Hello, and welcome to the SMCP 2022 annual results. My name is Caroline, and I'll be your coordinator for today's event. Please note, this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand over the call to your host, Amélie Dernis, Head of Investor Relations, to begin today's conference. Thank you.
Thank you. Good morning, everyone. This is Amélie Dernis, in charge of Investor Relations, speaking. Thanks for being with us today for the publication of SMCP full-year results. I'm here with our CEO, Isabelle Guichot, and our CFO, Patricia Huyghues Despointes. As usual, we'll go through the presentation and then we'll have the Q&A session. Apologize, we have an issue on our website, I send you the presentation by email. Before I hand it over to Isabelle and Patricia, I invite you to go through our usual disclaimer on page two. I think we can start now.
Thank you, Amélie. Good morning, everyone. Thank you all for joining us today to talk about 2022, with first the key highlights on results and business initiatives. Patricia will detail our performance, and we'll also take the opportunity of this presentation of our annual to provide you with a refresh on our guidance for 2023 and for the midterm. Let's move to page four and five. As you've seen from the press release, we have strong results for 2022, and we are very happy about our performance. It was an unusual year, with twists and turns within the business, but we managed to reach our guidance. This is a huge satisfaction for everyone in the company.
If you remember that, all that happened after we announced the guidance one year ago, with China under COVID restrictions all year long, inflation lasting longer than expected, and geopolitical tensions. The solid performance results from the desirability of the brand and the success of the collection, the full price strategy that we successfully delivered, the thorough execution of our investments, and a good control of our costs. I'm very proud of the job done by all the teams, and I wanted to thank all of them, the 6,000 employees, for their involvement. A record level of sales at EUR 1.2 billion, up by 13% on an organic basis versus last year, led by like-for-like growth. The full year performance is higher than pre-pandemic level for the first time since COVID crisis.
The growth is driven by all the markets in Europe, Americas, and Asia, excluding China. Excluding China, the group achieved a strong double digit of 23% versus last year. As mentioned, we successfully delivered the full price strategy. We have continued to reduce the average discount rate in season, - 4 points versus last year and -9 points in two years. After the end of the rationalization plan, the network is back to growth in the last quarter with 13 net openings. As you will see later in the presentation, it's all about a reasonable and geographically balanced growth. Moving on to page five. As you can see, we managed to deliver strong results and reach the guidance in a very challenging macroeconomic context. The management growth margin improved versus last year to reach 74.4%. 74.4%, sorry.
Adjusted EBITDA represents 9.2% of sales and reaches EUR 111 million, improving by 15% versus 2021. Net profit exceeds EUR 50 million, doubling versus last year. The group continued to improve the leverage ratio to reach a satisfactory level of 1.9x the EBITDA. On page six, let's focus on sales. 2022 is a record year in term of sales, despite the strong constraint in China due to sanitary situation. Actually, each quarter was at a record level. Q4 reaches EUR 332 million of sales, the second semester is up 7% versus last year. Our brands demonstrated a strong pricing power with another year of meaningful decrease of discount rate across all four quarters.
The growth rate versus last year may seem less significant in H2 than it was in H1. It is only explained by the softer basis of comparison in H1 from COVID lockdowns in Europe and Americas in 2021, as you can see from the red line on the graph. Finally, versus 2019, as you can see, the growth is visible for each quarter. Let's now move on to page seven. You will find the performance by region, driven by Europe and Americas, with strong double-digit growth. Patricia will get back in more detail by region later in the presentation. The split by region shows that the weight of Americas reached 15%, plus 1.5 percentage point versus last year. No big change in the split by brand, as all the brands are growing.
Retail part continues to progress and exceeds 90% in line with our strategy of being a retail pure player. Digital penetration is strong and stabilizes at 21%, slightly decreasing versus 2021, but more and more qualitative and strongly managed and controlled in the context of reduction of digital off price. Moving on to page eight , let me present a few brand initiatives implemented during Q4, starting with the first pillar of our strategy, brand desirability with innovative and creative collaborations. Let's start with Sandro. One veil is Hot Stuff capsule, the little devil born in the U.S . This, with a mischievous personality, seeks to do good around them. This iconic comic book character is working through patches on jackets, sweatshirts, cardigan, and even on a cap. Hot Stuff is represented in its original 1960s version, an aesthetic that echoes different vintage universe.
Maje continues the campaign with Taylor Hill. After the paparazzi campaign on spring/summer collection, now comes the party time capsule in the second part of the season. A sharp and trendy selection of evening outfits for sleepless nights meant to dress women in a sans-souci style with perfect outfits. Let's focus on Claudie Pierlot with key highlights. The fifth anniversary of the iconic Anouck bag. Claudie Pierlot pays tribute to the line of iconic bags in the stores and through its communication. Charming, elegant, recognizable, this bag has been carried out by thousands of women since its launch. To mark the presentation of the spring/summer 2023 collection, Claudie Pierlot for the first time invited friends of the brand to Les Fidèles, an iconic Parisian brasserie, an 100% Parisian establishment, where we welcome journalists, influencers, and other opinion leaders in a warm and authentic setting for the day.
A concept was born, Café Claudie, that we roll out later in a pop-up space in Galeries Lafayette Haussmann in November and then to our new store, Rue Pierre Charron. Fursac, with a look back at the launch of the capsule collection designed by painter De Rrusie i n the Parisian factory of Fursac traditionally showed you. This 12-piece collection is De Rrusie first experiment in fashion, and includes a black wool suit, printed T-shirts or shirts in shapes that remind you of his creative universe. Our key collaboration with key opinion leaders is helping us emphasize the brand's desirability and visibility over the world. Here are a few example of A-list celebrity wearing our brands, Paris Hilton, Jean Dujardin, and even Queen Letizia of Spain. Moving on to page 11, you will see a selection of our key achievements in terms of sustainability.
I would say that 2022 was really a step up in term of sustainability for the whole group. In Q4, we launched the SMCP Retail Lab, a certification school for the sales advisor of tomorrow. It's offering an innovative and certifying omni-channel training course that will take place over a year in the form of a work study program offered within our four brands. The program has been designed around a three-partied organization with SMCP, IFM, the famous Institut Français de la Mode, and EMA Sup, a renowned training school. The first students started this school just a few days ago. We are very proud of this initiative.
First, because it addresses the topic of hiring and retaining talent in retail, which is a key issue for our industry, and also because our first group of students is an amazing mix of different profiles and personalities, but all having one common point, a desire to learn and motivate and a passion, which is fashion. We continue our initiatives in circular economy, a key to create a more responsible fashion together. Maje launched its second-hand services and extended its rental in the U.S. Sandro launched its rental services and extended its second-hand that was initially launched in France, now in Germany and in the U.S. We're really moving on in that direction. Third point in this slide, we're proud that SMCP obtained a B score on the Carbon Disclosure Project questionnaire.
With this rating, the group was recognized for its transparency and performance on climate change. These results encourage us to continue and double down on our efforts to reduce the carbon footprint of our activities. Traceability, I think we really pioneered in that segment. We accelerated the implementation of the project with Fairly Made by increasing the number of SKUs to reach 250 SKU per brand that are fully traceable in spring/summer 2023. You can scan the QR code on this page to see the information available for the clients, on the wonderful Maje dress. A few openings, moving on to page 12 about brand network. This quarter has been the opening of very nice flagship for Sandro Rue de Passy. It's part of that strategy to fusion previously a woman and men store in one and unique flagship.
That's at the corner in 70 Rue de Passy. In the meantime, the group continues further selective development in Europe. Sandro opened a corner in Madrid in the last quarter, adding Spain to the portfolio of new countries for the brand. We also have a new partner in Malta and in the Czech Republic for Sandro and Maje. Not to forget about China. China network continued its selective expansion to fuel future growth, seize market opportunities, and adapt to a new Chinese reality. Here you can see some opening in Chengdu and one for Sandro and Maje. To continue with key highlights, we have just integrated, as of January 1st, our Australia and New Zealand partner to our network of direct retail. Formerly, those two countries were operated in a wholesale mode with a local partner.
This market is around 40 point of sale. It's an opportunity for the group to consolidate its presence in the area and capitalize on the rebound of Asian, of Asia and Asian tourism at large. I will now hand it over to Patricia to present our 2022 figures in more detail.
Thank you, Isabelle. Good morning, everyone. Moving on to slide 16, let's go in a bit more detail on our sales performance by region, starting by France and the MEA, that we can commence altogether with quite consistent trends. It was an excellent year for all our brands in this region, resulting in a full year at +23% in France and +31% in the MEA, and exceeding 2019 levels. Q4 was very strong, with France at +9 and MEA at +16, despite high bases of comparison. Growth is mainly driven by like-for-like, and notably in brick-and-mortar in Paris, with the locals and the tourists, and in all our big European markets. This is also supported by a strong control of discount rate, with more than five points gained in France in 2022, and three points in the MEA.
Digital is in line with 2021 in France, with more qualitative sales due to fewer discounted operations and growing in the MEA. As already mentioned, store count is back to growth now with the Q4 at just off in POS in the total of those two regions. On page 17, a contrasted situation in APAC and in America. Asia Pacific was a combination of two very different situations with, on the one hand, China still under a lot of constraints in Q4, we are no different from the market. On the other hand, other countries which performed very well, for example, in Korea, a big country for us or in Singapore. In China, the situation in Q4 looked like a mix of Q2 and Q3, as you can see on the graph on the right.
Q4 started as Q3 had looked like, a network nearly all open but still hit by very low traffic. After the lifting of sanitary constraints continued with a trend more comparable to that of Q2, with a big part of the network closed due to high number of cases and very little traffic in the rest of the network. The beginning of this year shows an encouraging improvement in the traffic, and we are confident that the situation will normalize. This is also why we continue to invest in this country to seize the opportunities of recovery. In America, the whole year was very successful, and it's quite explanatory in the graph on the right, where you can see a regular growth of the turnover quarter after quarter. America is now over 15% of the sales of the group. It's gaining 1.5 points in the mix.
Both brick-and-mortar and digital performed very well. The reduction of discount rate is quite massive. Five points gain in 2022 after a year 2021, which was already quite impressive in this respect. Now on page 18, let's focus on the P&L performance. One general remark I would do about the P&L comments, you will see several times the 2021 P&L figures have been restated. This is due to a change of accounting method under IAS 38, linked to the accounting of SaaS project, which means the IT projects on the cloud, now accounted for in OpEx, whereas it was CapEx before. We have started applying this method in 2022, and we have restated 2021 for a better comparability. The difference in bottom line is not material, but it can change a bit the view line by line. I close this accounting parenthesis and go back to business comments.
Gross margin ratio was quite homogeneous between H1 and H2, back to a level which we consider quite normative. We finished the year at 74.4%, improving versus 2021. As always, the variance of this ratio is the result of several pluses and minuses, but in a nutshell, the price increases that were passed were well accepted and enabled us to offset the increase of the cost of goods sold. We can also underline that the continued decrease of discount rate in Europe and America supported the trend and enabled to mitigate the headwinds impact in China. Let's go to OpEx now on page 19. The total weight of store costs and the G&A increases by 0.8 points, with many pluses and minuses. The main two minus being the impact of inflation on wages and rents, and an under-absorption of stores OpEx in China.
As G&A were globally better absorbed, as you can see on the bottom, which partly compensates. You can also see from the arrow an analytical reclassification of traffic marketing, SEM, SEO retargeting, from SG&A to stock pure reclassification. In the slide 20, we analyze the evolution of profitability in terms of EBIT margin to show you that the underlying business has gained 0.8 points of profitability, coming mostly from gross margin and amplified by better absorption of G&A. That the impact of setting this, on the right, is only linked to IFRS 16, i.e. technical accounting impact, which is less favorable in 2022 than it was in 2021. On the right, you can also see the H1/H2 operating margin at 8% in H1 and a bit more than 10% in H2.
I will go very quickly through the page 21, which shows the evolution of net profit between 2021 and 2022. We have already talked about adjusted EBIT. Below that, non-recurring is much lower in 2022. Financial results is also improving by EUR 3 million from a lower average debt, resulting in more controlled interest expenses. Income tax expenses logically increase, and the result is a net profit exceeding EUR 50 million. On page 22, on balance sheet and cash lines, starting with working capital, the absolute value of working cap is increasing to EUR 178 million, coming mostly from inventories. This increase of inventories comes from several factors, a context of current and expected growth, some inflation also, and the restocking in China, given the sanitary situation in 2022. That being said, the quality of the inventory is good, composed of recent merchandise, aimed at fostering growth.
In percentage of the activity, the weight of working cap increases a bit versus 2021, which was particularly tight, but remains completely consistent with historical levels. CapEx were stable versus the previous years, and thus a better result, and free cash flow ends at a generation of EUR 34 million, mostly concentrated in the second half of the year, within H2, at EUR 29 million free cash flow generated, which leads us to resulting in a decrease of net financial debt on page 23, landing below EUR 300 million and leading to a very sound leverage ratio of 1.9x . We have repaid in 2022, circa EUR 70 million of debt, without needing to draw on the revolving credit facility, which means that we continue to benefit from a very healthy liquidity headroom. I will now hand over to Isabelle.
Thank you, Patricia. Let's move on now to the 2023 outlook. Our strong 2022 enables us to be confident for 2023. For full year 2023, SMCP anticipates a mid-to-high single-digit sales growth versus 2022 at constant exchange rate from both like-for-like and network expansion. It will be a bit different from what we experienced in the past few years, where the growth was nearly only driven by like-for-like. 2023 will be back to a mix of both effects with our existing network expected to continue to perform, but also positive impact of openings as we have projects in the pipe. Regarding profitability, the group expects an adjusted EBIT margin as a percentage of sales in progress in 2023. The visibility on inflation continues to be quite limited, we won't be more precise at that stage.
We will try to be a bit more granular as the quarters go by. As mentioned in the introduction by Amélie, on top of the perspective for 2023, we would like also to take some time to talk about the midterm. It's been quite a while now since we did that. If you remember, it was in 2020, and so many things have happened in the market in the meantime. Actually, our strategic priorities have not really changed. We have just rephrased them, precise them a little bit. As you can see them on the slide 27, the first one is the singularity and complementarity of our brand to foster desirability. The second one is to create a sustainable wardrobe. It was already in our pillar in 2022, but now it's a top two.
The third and fourth pillar are to develop new touch points for our clients and reinforce infrastructures capability. Let's move to pillar number one. Pillar number one is the singularity and complementarity of our brands. I will not explain the DNA of each brand. You know them, and they haven't changed. They're just maybe now a bit more precise. I ensure on a daily basis in all the actions that we take, being in term of product, retailer communication, that each brand totally expresses the specificity of its history and particularity. Moving on to page 29, some examples of campaigns that illustrate the creative universe of each of our four brand, and you can see that they really express a different type of woman or man. Second pillar, and I will be a little bit more vocal about it.
As you know, our ambition around sustainability is structured around the three pillars: product, planet, and people. We already presented our ambition in the past in this respect. On this slide, you will see our updated targets, which are even more ambitious than the previous that we had shared. The first pillar, product, it's about developing a desirable and responsible offer by increasing up to at least 75% in 2027, the share of sustainable material and products in our collections to continue to accelerate our development in circular economy with the initiative and geographical rollout of the initiative that we launched and extend it to the other brands. Ensure the full traceability of our collection by reaching 100% of SKU fully traceable with a QR code by 2025.
This full traceability is something that goes way beyond the legal requirements of the law, for instance. Second pillar is to preserve our planet and its natural resources by reducing by 20% our environmental footprint by, in 2027 compared to 2018. Here we talk about a reduction in absolute value and not in intensity. It's a bold move for a group which grows quite fast. Rethink logistics flows to use less air transportation and develop more responsible stock concept based on seven criteria that I won't detail today, but that we could forward to you. The last one is people. To develop passionate entrepreneurs, many initiatives could be mentioned, among which I would like to underline once again the SMCP Retail Lab and the topic of diversity and inclusiveness.
On that topic, we are currently building a worldwide strategy with the outputs of a survey that, internal survey that was just conducted. Such an important pillar that we are considering the creation of a dedicated committee within the board of directors. Moving on to the next slide. The client touchpoints evolve and widen our horizon. The lines between brick-and-mortar and digital are becoming more and more blurred with new omnichannel services developed. Client experience can start on the website and in a store with a click and collect or e-reservation, or start in the store with a store to web and ship from store services. Addressing customer needs becomes a puzzle of situations with more and more pieces each year.
In parallel, we enhance the experience in store with a tailored approach by region, be more centered on retail excellence, customer experience with clienteling, social platform, live streaming and travel retail to create an ecosystem around our brands. To reinforce infrastructure capabilities to support the business needs, that's our fourth pillar. With structural projects such as the new ERP retail that we're implementing as I speak with the first two pilots that have successfully been implemented in France this week, and that will enable us more functionality than store and more omni-channel. We also worked on the future core ERP that will interconnect more and more flows and stages of the life of a product, and some projects that can appear quite technical, but which are crucial to an efficient supply chain, such as the warehouse management system, for instance.
Also obviously, infrastructure including 5G project, new clienteling tools, which are essential for the effectiveness of business and our agility. In the meantime, we also don't forget to reinforce our infrastructure in terms of quality and cybersecurity. Let's move on now to the bit of midterm and the key financial ambitions. When it comes to figures, what can we anticipate in the coming years? In terms of sales, moving on to page 34, I told you a few slides ago that for 2023, we anticipate a mid-to-high single digit growth in 2023. This is actually the yearly target that we sell until 2026, followed by a mid-single digit growth afterwards.
In term of drivers, we will come from a mix of light select and expansion, and we're supported by a growth for all our brands, slightly higher, obviously for the smaller brands, with a lower comparison than basics like Claudie Pierlot and De Fursac . We'll also continue to grow the share of sales outside Europe with both Asia and America growing in the mix, and for also the share of men and accessories. As we mentioned before on the next slide, after phase of rationalization of this network, we now re-enter phase of network development. Reasonable, selective of course, which could lead, let's say to about 60 net openings in average per year, meaning 5,000 additional selling surface, square meter of surface each year. I'm talking about selling surface because many people regularly ask me how many stores are, is a good target.
I think this is no longer the KPI. Total selling surface is more important for me than number of stores. On the right you will see an example of this Maje in Paris, where we used to have two stores quite close from each other in the same district, and very small and not operationally efficient. We've closed both. We opened another one, more visible, bigger, where we can display the entire collection, provide all the omni-channel services and provide a much better customer-centric service. We can also organize events, pop-up store, for instance, and we have used the store as a pop-up for the launch of the Maje rental services. This is a typical example on why square meter can matter more than the number of POS. Geographies now on page 36.
I won't go through all the comments that you can see on the slide. My main messages will be the following. In Europe, we'll continue to leverage the post-COVID context with strong local customers and a progressive return of tourism to focus on stock productivity. We will, of course, continue to optimize the quality of our network through relocation, also ensuring that we have flagships in all key fashion cities. We'll capitalize on some areas with very strong momentum. You can see for example, the new Sandro store recently opened at Dubai Mall, which is in the top rank of our network. In Asia Pacific, many markets will continue to be developed. China, of course, is number one, focused on new channel including travel retail, which is developing very well in China. You can see the example of [item] on the bottom of this slide.
Other markets also are strong and promising. Korea is a big market for us. Singapore, Malaysia are booming. Australia is now internalized. We're going to invest in that part of the world down under. There are still some markets where we are not distributed that could be addressed going forward, either directly or through cross-border online activity. Finally, America, namely, Japan, for instance. Finally, America, this is a market that we have significantly rationalized during COVID, not only by closing some stores, but also by renegotiating some rents. There is clearly room to grow for our brand in some states where we don't have stores for the moment. You can see the example of Arizona, for instance, where we open Sandro and Maje in 2023.
A lot of white space in America with Claudie Pierlot and De Fursac not yet in the market, and also in Latin America, where we could launch some partnerships.
This [crosstalk].
I will hand it over to Patricia on the figures.
Thank you. This was for top line. Profitability-wise, we intend to increase our EBIT margin, gaining on all three main lines with gross margin targeted to be above 75%, thanks to our pricing power and our continuous efforts to optimize inventory. Stock costs from an expected continuous improvement of sales per square meter. Finally, SG&A. In this respect, we will continue our investments in two lines, marketing and innovation, but other SG&A will increase at a lower pace and should be better absorbed. All in all, we expect to be at least 12% of EBIT margin by 2026 and gain circa half a point per year afterwards. On page 38, a few words about how we will use the cash generated. In terms of CapEx, we will continue to dedicate 4%-5% of sales to CapEx.
In the network, it will serve a more balanced development, with more CapEx allocated to America, and in South Asia, a better balance between all the markets. On page 39, after taking into account operational investments, what will be the financial policy? We still have more than one year before the maturity of our term loan, we have time. We will work on the refinancing of our debts before that date. In terms of leverage ratio, being at below 2x at year-end 2022, we consider that we are already at a very sound level. We won't guide on the level in the midterm. We will just aim at maintaining a sound financial structure.
Depending on the context and the opportunities, we could use our free cash flow in the future either to do a bit of M&A, focusing on segments that could add strategic value to our group in terms of diversification of products or channels, and/or to start shareholder returns.
Thank you, Patricia. Let's move on to the conclusion. In conclusion, we strongly believe that our performance combined with our strategy puts us in a perfect position to seize the opportunities and continue to deliver profitable growth. In term of brand portfolio, with a demonstrated success that has transformed SMCP into a unique actor, I would say even a platform of accessible luxury. In term of distribution, with a more and more balanced network that enables us to capture growth in good days and navigate crisis when they happen with agility. In term of CSR, with powerful initiatives already in place and strong ambitions for the future to accelerate. In term of structure, with a unique platform that drives efficiency. Finally, in term of financial performance, marked by a best-in-class growth margin and a disciplined expense management leading to a structurally cash-generating business model. Amélie, thank you.
Thank you, Isabelle. I think we can take your question now.
Sure. Thank you. As a reminder, if you would like to ask a question, please signal by pressing star one on your telephone. We will take the first question from line David Da Maia f rom CIC. The line is open now. Please go ahead.
Yes. Hi, good morning. Quick question for me, please. The first one on China and the second one on free cash flow and the third one on shareholding. The first one on China, its performance last year turned out to be better than [audio distortion].
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First question on China. Can you share a more precise figure on the performance in Q4 and give us an update on the current situation in this key market? Are you already recording a significant rebound in sales since the beginning of the year? That's the first question. The second question on free cash flow. This has been quite low last year due to the sharp increase in inventory.
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First answer on China.
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We are in line with the trend described by our peers, with a decrease between 20% and 30% versus 2021 in Greater China in Q4. What do we see now in the current trading? I think it's a question that everybody will ask, so I'd rather answer it right away. We've seen improvement in January versus December 2022. It's a gradual improvement in the first month of 2023. Still complicated in January with a lot of cases and thus the traffic a bit low. The traffic is improving in February, and we expect a gradual consolidation of the situation in Q2.
Okay.
I suggest we take the next question, and we'll get back to you, David, if possible, after if the line is a bit better.
Okay.
Sure. We will take the next question from line Kathryn Parker from Jefferies. The line is open now. Please go ahead.
Good morning, everyone. Just checking. Can you hear me okay?
Yes, we can hear you.
Okay, good. My first question is on the store network. I wondered if the 60 directly operated store openings also applies to 2023. I also wanted to check how many stores the Australia internalization applies to, and whether this would be included within the 60, and how many remaining Sandro stores you plan to convert to the dual-gender format. My second question is on the guidance for EBIT margin. Obviously, you're looking for the progression to the 12% EBIT margin, do you think this will be kind of front-loaded in 2023 as you have the return of the China business, and support there? My final question is on the gross margin and getting back to the 75%.
I wondered what the main drivers of this are. Is it prices going up, or do you think you can make further progress on your discount rate? Thank you.
I will answer on the first question about the store network. When we talk about 60 stores, it's DOS and POS, so it also includes the, you know, the new territories in which we are going to open a store. We are working on the project for 2023. I don't know if it will be 60, but anyway, it will be a material in term of number of openings between directly operated stores and a store operated with partners. Australia was already counted in our number of point of sales in general, but now they will just move to DOS. At the same time, don't forget also that we've closed our stores in Russia at the end of February.
We will lose also that stores on that part, so that has an impact also on our number of stores. As I mentioned in my speech, I would say that more and more we look at the number of square meter, which is for us the real and interesting metrics about it. On your question of our number, what is the number of Sandro store that we still need to convert to unisex, I'll decide to get back to you with a precise number, but we've done already I would say a good part of the job.
Thank you, Isabelle. Kathryn, on your question about guidance for 2023, I think it has already been answered by Isabelle saying that we aim at improving the EBIT margin. To be honest with you, it's a bit early to say by how much. Of course, the logic is to have a consistent and harmonious growth that leads us year after year to this 12% that we aim at achieving by 2026. In terms of gross margin, we target at or above 75%. We are already at half a point from this target, which is not that far. You mentioned price and discount. Yes, those will be the drivers a bit equally.
In terms of discount, we are already at a very satisfactory level, but we know we can gain a little bit on some markets in the U.S. or in Asia, which have been quite constrained in 2022, and also in digital, which continues to improve in terms of gross margin.
Great. Thanks very much.
Thank you.
Thank you. We will take the next question from line, Gilles Crespel from Alizés . The line is open now, please go ahead.
Thank you very much, Patricia, Isabelle, for the outlook. I have, if you allow me, two questions, one is on Asia. I hope you can hear me fine.
Yeah.
Yes. Yes.
Great. One is on Asia. Performance in the last quarter and in the previous quarters seems quite subdued, a bit underperformance against market indicators. Obviously, we understand the sanitary situation, the closed stores. If we look at what indicators we follow on the Chinese market, we have seen somewhat better performance, which would give SMCP some, well, almost 20% below what we look at. I wondered if you could give us some color on what might explain this performance. The second question I would have is, you outlined the importance not only of the store number, but also of the store surface, which we fully concur. I wondered, I don't think SMCP publishes its total store surface.
If you could give us some color on the evolution over the last years and what you see in terms of total stores surface. Thank you very much.
I would take the first question about China. I understand your point. At the same time, it's very difficult to find a peer that has the same kind of activity, the same kind of exposure in China, the same kind of number of stores that we have. We have a business which is dominantly ready-to-wear, which is very different from accessories business when you don't need to go in store and try the pieces.
We also have a business where we have a very homogeneous price point and very homogeneous transaction level, which means that we're truly dependent on the traffic, where luxury actors have, you know, a reservoir of VIC clients that they can trigger to generate high-ticket sales that are going to make their the top line looks fantastic. It's true that we have a very different kind of business model that we need a regular flow of traffic, confidence to get back in the mall, confidence to enter our store, try on the pieces. We need really a gradual normalization of the traffic to come back to our business usual level. We're confident that it's going to happen. It's happening gradually.
You cannot compare us with people that are selling, you know, accessories that can be, that don't need to be tried on, that can be, it can be immediately click and collect, and you can with a high-ticket transaction, make up for the lack of traffic in our store. We have hard time really finding an exact peer that has a similar business model that we have and that can, could be a benchmark in China. I think what we see, what we monitor is clearly the reality in China. We know when that we perform in China is that we have come back with it. We have come back to a very normalized level of traffic in department stores, in mall, in shopping centers. I don't know if it answers your question.
It did. Thank you very much. Maybe if you can give us a little of color on how the start of the year was, how the Chinese New Year performed with SMCP?
I just meant, I think I answered it to David in my app previously, that we see a gradual improvement.
Okay
Of the situation, since the beginning of the year.
About the selling surfaces and your question about this topic. As you can see on the slide 35, we gave some indication on total surfaces. We will cross the threshold of 100,000 square meter for our direct network in 2023. This is something we were not used to communicate in the past, but for the reasons explained by Isabelle, we will now probably more focus on this KPI. In terms of surface by store, it's different from one brand to another. It's the average varies from 70, 80 square meter- 150 square meter for bigger central stores or dual gender. It really depends on the situation of the brand.
You have some details on this topic in the URD each year. This is the average figure. The average per store should not vary that much, maybe increase a little bit from typically the example you have on the right of some small stores that we closed to replace by a bigger one. On the whole, this average of 80 square meter-1 50 square meter should remain valid with a total of 100K square meter in 2023, which should increase by 5K per year.
Thank you very much.
Thank you. We will take the next question from line, Marie-Line Fort from SG. The line is open now. Please go ahead.
Good morning. I hope my line is quite clear. I just would like to know what is your CapEx envelope for 2023. My second question is about Europe. Do you see Europe normalization now? Do you expect further improvement in 2023, thanks to the recovery in tourism?
I will take the question on your second question, and I'll leave it to Patricia on the CapEx. Yes, we see normalization in Europe. Yes, we expect a return of tourism, American tourism, intra-European tourism, and maybe later on, at the end of the year or early 2024, Chinese tourism. Definitely this is something that is contributing to the performance of Europe. The only country that is still a bit more impacted than the other might be the U.K., where we have a contrasted situation, partly linked to the tax-free regulation still in place. We are very confident on the European performance and on the fact that we're really coming back to a normalization.
At the same time, all the work that has been done on the local clientele is really paying off. We're confident, very confident in Europe.
Regarding your question, Marie-line, on CapEx for 2023, we mentioned the guidance of 4%-5% of sales in the coming years, and 2023 will be in line with that, probably in the top of this range. As you know, we are in a process of quite big investment in some important IT systems, just like Isabelle talked about in terms of ERP, et cetera. I would say that for 2023, it will be in the high range of our. I think we'll take the last question now. Maybe David, you want to retry or?
Hello, can you hear me? It's better now?
Maybe, David, you want to send us by email and we can say the question for you.
Hello?
Hello?
Hello?
We .
Yes, can you hear me?
Let's try.
Yeah.
Let's try.
Okay. Let's try.
It was on free cash flow, but we didn't hear the exact question.
Yeah. On free cash flow, because free cash flow has been quite low last year due to the sharp increase in inventories. Are you expecting a kind of normalization this year on your working capital requirements? Should we expect any de-stocking, especially in China? If so, is there any negative impact to anticipate on your gross margin? That's the first question.
Mm.
The second one on shareholding. The sale process for the pledged shares has been officially launched yesterday. Are you aware of any new developments that could have triggered this process? For example, any news from the unpledged shares that are still owned by your former majority shareholder? Thank you.
Your second question was [crosstalk] d ifficult to hear.
We understand and are trying to read between the lines. We understood that you acknowledge the fact that we, the bondholders have mentioned that they now put their stake for sale. This is something that was bound to happen. We now have a date and a starting point for the process that we are happy to be following and encouraging to find a new stability in our shareholding situation. You know, I could not hear the other part of your question. I can take on free cash flow. You mentioned what. It was very difficult.
No, I was mentioning if you have any news from the unpledged shares that are still owned by your former majority shareholder.
Would we [crosstalk].
Maybe this has triggered something in this process. I was wondering why?
No, no.
The timing, yeah.
We have no additional information on the 16%, nothing to say about that. The only update that we have from a notice published by GLAS with a link to a judgment in Luxembourg, from which we understand that the Luxembourg judge has ruled out in favor of the petition of the bondholders requesting the liquidation of European TopSoho. This is the only update that we have, nothing about the 16%, which are unpledged. About your question on free cash flow, it's much better the second time. Sorry for that. Yes, the 2023 should be better in terms of free cash flow.
2022, I would say if you look at the historical figures, it was not that bad. It compared to 2021, which was unusually high with the conjunction of several positive factors. We had put inventories and there are huge constraints in period of COVID et cetera. We had maximized the cash generation in 2021. It was even higher than the net profit. In 2022, it's a lower amount, but it's not negligible. 2023 should be in between with the situation of inventories normalizing. It should be in between 2021 and 2022.
Thank you, Patricia. I think we are done with the question now. I wish you all a very nice day.
Thank you everyone.
Thank you. Thank you very much.
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