro] 8.33 5.90 8.50 9.75 18.71

Price/earnings ratio [P/E] 14.3 15.4 n.a. 15.5 16.5

Share price/Shareholders equity per share 1.4 1.4 1.4 1.9 3.4

Market capitalization [millions of euro] 1,768 1,654 1,543 2,309 3,996

Average no. of shares outstanding [2] 181,558,811 181,558,811 181,341,018 180,720,969 180,505,910

Number of shares outstanding 181,558,811 181,558,811 181,558,811 181,558,811 181,558,811

[1]Restated after a reverse split of the shares approved by Shareholders Meeting on May 8, 20 01.

[2] Net of treasury shares held during the year.


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Manufacturing and other6.4%

Sportswear and equipment 4.4%

Casual89.2%

9

FINANCIALHIGHLIGHTS

2004 revenues by activity [in %]

The Americas 4.3%

Asia 10.3%

Europe 85.1%

Rest of the world 0.3%

2004 revenues by geographical area [in %]

Net revenues [millions of euro]

2004

2003

2002

2001

2000

1,686

1,859

1,992

2,098

2,018

Total capital expenditures and self-financing [millions of euro]

174

312

Total capital expenditures

Self-financing

170

327

170

311

349

374

312

311

2004

2003

2002

2001

2000


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The Benetton Group, in 2004, can be briefly summarized as follows: consolidated revenues of 1,686

million euro, impacted by the sale of the sports equipment business [completed during the first half

of 2003] and by continuing unfavorable trends in the principal foreign currency exchange rates;

increasing net income, in line with forecasts, and a satisfying cash flow, with a significant gain in

efficiency on the costs front; balance sheet strength, confirmed as being of the first order.

With consumers being very cautious in their spending and a deflationary trend generated by

both economic uncertainty and the ending of the multifiber agreement with China, the market is

presenting complex challenges. The economic environment, in the principal European markets in

particular, continues to be cautious.

But the Group can count on significant strengths to compete in this highly competitive situation.

I would particularly like to mention, on the one hand, a network of expert and experienced partners

who work for and invest in the brand; and on the other, a management team that combines

the traditional innovative Benetton culture with new and ambitious management and planning

capabilities.

In conclusion, we believe that we have strong foundations for the competitive relaunch of our

business model in the medium term, which will enable the Group to compete in all international

markets in future years.

Silvano Cassano

Managing Director

Directors report

Markets, trademarks and licenses

The areas with highest growth in 2004 were Eastern European countries and Russia, followed

by Spain and Switzerland where our presence was fur ther consolidated. In a market of primary

importance like Germany, our position was strengthened by a joint venture agreement and

purchase of stores to be managed directly. The retail network has reached 200 stores in the

principal international capitals of fa shion; this is strategic for the protection of commercial

positions which are already important or tactical for future development. In 2004, there were

new openings in Paris, in the prestigious Boulevard Haussmann, as well as in Berlin, Stuttgar t,

Stockholm, Fukuoka in Japan and St. Moritz in Switzerland.

Regarding emerging countries, plans for commercial agreements are being studied in

Middle-Eastern markets and an organization has been set up in India, controlled from Hong

Kong, which is directly managing production and sales in the local market.

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DIRECTORSREPORT

Our market response must travel at the same speed as

our ideas. Fabrizio De Nardis, Chief Commercial Officer


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12

DIRECTORSREPORT

The stores network has been involved in a program to change internal architecture, developed

following specific and consistent concepts with a more precise and distinc tive positioning of

the various brands. Dur ing 2004, the new Twins concepts were launched for UCB, designed

to express the various styles in the collections more effectively, and for Undercolors. In 2005,

Pentagram, the new Sisley concept will make its debut.

Also in 2004, a progressive sales policy ac tion was introduced which , confirming the central

role and value of the partner-entrepreneur system, aims to achieve greater competitiveness

based on more pronounced flexibility in terms of pricing and margins, which should guarantee

benefits both to the sales network , providing investment to keep it fresh and efficient, and to

the final customer.

In terms of product mix, a program was started to enhance the accessory collections

of the various brands, with the twofold objective of completing the proposed looks and

of providing interesting independent purchasing opportunities. A single team is involved in

this, combining design, marketing and sourcing skills.

On the license front, during 2004, development continued, in cooperation with highly

experienced and competent companies and producers, in sectors [from furnishing to

publishing, from fabrics to dcor, from perfume to stationer y] in which Benetton taste, design

and way of life make an innovative and unique contribution. In particular, agreements were

signed in the jewelry and contraceptive sectors and the widening of the product ranges offered

continued, from toys to childrens books, with Benny the sheep, the Benetton brand mascot,

as the star.

Production organization

Capital expenditure was directed above all towards the managerial independence of

production centers in Croatia, Hungary and Tunisia, which operate complete cycles [from

raw material to finished product] and on quality control systems which fully meet the strictest

Benetton Group standards.

In an ever more competitive scenario, the production organization, which maintains its

strategic hear t [design, planning, coordination and programming] in Italy, is arranged into a

dual production line: in Italy, based mainly on a logic of speed of response to the market,

and abroad, where efficiency is combined with the necessary cost control. The process of

decentralization of production activities within Europe continued during the year.

Special attention was given to the sourced products area, with total outsourc ing of

production, reserved for particular products and specific markets like China. This area

of activity, among other things, has triggered competitive benefits within the Benetton

organization, in terms of cost reduction and shortening of production times.

In 2004, the Hong Kong sourcing platform was completed, which, with 40 specialists, ensures

faster action and better customer service in the markets of China, Far Eastern countries, Japan

and the United States.

In addition, the new multi-hub model was designed and implemented for management

of the international logistics platform. This model is supported by a centralized I.T. system,

accessible to the various logistics centers, which is able to coordinate and optimize, from the

The production organization has its head in Italy and its

operations arm without borders.Biagio Chiarolanza, Chief Operating Officer

2004 t l b b d [i %]


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13

DIRECTORSREPORT

2004 net sales by brand [in %]

Killer Loop 0.7%

Other6.4%

Sisley18.9%

Playlife 2.0%

United Colors of Benetton 72.0%

Net sales by brand [in %]

2004

2003

Casual89.2%

Sportswear

and equipment4.4%

Manufacturing

and other6.4%

Casual

84.9%

Manufacturingand other

6.5%

Sportswearand equipment

8.6%

Revenues by activity [in %]

2004

2003

United Colors of Benetton

72.0 %

Sisley

18.9%

United Colors of Benetton

67.5%

Playlife

1.4%

Playlife

2.0%

Other

6.2%

Other

6.4%

Prince and Ektelon

1.5%

Nordica

0.3%

Killer Loop

0.8%

Killer Loop

0.7%

Rollerblade

3.3%

Sisley

19.0%

headquarters dispatches of products according to required delivery date and geographic


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14

DIRECTORSREPORT

headquarters, dispatches of products according to required delivery date and geographic

location of the customer, combining timeliness of information and better control of the

business.

The new Product Technical function was brought into operation, which, acting as a link

between product, operations and commercial functions, focuses efforts and resources on

the common objectives of innovation and programming, also working with research centers,

universities and laboratories.

Human resources

During the year, Human Resources function concentrated on the development of an

organization which is able to merge the innovative capacity of new resources with the company

culture that encompasses the experience and strong managerial tradition of Benetton.

One of the many project s under development to be implemented was Project Vivaio, aimed at

identifying company resources of high-potential young people, to be integrated, in line with the

companys multicultural and international vision , with talents coming from all over the world,

people with innovative abilities to be fitted into the three key areas of sales and marketing,

product and operations.

Another impor tant project implemented in the year was the Product Technology Center, a

center of excellence which cooperates with the most prestigious international institutes

and universities [from the Massachuset ts Institute of Technology to The Milan Politecnico],

dedicated to the development of new and innovative materials, fabrics and product s to be

introduced into the production lines.

Information technology

The most significant initiative in the year was par t ofProject Phoenix, of which the main

objective is to support the core business through total systems integration. A new production

planning project was initiated which provides for a complete review of the process and for

application and technological updating of the systems used. This project forms par t of a

complete review of the production and logistics struc ture in order to achieve a shorter time to

market than at present, and with optimized and coordinated customer deliveries.

The work related in particular to the merchandized products support system [from planning

to production by the chosen supplier, from Benetton quality control to delivery to the

customer] with high savings in terms of costs and time. IT support was also implemented for

The human capital at the center of the company,

a mix of innovative abilities and historical knowledge.

Andrea Negrin, Human Resources Of ficer

Investments in Information Technologies are the new frontier

of competition.Adolfo Pastorelli, Chie f Information Technolog y

the new logistics/distribution structure in Hong Kong for products sourced in the Far East:


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DIRECTORSREPORT

the new logistics/distribution structure in Hong Kong for products sourced in the Far East:

a multi-hub model which will contribute to increase our international presence due

to greater timeliness of information flows, combined with better control of all activities.

Concerning the foreign production centers, the new production control system has enabled

us to monitor stages of production in the various production units in real time and to make

projections for the dispatch of orders.

Accounting, tax and corporate organization

The impact of the introduction of International Accounting Standards/International Financial

Reporting Standards [IAS/IFRS] is currently being analyzed, with the resultant organizational

repercussions, also in terms of training and information systems .

A projec t has al so been s tar ted to adjust for the requ isites of the Sarbanes Oxley Act, the

2002 American law that requires companies listed on the NYSE to provide and document a

detailed control and documentation system for company processes and data reported in the

financial statements. This project will ensure Benetton Group compliance within the time

limits set by the law.

Finally, during 2004, the Company has been working on consolidation of the corporate

structure created by the business reorganization which took place in December 2003.

Investor relations

During 2004, Investor Relations stayed in constant touch with the market: in the year, various

meetings were organized with members of the national and internationa l financial community

and major brokers continuously publicized research on Benetton shares.

The departments activities also included telephone conferences at the time of publication

of the results, organization of days dedicated to financial ana lysts, which involved top

management and some operational managers, as well as participation in sector conferences.

2004 also saw the celebration of 15 years listing on the NYSE. On that occasion, June 8 , the

Benetton Group took par t in the ceremony at the end of the New York Stock Exchange

working day, ringing the traditional closing bell.

During 2004, the Benetton Group Investor Relations website was enhanced with new sections:

IAS/IFRS, Glossary, Share your thoughts, FAQ [Frequently Asked Questions]. The structure of

the Corporate Governance and Analyst coverage sections were revised to enhance the contents

and make navigation easier.

The website characteristics of completeness, clarity and ease of navigation, in April, earned the

Group the prize for the best European IR website in 2004 and, in September, it was awarded the

prize for the best IR website in the consumer goods sector by the Web Marketing Association.

In September 2004, an identification of the composition of shareholders was completed, which

showed the subdivision of shares on the market by geographical area ; in particular, shares

held by European investors were equivalent to 67% of the total floating shares [33%], while

American investors represented 31% .

15

Financial soundness and strong operational leverage are

the certainties which can be relied on for future growth.

Pier Francesco Facchini, Chief Financial Officer

Communications


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16

DIRECTORSREPORT

Communications

In 2004, Fabrica, the Benetton communication research center had its tenth birthday. What

immediately became a workshop where communication for the future could be planned

and, at the same time, tested in the field, is now an international, multicultura l center which

participates in the free circulation of opinions and in the debate on ideas. The anniversary,

celebrated by a book published by Electa, also provided an opportunity to highlight the role of

Fabrica, a s a frontier outpost of the Benetton Group business culture.

Fabrica ran the United Colors of Benetton 2004 fall-winter communication campaign,

which showed pictures of orphaned primates confiscated from illegal traders. The campaign

continues Benettons reflection on diversity, seen as the richness of our world, extending

it from the variety of human races to living beings that occupy first place in zoological

classificat ion. It was presented in London in October, at the Natural History Museum, which

will host the entire exhibition of pictures f rom May to July 2005. The English publisher Boots

has published the bookJames and other Apeswith an introduction by Jane Goodall, one of the

leading experts on the science of animal behavior and habitat and the defense of nature, who

backed the Benetton project.

Also in fall season, the product campa ign, photographed by David Sims for Fabrica, was

launched; this reaffirmed the values of the United Colors of Benetton brand, in particular

color, youth and contemporary style.

Corporate Governance


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17

DIRECTORSREPORT

p

Corporate Governance.Again, in 2004, the Benetton Group paid part icular at tention to

corporate governance, continuing with the adaptation of organization structures relating to

control, decision-making and management to best national and international practice, complying

with the standards required by the Code of Conduct for Listed Companies.

The corporate governance system, as outlined below, is based on the principles of proper

management and information, achieved by means of a continuous process of verification of their

efficiency and effectiveness.

The Company has adopted a traditional system of corporate governance by virtue of which the

management body of the Company is the Board of Directors, the monitoring body relating to

compliance with such matters as the law, the articles of association and the principles of correct

administration is the Board of Statutory Auditors, while the independent auditors carry out the

accounting audit.

Ownership of the Company.As described in greater detail in the Ownership of the

Company section of the Directors report relative to the 2004 financial statements and based

on the latest available report, the Shareholder Edizione Holding S.p.A. controls the Company

with a shareholding of 67.144% .

Board of Directors. Directors.

Executive Committee, Related Party Transactions.

Board of Directors. During 2004, the Board of Directors held eight meetings during which they

reviewed and approved guidelines for the Groups operations, proposals for changes to the

organization and general pol icies regarding the management of human resources, proposals

for the reorganization of the corporate structure, the trend of business, extraordinary

operations, and the quarterly and half-year results.

During these meetings, the Executive Direc tors also provided adequate information to the

Board of Directors and to the Board of Statutory Auditors concerning any significant, atypical

or unusual transactions or transactions with Related Parties. The Board of Directors also

paid particular at tention to the periodic reports prepared by the Internal Audit Committee

regarding its activities and, amongst other things, evaluation of the adequacy of the internal

audit system.

For Board meetings, Directors are provided, sufficiently in advance, with all the documentation

and information needed to enable the Board to make decisions with adequate background

knowledge of the matters in question.

The current system of powers granted by the Board of Directors on May 12, 2004, as

illustrated below, and the information procedures adopted by the Company ensure that

all transactions of major economic and financial importance are submitted for Board

approval. The code of conduct relating to transactions with Related Parties and significant

transactions, adopted by the Company on March 30, 200 4, also requires that the Executive

Directors, al though having the relative powers, submit for prior approval of the Board of

Directors, any transactions with significant balance sheet, profit or financial impacts for the

Company and the Group. For significant transactions which exceed a value of 1.5 million euro,

each Director or Statutor y Auditor has the right to ask for an evaluation by one or more

independent experts.

Directors. The Board of Directors, which remains in office until the Shareholders meeting


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18

DIRECTORSREPORT

to approve the financial statements to December 31, 2004, is made up of eleven Directors.

On September 9, 2004 , the Company, at the time of adopting some changes to the artic les

of association resulting from coming into effect of the recent reform of company law, took the

opportunity to increase the maximum number of members of the Board of Directors from

eleven to fifteen.

The Chairman, Luciano Benet ton, has power to represent the Company and to carry out all

acts that are pertinent to the Companys activities, with limits on certain categories of acts and

in particular the following operations:

_purchase and sale of shareholdings, company stocks and bonds for amounts over

25 million euro;

_purchase and sale of companies and businesses, purchase and sale of real propert y

for amounts over 25 million euro;

_granting of loans to persons or entities other than subsidiary companies for amounts

over 5 million euro.

The Managing Director, Silvano Cassano, has power to carry out acts relating to ordinary

administration, as well as certain acts of extraordinary administration, subject to limits on

values for the following operations in particular:

_purchase and sale of shareholdings and company stocks for amounts over 5 million euro;

_purchase and sale of secur ities and bonds for amounts over 10 million euro;

_purchase and sale of companies and businesses, purchase and sale of real propert y

for amounts over 10 million euro;

_granting of loans to persons or entities other than subsidiary companies for amounts

over 5 million euro.

None of the other Directors have executive powers.

There are seven Non-Executive Directors [Carlo Benetton, Gilberto Benetton, Giuliana

Benetton, Reginald Bartholomew, Luigi Arturo Bianchi, Sergio De Simoi and Ulrich Weiss]

and, of these, three [Reginald Bartholomew, Luigi Arturo Bianchi and Ulrich Weiss] are

independent from the owners and from corporate management, as prescr ibed by the Code

of Conduct for Listed Companies, while all are assiduous participants in the Boards activities.

The Board of Directors , also based on information supplied by the Directors themselves,

annually checks the exis tence of the requirements of independence of each of its members in

accordance with the Code of Conduct for Listed Companies.

The following table lists the of fices which Directors hold in other companies not belonging to


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19

DIRECTORSREPORT

the Group:

Director Office Company

Luciano Benetton Director 21,Investimenti S.p.A., Edizione Holding S.p.A.

Carlo Benetton Deputy Chairman Edizione Holding S.p.A.

Director Tecnica S.p.A .

Gilberto Benetton Chairman Autogrill S.p.A., Edizione Holding S.p.A., Ragione S.A .p.A.

di G. Benetton & C.

Deputy Chairman Telecom Italia S.p.A., Olimpia S.p.A.

Director Banca Antoniana Popolare Veneta S.p.A., Mediobanca S.p.A.,

Autogrill Group Inc., Lloyd Adriatico S.p.A.,

Autostrade S .p.A., Pire lli & C. S.p.A . , Schemaventotto S .p.A.

Giuliana Benetton Director Edizione Holding S.p.A.

Alessandro Benetton Chairman and

Managing Director 21,Investimenti S.p.A., 21,Investimenti Partners S.p.A.

Chairman 21,Partners S.G.R. S.p.A.

Deputy Chairman Nordest Merchant S.p.A.

Sole Director Saibot S.r.l.

Director Edizione Holding S.p.A., Autogrill S.p.A., Sirti S.p.A. ,

Permasteelisa S.p.A., 21,Centrale Partners S.A .

[member of the Supervisory Board]

Reginald Bartholomew Director Pirelli & C. Real Estate S.p.A.

Luigi Arturo Bianchi Director Anima S .G.R. S .p.A., Assicurazioni Gener ali S .p.A.

Gianni Mion Deputy Chairman Tim S.p.A.

Managing Director Edizione Holding S.p.A., Schemaventotto S.p.A.

Director 21,Investimenti S.p.A., Autogrill S.p.A., Autogrill Group Inc.,

Autostrade S .p.A., Car tiere Burgo S .p.A.,

Banca Antoniana Popolare Veneta S.p.A., Olimpia S.p.A.,

Telecom Italia Media S.p.A., Telecom Italia S.p.A.,

Fondazione Cassa di Risparmio di Venezia,

Luxottica Group S.p.A .

Sergio De Simoi Auditor Olimpia S.p.A.

Director Autostrade S.p.A ., Schemaventotto S.p.A .,

21,Investimenti Partners S.p.A., 21,Investimenti S.p.A.

Ulrich Weiss Director Ducati Motors S.p.A., HeidelbergCement AG [Heidelberg],Continental AG [Hannover], Bego Medical AG [Bremen]

Executive Committee.An Executive Committee was set up in September 20 03, consist ing, in

dd h Ch L B f h M D S l C d


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DIRECTORSREPORT

addition to the Chairman Luciano Benetton, of the Managing Director Silvano Cassano and

Directors Alessandro Benetton and Gianni Mion.

Executive Committee meetings are also at tended by the Board of Statutory Auditors and the

Chairman of the Internal Audit Committee, neither of which have the right to vote.

One of the Executive Committees tasks is to define, upon proposal by the Managing Director,

Company and Group strategic, industrial and financ ial plans, the annual budget and interim

adjustments for subsequent submittal to the Board of Directors.

The Executive Committee also reviews and approves investment and divestiture plans

of particular importance, the granting of loans and the giving of guarantees, and analyzes

the more important problems relating to the Companys performance , which in turn enables

the Board of Directors to comply more effectively with its legal obligations.

The Executive Committee met seven times during 2004.

Related Party Transactions. On March 31, 2004, the Board of Direc tors formally adopted the

Rules of Conduct that Benetton Group S.p.A. will have to comply with in matters regarding

Related Party Transactions and significant transactions. These Rules reiterate the central role

of the Board of Directors in the Companys system of corporate governance and aims to

ensure that the transactions being regulated are carried out according to criteria of substantial

and procedural fairness.

Related Party Transactions, also non-intercompany transactions, which are atypical, unusual or

concluded with non-standard conditions, even though not normally subject to Board approval,

must, nevertheless, be submitted for prior Board approval.

Prior Board of Directors approval is also required for transactions that could have a significant

economic or financial impact on the Company or the Group and which in terms of value,

counterparty quality, object, methods or timing could jeopardize the Companys assets.

For both of these types of transactions , the Board of Directors has to decide on the basis,

among other things, of detailed information acquired with suit able advance notice.

The above-mentioned Rules of Conduct do not expressly provide for directors with an

interest in an operation to leave the board meeting. Therefore it is left to the Board to decide

whether it is suitable or not to leave when this could prejudice the maintenance of a quorum

in the meeting.

The Rules of Conduct in relation to significant transactions and transactions with Related

Parties have been adopted by subsidiary companies in 2005.

Board of Statutory Auditors. The Board of Statutory Auditors is made up of:_Angelo Cas . Chairman;

_Filippo Duodo . Auditor;

_Dino Sesani . Auditor;

_Antonio Cor tellazzo . Al ternate Auditor;

_Marco Leotta . Al ternate Auditor.

All members of the Board of St atutor y Auditors were appointed on May 14, 2002. The ir

mandate expires on the date of the Shareholders Meeting to approve the 2004 financial

statements.

The Statutory Auditors are appointed, in accordance with the criteria laid down in ar t. 148of the Finance Consolidation Act, which is implemented in art. 19 of the articles of association,

on the basis of voting lists submitted to the Companys registered office prior to the

Shareholders Meeting, accompanied by an adequate description of each candidates personal

and professional characteristics.


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There is no Auditor representing the minority Shareholders, as they did not present

alternative voting lists


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22

DIRECTORSREPORT

alternative voting lists.

The Board of Statutory Auditors met seven times during 200 4.

Management and coordination in accordance with art icles 2497 and subsequent of the

Italian Civil Code. In January 2004, all of the Italian subsidiaries, directly or indirectly wholly

owned by Benetton Group S.p.A., made the announcements required by art. 2497-bis of

the Italian Civil Code, recogniz ing the management and coordination function performed by

the Parent Company Benetton Group S.p.A.

Compensation Committee and Committee for Proposed Appointments of Directors.

In implementation of the Code of Conduct for Listed Companies and with the duties

mentioned therein, the Board of Directors reconfirmed, as members of the Compensation

Committee for 2004, Directors Reginald Bartholomew, Ulrich Weiss and Gianni Mion,

Chairman. The Committee, therefore, consists mainly of non-executive directors; in view

of the composition of the shareholders, a non-independent director is included among the

members of the committee.

The Compensation Committee, by express provision of the relative rules governing its

activities, formulates its proposals for submission to the Board of Directors, in the absence

of persons directly interested, who leave the meeting during discussions and resolutions

concerning them.

During 2004, the Compensation Committee met three times.

For fiscal year 2004, compensation for executive Directors and/or Directors with special tasks

was apportioned by the Board of Directors on the basis of the proposal formulated by the

Compensation Committee, in the amounts indicated in the notes to the consolidated financial

statements of the Benetton Group, following the determination of the aggregate compensation

by the Shareholders Meeting, in accordance with the Articles of Association.During the reference year, the Compensation Committee a lso proposed, having used a

company with experience in the preparation of variable compensation schemes, adoption

of a Stock Option Plan aimed at motivation and retention of the Companys top managers.

After adoption of the Plan by the Board of Directors on July 15, 2004, the Compensat ion

Committee provided the Board with fur ther indications of the number of options to be

assigned and the identity of the persons to receive them. The said Stock Option Plan is linked

to company results and achievement of preset objectives.

Further information is shown in the paragr aph stock option in the Directors Report

accompanying the statutory and consolidated financial statements of Benetton Group S.p.A.Given the current composition of the Companys Shareholders, the Board of Direc tors does

not consider it necessary yet to set up a Committee for proposed appointments of Directors.

Directors are nominated on the basis of a single voting list which is deposited at the

Companys head office prior to the Shareholders Meeting, accompanied by an adequate

description of the candidates personal and professional characteristics.

Internal Audit Committee. Internal audit. The Internal Audit Committee is made up of three

Non-Executive Directors, two of whom are independent. On May 12, 2004, the appointments

of Directors Ulrich Weiss, Luigi Arturo Bianchi and Sergio De Simoi were confirmed.The Internal Audit Committee has the following tasks:

_make proposals for the establishment of an internal audit department responsible for the

internal audit and to determine the duties of this department;

_review periodic reports, reporting relationships and the executive plan of persons

responsible for internal audit, also promoting actions for the improvement of the internal

audit system;


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DIRECTORSREPORT

audit system;

_report to the Board of Directors, at least every 6 months, in connection with its approval

of year-end financial statements and the half-year report, on activities carried out and on

the adequacy of the internal audit;

_monitor compliance with, and periodic revision of, corporate governance rules;

_verify, together with the head of the finance function and the independent audit company,

the adequacy of accounting principles used;

_assess, together with the heads of the finance and internal audit functions, proposals

submitted by independent auditing firms for assignment of the independent audit, making

a recommendation for assignment of the task that the Board of Directors has to submit to

the Shareholders Meeting;

_evaluate the results presented in the independent auditors report.

The Committee performed its functions during 2004, meeting five times under the

chairmanship of Ulrich Weiss and with the participation of the entire Board of Statutory

Auditor s, in conformity wi th the regulations adopted by the Company.

The functionali ty and adequacy of the internal audit system were guar anteed by the Board ofDirectors, w ith the help of the specific corporate funct ion coordinated by the Head of Internal

Audit . Organization and information systems were found to be able to assure, also as regards

subsidiaries, monitoring of the administrative and accounting system and of the central and

decentralized organizationa l structure. Work continued on mapping of processes and risks

concerning the activi ties of all Group companies, as well as operational and budget control

of individual businesses and review of internal auditing procedures.

These activities , taking into account the listing of Benetton shares also on the United States

stock exchange, were car ried out observing likewise the regulatory provisions contained in the

so-called Sarbanes-Oxley Act.Non-Executive Directors, the Board of Statutory Auditors, and the independent auditing firm

all received adequate information in this respect.

During 2004, the Internal Supervisory and Monitoring Body, as required by article 6,

paragraph 1 letter b] of Legislative Decree 231/2001, consisting of Ulrich Weiss, Chairman,

Luigi Arturo Bianchi and Roberto Taiariol, performed its checks on operation and observance

of the Organizational and Operational Model adopted by the Company. This Model, you are

reminded, consists of:

_a code of ethics and of conduct;

_operating procedures and reporting systems;_an internal supervisory and monitoring body;

_a disciplinary system.

The Organizationa l and Operational Model was also adopted by the main Group companies

during 2004.

Handling of confidential information.All confidentia l information is managed by the Managing

Director, upon consultation with the Chairman. Together, the Managing Director and the

Chairman also ensure that adequate checks are carried out with regard to the classification of

confidential information in accordance with current legislation.The Board of Directors approves all press releases relating to approval of the annual financial

statements, the half-year report, and the quar terly report, as well as ex traordinary operations

that are subject to the approval of the Board of Directors.

All communicat ions to and relations with the press, insti tutional investors and individual

Shareholders are conducted by the Media and Communications Department and the Investor

Relations Department, respectively.


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24

DIRECTORSREPORT

p , p y

Implementing the Regulation for Markets Organized and Managed by Borsa Italiana S.p.A.

[Regolamento dei Mercati Organizzati e Gestiti da Borsa It aliana S.p.A.] , since fiscal year 2002,

the Board of Directors has officially adopted the Code of Conduct for Internal Dealing.

This is designed to regulate obligations of notification and disclosure concerning transactions

undertaken in financial instruments issued by Benetton Group S.p.A. by those persons defined

by the Code as Important Persons.

The notification obligations imposed by the Code on Important Persons provide for tighter

timing and involve wider categories of subjects and securities than does the Regulation of Borsa

Italiana S.p.A.

Since Benetton Group S.p.A. shares are also listed on the Frankfurt stock exchange, the Code

of Conduct also implements the obligations of notification and disclosure provided by the

Wertpapierhandelsgesetz WpHG law [Securit ies Trading Act], Sec tion 15a, introduced by

the 4th Finanzmarktfrderungsgesetz [Fourth Financial Markets Promotion Act].

Relations with Institutional Investors and with other Shareholders. The Investor Relations

Department ensures correct management of relations with financial analysts, institutionalinvestors and individual Italian and foreign Shareholders. Among other things, this department

co-ordinates activities with members of the Financial Community.

This function complies with the criteria of fairness, clarity and equal access to information

contained in the Market Information Guide drafted by Borsa Italiana S.p.A., making available

in the Investor Relations section of the Companys website http://www.benettongroup.com/

investors/ ample documentation and information concerning the Company, with particular

reference to price-sensitive information.

The following documents, among others, are available on the site: the Articles of Association,

the Code of Conduct for Internal Dealing, the Organizational and Operational Model, theRules of Conduct in Related Party Transactions, press releases and periodical financial

information.

This document is available on website http://www.benettongroup.com/investors/ in the

Corporate Governance section.

Supplementary information


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25

DIRECTORSREPORT

Benetton shares and shareholdings

Treasury shares. During the period, Benetton Group S.p.A. neither bought nor sold any

treasury shares or shares or stock in parent companies, either direc tly or indirectly or through

subsidiaries, trustees or other intermediaries.

Shares held by Directors and Statutory Auditors.Directors Luciano, Gilberto, Giuliana and Carlo

Benetton directly and indirectly hold equal interests in the entire share capital of EdizioneHolding S.p.A., the parent company of Benetton Group S.p.A. and owner of 67.144% of the

share capital.

Except as indicated, Directors Luciano, Gilberto, Giuliana and Carlo Benetton [including

their not legally separated spouses and children who are minors] have not, during 2004, held

other shares in Benetton Group S.p.A. or in subsidiary companies, either directly or through

subsidiaries, trust companies, or third par ties, except as indicated below, referring to Gilberto

Benetton.

As indicated in the statements received, dur ing 2004 no other equity investments in the

Company have been held by its other Directors and Statutory Auditors, except thoseindicated in the table below:

Stock opt ion plan. The resolution of the extraordinary Shareholders Meeting authorized the

Board of Directors, in accordance with article 2443 of the Italian Civil Code, to decide, also

more than once and for a maximum period of five years from the date of the shareholders

meeting resolution, to increase the share capit al, for cash, one or more times, with the

consequent issue of ordinary shares, with normal ownership, to be offered for subscription

by employees of Benetton Group S.p.A . and subsidiary companies at prices equivalent to the

nominal value of 1.30 euro each, as well as a share premium determined at the time they are

assigned, on the basis of the arithmetic average of share prices recorded in the last month

in Borsa Valori di Milano [Milan Stock Exchange], excluding option rights in accordance witharticle 2441, final paragraph of the Italian Civil Code, for a maximum total of 6.5 million euro,

through the issue of a maximum of 5,000,000 ordinary shares with a nominal value of 1.30

euro each.

The Board of Directors on the same date resolved to increase, for cash, the share capital

by 236,026,454.30 euro to 240,230,104.40 euro to service the share incentive Plan, issuing

3,233,577 options which confer the right to subscribe to the same number of Company shares,

at a price of 8.984 euro. If the resolved increase is not fully subscribed within the period from

time to time fixed for the purpose, the capital will be increased by an amount equivalent to

subscriptions received at the expiry of this period.

These stock options represent an instrument to motivate and retain, in the medium-long term,

employees and directors, selected from among the top executives of the Company and its

subsidiary companies, who hold offices which are considered the most important strategically.

Number of Number Number Number of

shares held as of of shares of shares shares held as Type of

Name and surname 12.31.2003 Company purchased sold of 12.31.2004 ownership

Gilberto Benetton 45,000 Benetton Group S.p.A. - - 45,000 Owned

Alessandro Benet ton 4,000 Benetton Group S.p.A. - - 4,000 Owned

Ulrich Weiss 3,500 Benetton Group S.p.A. - - 3,500 Owned

The assignment cycle envisaged consist s of a period when exercise of the options is restricted

of four years from the date of assignment [the so-called vesting period] and a further period


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DIRECTORSREPORT

of five years for exercise of the options; however, under certain conditions , there will be the

possibility of exercising up to a maximum of 50 % of options assigned two years after the date

of assignment.

The proportion of offers assigned that will become effectively exercisable, once the vesting

period of four years has passed, will depend on the level of achievement, accumulated in the

vesting period, of preset objectives which are used as indicators of EVA [Economic Value

Added] performance with reference to the 2004/2007 four year period.More details are contained in the Stock Option Plan Rules available under Codes in the

Corporate Governance/ Investor Relations section of the Companys website.

Ownership of the Company.Edizione Holding S.p.A. [with registered office in Treviso, Italy],

a holding company, wholly owned by the Benetton family, has the majority holding in the

Company with 121,905,639 ordinary shares , equivalent to 67.144%.

[1]As per la st Spafid survey as of J anuar y 13, 2005.

Shareholders by class %

Edizione Holding S.p.A. 67.144Institutional investors and banks 17.220

Other investors 15.636

By size of holding [1] No. of shareholders Number of shares

From 1 to 4,999 shares 27,221 10,502,130

From 5,000 to 9,999 shares 206 1,395,851

Over 10,000 shares 371 176,692,592

Holdings not classified [7,031,762]

Total 27,798 181,558,811

Performance of Benetton shares. The performance of Benetton shares during 2004 was

positive overall, with an increase of 6.9% compared with December 31, 2003, agains t a Mibtel


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01.0

2.0

4

02.0

2.0

4

03.0

1.0

4

04.0

1.0

4

05.0

3.0

4

06.0

1.0

4

07.0

1.0

4

08.0

2.0

4

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

09.0

1.0

4

10.0

1.0

4

11.0

1.0

4

12.0

1.0

4

12.3

1.0

4

10.5

10.0

9.5

9.0

8.5

8.0

Volume Share [euro]

01.0

2.0

4

02.0

2.0

4

03.0

1.0

4

04.0

1.0

4

05.0

3.0

4

06.0

1.0

4

07.0

1.0

4

08.0

2.0

4

2,500,000

2,000,0001,500,000

1,000,000

500,000

09.0

1.0

4

10.0

1.0

4

11.0

1.0

4

12.0

1.0

4

12.3

1.0

4

28.0

26.024.0

22.0

20.0

Volume ADR [US $]

27

DIRECTORSREPORT

performance of 18.1% and a Midex performance of 12.6%.

In the American market, Benetton ADRs [American Depositary Receipts] went up by 17.4%

with increased trading during the year.

[1] Restated after a reverse split of the shares approved by Shareholders Meeting on May 8, 2001.

[2] Net of treasury shares held during the year.

Performance of ordinary share and Benetton ADR - Dec . 31, 2003 to Dec. 31, 2004

Share and market data 2004 2003 2002 2001 2000

Earnings/[Loss] per share [euro] [1] 0.68 0.59 [0.05] 0.82 1.35

Shareholders equity per share [euro] [1] 6.77 6.47 6.29 6.86 6.50Dividend per share [euro] [1] 0.34 0.38 0.35 0.41 0.46

Pay out ratio [%] 50 64 n.a. 50 37

Dividend yield 3.9 3.8 4.8 3.6 4.8

Share price: December 31 [euro] 9.74 9.11 8.50 12.72 22.01

Screen-based market: high [euro] 10.18 11.30 15.90 22.44 24.20

Screen-based market: low [euro] 8.33 5.90 8.50 9.75 18.71

Price/earnings ratio [P/E] 14.3 15.4 n.a. 15.5 16.5

Share price/Shareholders equity per share 1.4 1.4 1.4 1.9 3.4

Market capitalization [millions of euro] 1,768 1,654 1,543 2,309 3,996Average no. of shares outstanding [2] 181,558,811 181,558,811 181,341,018 180,720,969 180,505,910

Number of shares outstanding 181,558,811 181,558,811 181,558,811 181,558,811 181,558,811


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Relationships between the parent company, its subsidiaries and other related parties.

The Benetton Group has limited trade dealings with Edizione Holding S.p.A. [the parent

company] with subsidiary companies of the same and with other parties which directly or


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29

DIRECTORSREPORT

company], with subsidiary companies of the same and with other parties which, directly or

indirectly, are linked by common interests with the majority Shareholder. Trading relations

with such parties are conducted on an arms-length basis and using the utmost transparency.

These transactions relate mostly to purchases of tax credits and services.

In addition, Italian Group companies are participating in a national tax consolidation per

artic le 117 and subsequent of the Tax Consolidation Act DPR 917/86 based on a proposal by

the consolidating company Edizione Holding S.p.A. which exercised the option for this regimeon December 31, 2004. The duration of the option is three years starting from the 2004 fiscal

year. The rela tionships a rising from par ticipation in the consolidation are governed by specific

Rules approved and signed by all participating companies.

The relevant totals appear below:

The Group has also undertaken some transactions with companies directly or indirectly

controlled by, or in any case, under the influence of, managers serving within the Group.The Parent Companys management believes that such transactions were completed at

market rates. The total value of such transactions was not, in any case, significant in relation

to the Groups total value of production . No Director, Manager, or Shareholder is a debtor

of the Group.

Management of financial risks. The Group has always paid special attention to financial

risk management by constantly monitoring its exposures and managing them by means of

derivative instruments.

Exposure to exchange risk is marginal and almost totally concentrated in the US dollar,Japanese yen, British pound and Swiss franc; at the end of 2004, such exposure was

substantially neutralized by Outrights, Currency Swaps, Non Deliverable Forwards and

Collars [zero cost] for:

[thousands of euro] 2004 2003

Accounts receivable 32,864 1,198

_including for participation in the Edizione Holding S.p.A. tax consolidation 32,283 -Accounts payable 19,285 11,049

_including for participation in the Edizione Holding S.p.A. tax consolidation 18,664 -

Purchases of raw materials 2,982 3,432

Other costs and services 13,229 13,863

Sales of products 17 76

Revenue from services and other income 937 776

Currency to sell Currency to buy

[in millions] Currency Euro Currency Euro

US dollar 159 124 116 87

Japanese yen 49,672 368 33,300 247

British pound 35 51 2 2Swiss franc 50 33 1 1

During 2004, the Group did not use any derivative instruments that involved collecting or

paying premiums.


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DIRECTORSREPORT

Under the Groups guidelines, its exposure to exchange risk is split into:

_exposure to economic exchange risk: represented by the sum of monetary flows [receipts

and payments in the same currency are net ted] in all currencies other than the functional

currency. Risk exposure arises as soon as the price lists for collections are defined [each

year being divided into two main collections], which takes place approximately 15 months

prior to the time when cash will be received: the prices in foreign currency applied to thebudget volumes for each item are converted at an exchange rate [known as the target rate]

to calculate a budgeted result that the hedging policy has to ensure;

_exposure to exchange translation risk: on the net investment made by Benetton Group

S.p.A. in foreign Group companies. Each variation in the exchange rate generates a new

value for the net amount that the Parent Company has invested in Group companies

located outside of the euro-zone. The translation differences that arise in such cases

represent gains or losses that have a cash impact when there is a distribution of dividends

or if the foreign subsidiary is liquidated or sold off; these differences do not flow into the

statement of income, but are a direct adjustment to Group Shareholders equity.

In the same way as the exposure to exchange risk, exposure to interest riskis also

monitored on an ongoing basis and managed by way of derivative instruments. At the end

of the year, the risk exposure on the liabilities side [essentially a floating-rate bond loan with

maturity in 2005 for 300 million euro and a floating-rate syndicated loan with maturity in

2007 for 500 million euro] is partially hedged by interest rate swaps for a notional value of

240 million euro, taken out mostly in previous years of which 190 million will mature in 2005.

The offsetting asset risk exposure is controlled by a policy, approved by the Parent CompanyBoard of Directors in July 2003. The policy requires that investment instruments be bank

deposits, monetary funds or short-term bonds and fixed or variable rate bonds with

durations under three years. These instruments have to have an issuer rating of not less

than A- from S&P or Fi tch or A3 from Moodys. Moreover, in order to avoid an excessive

concentration of risk in a single issuer in the case of issuers with a rating of less than AA

[or equivalent], the maximum amount that can be invested must not exceed 10% of the

Groups total investment of liquid funds up to a maximum of 20 million euro.

Privacy and the protection of personal data. As early as 2000, the Company adopted theSecurity Planning Document [SPD] envisaged by the legislation then in force. This concerned the

processing by IT systems of information considered sensitive or judicial.

Legislative Decree 196 of June 30, 2003, partially amending the previous regulations, provides

for adoption of the new minimum security measures and compliance with reference to the same

data by December 31, 2005 [date in the latest extension by Decree Law 314 of December 30,

2004, article 6-bis].

The Company updated its SPD as of 2004 and will again update it in compliance with the new

rules by December 31, 2005.

All Group companies have brought themselves into line wi th the data security model adoptedby the Parent Company.

Directors. Parent Company Directors as of December 31, 2004 are as follows:

Name and surname Date of birth Appointed Office


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31

DIRECTORSREPORT

Luciano Benetton, Gilberto Benetton, Carlo Benetton and Giuliana Benetton are brothers

and sister; Alessandro Benetton is the son of Luciano Benet ton.

Directors fees due to members of the Board of Benetton Group S.p.A . totaled 4,927thousand euro in 2004.

Principal organizational and corporate changes. The branches of Bencom S. r.l. in Spain,

France and Great Britain became operational in January 2004. Through these branches,

Bencom S.r.l. directly manages a cer tain number of Benetton stores in the above-mentioned

countries, previously controlled by Benetton Retail Spain S.L., Benetton Retail France S.A.S.

and Benetton Retail [1988] Ltd., respectively. During June, a branch was set up in Belgium,

operational from August 1, to purchase and manage, also by rental to third parties, businesses

operating Benetton stores.On February 17, 2004 Benfin S.p.A . bought from third parties, for 15 million euro, 15% of the

Olimpias S.p.A. share capital, of which it previously held 85%. This company produces, mainly

for Group companies, textile products and, in particular, fabrics, knitted fabrics, yarns, woven

and printed fabrics, as well a s acting as a dye house and laundry. With effect from December

1, 2004, Olimpias S.p.A. was merged by incorporation into the parent company Benfin S.p.A.,

which changed its name at the same time to Olimpias S.p. A. The operation is par t of and is

based on the same rationale as a more general reorganization of the Group, largely completed

during the 2003 financial year.

During May, Benetton International S.A. [formerly Benetton Retail International S.A.] soldto Benetton Holding International N.V. S.A. [formerly Benetton International N.V. S.A.] its

holding in Benetton Asia Pacific Ltd., a company operating in Hong Kong in retail activities and

services for other Group companies.

The German subsidiary New Ben GmbH purchased, for a price of 4 million euro, the entire

shareholding in Mari Textilhandels GmbH, a German company owning around 30 stores

engaged in the sale of Group-branded products in various German regions. This purchase

was effective on July 1, 2004; from the same date, Mari Textilhandels GmbH was merged by

incorporation into New Ben GmbH.

Continuing with the same process of simplification of the corporate structure, with effectfrom September 1, 2004, I.M.I . S.r.l. was merged by incorporation into the parent company

Bencom S.r.l.

In September 2004, Benetton Group S.p.A. sold its holding of 10% of the share capital of

Tecnica S.p.A. to third parties.

Name and surname Date of birth Appointed Office

Luciano Benetton 05.13.1935 1978 Chairman

Carlo Benetton 12.26.1943 1978 Deputy Chairman

Silvano Cassano 12.18.1956 2003 Managing Director

Giuliana Benetton 07.08.1937 1978 Director

Gilberto Benetton 06.19.1941 1978 Director

Alessandro Benet ton 03.02.1964 1998 DirectorGianni Mion 09.06.1943 1990 Director

Sergio De Simoi 05.23.1945 2003 Director

Ulrich Weiss 06.03.1936 1997 Director

Reginald Bartholomew 02.17.1936 1999 Director

Luigi Arturo Bianchi 06.03.1958 2000 Director

During its July 15 meeting, Benetton Group S.p.A. Board of Directors approved a stock option

plan for Group top management. Details of this operation are shown in the paragraph Stock


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p p p g p p g p

option plan.

The corporate restructuring plan in Spain and Portugal was completed with the transfer of

the shareholding in Benetton Real Estate Spain S.L. [formerly Benetton Textil Spain S.L.] from

Benetton Holding International N.V. S.A. to Benetton Realty Spain S.L.

Benetton Realty Spain S.L. sold its shareholding in Benetton Realty Portugal Imobiliaria S.A. toBenetton Real Estate International S.A.; Benetton Real Estate Spain S.L. sold its shareholding

in Benetton Txtil Confeco de Txteis S.A. to Benetton Manufacturing Holding N.V.

The corporate restructuring plan continued in France with the transfer of the shareholding

in Benetton France Commercial S.A.S. [formerly Benetton Retail France S.A.S.] by Benetton

International S.A. to Benetton France S. r.l. [formerly Benetton France Trading S. r.l.].

Benetton France Commercial S.A.S. sold to third parties the entire shareholding in the French

company LApollinaire S.n.c. , owner of a sales business.

In December, the purchase of the remaining 50% of the share capital of DCM Benetton

India Ltd. from third parties by Benetton Holding Internationa l N.V. S.A. was final ized and

the liquidations of Benetton Spor tsystem Taiwan Ltd. and Benetton [Far East] Ltd. were

completed.

Significant events since year-end. No significant events occurred after year-end.

Outlook for 2005. The economic environment in the principal European markets, especiall y

in Italy and Germany which represent 55% of Group revenues, continues to be disappointing.Consumers are spending very cautiously and are placing great emphasis on the quality-price

ratio even more than in the past. Deflationary pressures in the market are generated both by

economic uncertainty and by the ending of the multifiber agreement for the Chinese market.

In this situation, it is difficult to speculate on an economic recovery in the short-term.

The Group has established an important policy of incentives to the network of partners, in

line with the business model, with the objective of placing them in a condition to increase their

investment capacity, to open new stores and to renew the existing ones, as well as to increase

their competitive capacit y in terms of price to the final customer.

This policy of incentives to the network has been made possible by the strategic focus onefficiency actions, optimization of production and organization systems and strict containment

of administrative costs.

Expected revenues for 2005 are between 1,620 and 1,650 million euro, with EBIT around

9.5-10% and net income around 6%.

In 2005, the level of investments will amount to around 130-150 million euro, leading to a net

financial position of around 400 million euro and free cash flow of around 100 million euro.

Group consolidated results

Consolidated statement of income. The highlights of the Groups statement of income for


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2004 are presented below; they are based on the statement of income with the reclassified

revenues and cost of sales used for internal reporting purposes [percentage changes are

calculated on the precise values].

In the year, the Group generated revenues of 1,686 million euro compared with 1,859 million

the previous year, an overall decrease of 9.3% . This is the combined result of two mainfactors: sale of the sports equipment business, completed in the first half of 2003,

and persistent unfavorable trends in the principal foreign currency exchange rates, especially

the dollar and the yen. The reduc tion in sales due to the business sold was a round 89 million

euro, while the exchange impact on total consolidated revenues was 17 million euro; without

this impact and excluding the sports equipment business, the contraction in sales is reduced

to 3.6% compared with 2003, in a very weak consumer market, especially in Europe.

Casual sector sales, net of the exchange impact, showed a reduction of 3.7% with constant

volumes.

In the sports sector, the net reduction in revenues was 84 million euro due mainly to theimpact of sale of the equipment business, partially compensated by sportswear which

increased by 5 million euro.

Sales in the manufacturing sector reduced by around 14 million euro, equivalent to 11.5%,

due to the contraction of demand in the market for fabrics and yarns.

Cost of sales decreased both in absolute terms , by 120 million euro, and as a percentage of

revenues, from 56.4% to 55.1%. This improvement is attributable to greater production and

logistics efficiency in the casual sector, sale of the sports equipment business, with an impact

of 57 million euro and a positive exchange impact of 8 million euro.

[millions of euro] 2004 % 2003 % Change %

Revenues 1,686 100.0 1,859 100.0 [173] [9.3]Cost of sales [929] [55.1] [1,049] [56.4] 120 [11.4]

Gross operating income 757 44.9 810 43.6 [53] [6.5]

Variable selling costs [104] [6.2] [114] [6.2] 10 [9.4]

Contribution margin 653 38.7 696 37.4 [43] [6.0]

General and administrative expenses [436] [25.8] [464] [24.9] 28 [6.0]

Income from operations 217 12.9 232 12.5 [15] [6.2]

Foreign currency gain, net - - 10 0.5 [10] n.s.

Net financial expenses [23] [1.4] [32] [1.7] 9 [25.0]

Ordinary income 194 11.5 210 11.3 [16] [7.6]Other expenses [3] [0.2] [7] [0.4] 4 [57.1]

Non-recurring items [26] [1.5] [38] [2.0] 12 [31.6]

Income before taxes 165 9.8 165 8.9 - [0.6]

Income taxes [42] [2.5] [56] [3.0] 14 [26.0]

Minority interests income - - [1] [0.1] 1 n.s.

Net income for the year 123 7.3 108 5.8 15 14.1

Gross operating income was 757 million euro compared with 810 million in 2003,

representing 44.9% of sales compared with 43.6% in the previous year. The reduction in

absolute terms was 53 million euro, of which 32 million euro was due to sale of the sports


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equipment business and 17 million euro related to the casual sector, where, however, it

increased from 46.7% to 48.0 % of revenues. The manufacturing sector went down both in

absolute terms and as a percentage of revenues.

Variable selling costs were 6.2% of revenues, in line with the previous year.

General and administrative costs were 436 million euro compared with 464 million euro in

2003, with a reduc tion of 28 million euro, and 25.8% of net revenues compared with 24.9%in the previous year.

The reduction in absolute terms was mainly due to the business sold and to strong

rationalization and cost containment actions carried out in 2004; these latter almost entirely

compensated for the natural growth of costs for development of retail activities.

In the casual sector, general and administrative cost s increased in absolute terms by 4 million

euro, increasing from 26.1% to 27.8% of net revenues; among administrat ive costs, personnel

costs and other operating costs went up by 25 million euro, due to the greater number of

directly operated stores; adver tising and sponsorship costs and provisions reduced by 8 and

13 million euro respectively.Income from operations was 217 million euro compared with 232 million in 2003, improving

from 12.5% to 12.9% of revenues. The reduction in absolute terms of 15 million euro was mainly

due to the casual sector, where this was 14.0% of revenues against 14.4% in the previous year.

The sports sec tors income from operations was 1 million euro compared with a loss in the

previous year of around 2 million. This improvement was due to the impact of selling the

sports equipment business.

Foreign exchange management tended towards breakeven compared with the 10 million euro

net gains of the previous year, influenced by movements of the principal foreign currencies.

Net financial expenses, of 23 million euro, reduced in absolute terms by 9 million euro, from1.7% to 1.4% of net revenues; this improvement was due to both the reduction in the average

financial position by 100 million euro and the reduced cost of borrowing.

Ordinary income was 194 million euro, compared with 210 million euro in the previous year,

improving from 11.3% to 11.5% of revenues.

Net other and non-recurring expenses were 29 million euro and mainly comprised adjustment

to current values of some assets in England, France and the United States relating to the

sales network and gains from the sale of some property in the third quar ter. The significant

reduction, compared with 45 million in 2003, was due to expenses of Italian companies for

the tax amnesty included in the amount for the previous year.Net income for the year was 123 million euro compared with 108 million euro in 2003,

representing 7.3% of revenues compared with 5.8%.

Revenues by geographical area are as follows:



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Europe continues to be the Groups main reference market. The two years are not directly

comparable because of the exchange rate impact of the US dollar and the Japanese yen and

the impact of selling the sports equipment business.

Performance by activity. The Groups activities are traditionally divided into three sectors

to provide the basis for effective administration and adequate decision-making by company

management, and to supply accurate and relevant information about company performance

to financial investors.

The business sectors are as follows:_casual, representing the Benetton brands [United Colors of Benetton, Undercolors and

Sisley], which also incorporates figures for the retail business, as well as complementary

products, such as accessories and footwear;

_sportswear and equipment, developed with the Playlife and Killer Loop brands;

it also includes sales of equipment relating to production for third parties by a Group

manufacturing company. The 2003 comparison period still includes sales of sports

equipment carrying the Nordica, Rollerblade and Prince brands;

_manufacturing and other, composed mainly of sales of raw materials, semi-finished products

and industrial services as well as of revenues and expenses from real estate act ivity.

Europe 1,435 85.1 1,546 83.2 [111] [7.2]

The Americas 72 4.3 113 6.1 [41] [36.3]

Asia 174 10.3 190 10.2 [16] [8.4]

Rest of the world 5 0.3 10 0.5 [5] [50.0]

Total 1,686 100.0 1,859 100.0 [173] [9.3]

Results of the Casual sector


S t t t l 1 504 100 0 1 579 100 0 [75] [4 7]


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Sector revenues were 1,504 million euro compared with 1,579 million euro in 2003 with

a reduction of 4.7%. Without the exchange effect, described in the previous section, the

reduction in sales goes down to 3.7% . Sales volumes were substantially unchanged. Cost of

sales reduced by 6.9% , improving from 53.3% to 52.0% of net revenues and gross operating

income increased from 46.7% to 48.0%, due to even more efficient rationalization of the

manufacturing process.

Selling costs remained stable as a percentage of sales, whereas general and administrativeexpenses felt the impact of actions under taken to develop the sales network.

Income from operations was 211 million euro, representing 14.0% of net revenues.

Results of the Sportswear and equipment sector

Sale of the sports equipment business was completed in the first half of 2003 and around

89 million euro of the reduction in sales revenues in 200 4 was due to this disposal, while

sportswear sales at 45 million euro increased by around 12%.

Cost of sales was 55 million euro lower following sale of the sports equipment sector andincreased from 69.7% to 75.3% of net revenues. Selling costs went from 5.0 % to 3.9% of

revenues.

The improvement from operations, f rom a loss of 2 million euro to a profit of 1 million euro,

was due to savings in general and administrative cost s relating to both sportswear and the

business sold.

Sector total revenues 1,504 100.0 1,579 100.0 [75] [4.7]

Cost of sales [783] [52.0] [841] [53.3] 58 [6.9]


Selling costs [93] [6.2] [98] [6.2] 5 5.1


General and administrative costs [417] [27.8] [413] [26.1] [4] [1.2]Income from operations 211 14.0 227 14.4 [16] [7.0]


Sector total revenues 75 100.0 159 100.0 [84] [52.8]

Cost of sales [56] [75.3] [111] [69.7] 55 [49.0]

Gross operating income 19 24.7 48 30.3 [29] [61.6]Selling costs [3] [3.9] [8] [5.0] 5 [62.9]


General and administrative costs [15] [19.7] [42] [27.1] 27 [65.8]

Income from operations 1 1.1 [2] [1.8] 3 n.s.

Results of the Manufacturing and other sector


Sector total revenues 107 100 0 121 100 0 [14] [11 5]


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Manufacturing sector sales went down by 11.5%, due to contrac tion of the fabrics and yarns

market, while the cost of sales increased to 84.2% of revenues compared with 80.2% in the

previous year. This resulted in a reduction in gross operating income both in absolute terms

and as a percentage of sales. Selling costs remained substantiall y in line with the previous year,

while general and administrative expenses reduced both in absolute terms and as a percentage

of sales, partially compensating for the higher cost of sales and leading to income from

operations of 4.6% of revenues compared with 5.8% in 2003.

Financial situation - highlights. The more important elements of the balance sheet, with

comparative figures as of December 31, 2003, are as follows:

Compared with the previous year, working capi tal reduced by 41 million euro, mainly due

to a reduction in trade receivables , partially of fset by the increase in inventories and other

receivables. Asset s due to be sold in 2004 relate to a factory in the manufacturing sector, while

those in 2003 related to the sports equipment sector.

Apar t from what has already been said, the change in net cap ital employed was al so due to the

combined effect of the following factors:_additions to tangible and intangible fixed assets as a result of investments total ing

152 million euro;

_depreciation/amortization, write-downs and disposals of 100,14 and 62 million euro

respectively;

_change in operational reserves of 10 million euro;

_increase in tax rece ivables of 99 million euro, relating essentially to the corporate business

transfer operation at the end of 2003, the impac t of which on net capital employed emerged

during 2004;

_decrease in financial fixed asset s of 41 million euro.

[millions of euro] 12.31.2004 12.31.2003 Change

Working capi tal 688 729 [41]

Asset s due to be sold 8 8 -

Total capital employed 1,668 1,655 13

Net financial position 431 468 [37]Shareholders equity 1,230 1,174 56

Minority interests 7 13 [6]

Sector total revenues 107 100.0 121 100.0 [14] [11.5]

Cost of sales [90] [84.2] [97] [80.2] 7 [7.2]


Selling costs [8] [6.9] [8] [6.8] - [8.7]


General and administrative costs [4] [4.3] [9] [7.2] 5 [47.1]Income from operations 5 4.6 7 5.8 [2] [30.6]

The net financial position was 431 million euro, a decrease of 37 million euro compared with

the previous year, broken down as follows:

[millions of euro] 12 31 2004 12 31 2003 Change


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To provide better support for the cycli cal nature of the Group business and meet future

commitments, on March 4, 2005, the Board of Directors author ized the management tonegotiate a revolving line of credit for a maximum amount of 500 million euro and with a

maximum duration of 5 years.

These financial resources, of 394 million euro at the end of 2004, will enable to meet the

maturity date in July 2005 of the 300 million euro bond loan, which places limitations on

giving collateral security for new loans but does not require observance of any financial ratio

[financial covenants].

The syndicated loan of 500 million euro, maturing in July 2007, provides for compliance with two

financial ratios that have to be calculated every six months on the consolidated figures, namely:

_minimum ratio between EBITD [earnings before interest, tax and depreciation] and netfinancial charges of 2.5 times;

_maximum ratio between the net financial position and shareholders equit y of 1.

Moreover, there are limits on significant disposals of activities and on the granting of collateral

security for new loans.

[millions of euro] 12.31.2004 12.31.2003 Change

Current financial assets:

_Italian government securities and monetary and bond funds 118 27 91

_bank deposits 141 207 [66]

_cash and ordinary current accounts 119 118 1

_other short-term financial receivables 16 17 [1]Total current financial assets 394 369 25

Medium-term financial receivables 29 31 [2]

Total financial asset s 423 400 23

Current financial liabilities:

_bond loan [300] - [300]

_short-term financial payables [25] [35] 10

_current portion of medium-term debt [1] [2] 1_current portion of amounts due to leasing companies [6] [5] [1]

Total current financial liabilities [332] [42] [290]

Medium-term financial payables:

_bond loan - [300] 300

_syndicated loan [500] [500] -

_other medium-term loans [4] [4] -

_due to leasing companies [18] [22] 4

Total medium-term financ ial payables [522] [826] 304Total financial liabilit ies [854] [868] 14

Net financial position [431] [468] 37

Net short-term financial position 62 327 [265]

Net medium-term financial position [493] [795] 302

Net financial position [431] [468] 37

Statement of cash flow

[millions of euro] 2004 2003

Cash flow from operating activities 269 252


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2004 annual report en

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