Ladies and gentlemen, thank you for standing by and welcome to the Hugo Boss third quarter results 2019 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you this conference is being recorded today, the 5th of November, 2019. I'd now like to hand the conference over to Christian Stöhr, Head of Investor Relations. Thank you. Please go ahead.
Yes. Good afternoon, ladies and gentlemen. My name is Christian Stöhr. I'm heading up the investor relations activities at Hugo Boss, and I would like to welcome you to our 2019 third quarter financial results presentation. Today's conference call will be hosted by Mark Langer, CEO, and Yves Müller, CFO of Hugo Boss. As always, during the Q&A session, I kindly ask you to limit your questions to a maximum number of two so everybody gets a chance to ask his or her questions. With that, let's get started and over to you, Mark.
Thank you, Christian, and good afternoon, ladies and gentlemen. Welcome to our third quarter results conference call. The next 20-25 minutes, Yves and I will present to you our Q3 operational and financial performance before taking a closer look at our updated outlook for the full year 2019. After that, we'll open the floor to your questions. As already announced back in October, our Q3 top and bottom line performance came in below our own expectations. In particular, the persistent macroeconomic uncertainties increasingly weighed on consumer demand in some of our core markets, something we were not able to compensate elsewhere.
Not only did our business in the Americas experience a further deterioration in the third quarter with a particular weakness in U.S. wholesale, also our business in Asia Pacific saw a significant slowdown in Q3 as turmoil in Hong Kong had a severe impact on the market and the region alike. Consequently, the top-line performance in Q3 did not show the expected acceleration with currency-adjusted group sales in Q3 at the prior year level. In EUR terms, sales grew 1% to EUR 720 million as currency effects continued to provide a slight tailwind to revenues. Let's take a closer look at the regions, starting with the Americas, where sales declined 8% on a currency-adjusted basis. As already highlighted last month, and against our expectations, the market environment in North America saw a further deterioration in the third quarter.
This can be attributed to a number of challenges that all weigh on consumer sentiment in this market. First and foremost, the important U.S. market where currency-adjusted sales were down 10%, the tourism spend was significantly lower as a result of the ongoing trade tension as well as the appreciation of the U.S. dollar. Besides that, a general softness in local demand put a strain on our business. This is particularly true for the wholesale channel, for which Q3 was marked by weaker than expected order business as well as ongoing promotion activity, especially for the formal wear part of our business. Consequently, U.S. wholesale sales were down by a double-digit rate in the third quarter. The aforementioned decline in the tourist spend also put a strain on our business in Canada, where sales were down 7% in the third quarter, reflecting declines in both channels.
Finally, sales in Latin America decreased slightly in Q3 as the strong performance in Brazil was more than offset by lower sales in Mexico. Coming to Asia Pacific, where sales grew 2% currency adjusted in Q3, thus below the levels witnessed during the second quarter. While mainland China once again drove regional sales growth with yet another quarter of double-digit Comparable store sales improvements, our business in Hong Kong has been significantly disrupted since the beginning of the demonstrations. This became particularly visible during the course of the third quarter as we were confronted with a sharp decline in tourism, which under normal circumstances represents between 70% and 75% of our Hong Kong business. Consequently, sales in this market, which usually account for approximately 25% of Greater China revenues, were down 50% in the third quarter. In Macau, the store renovations we flagged earlier this year have been largely completed.
In the meantime, however, the Hong Kong protests also affected our business in this market as the usual tourist travel pattern is a combined Hong Kong-Macau trip. In contrast, other markets of the Asia Pacific region posted healthy growth in the third quarter. In particular, Japan, where sales were up in the high single digits in Q3. Coming to our largest region, Europe, where sales increased 2% on a currency-adjusted base and on a reported base. With sales growth of 5%, the U.K. stood once again out, driven by strong momentum in own retail despite ongoing uncertainties around Brexit. While our business in France continued to record positive Comparable store sales increase in Q3, a number of large store optimization projects during the quarter, including the renovation of our BOSS flagship store on Champs-Élysées, weighed on the market's overall performance.
This brings me to Germany, where currency-adjusted sales declined 5% in Q3. Both channels, wholesale and retail, ended the quarter below the prior year level. The latter was also affected by the transition to our new flagship outlet near our Metzingen headquarters towards the end of September, as we had to wind down the previous outlet operations over several weeks during Q3. Allow me to say a few words about our biggest outlet worldwide in terms of both selling space and commercial relevance. Located in the heart of one of Europe's largest outlet cities, this new outlet offers our customers a unique shopping experience. While the product offering is clearly centered on apparel covering all different wearing occasions, from formal to casual wear and athleisure, it is also offering a broad selection of shoes and accessories.
Without a doubt, starting with Q4, the new outlet will contribute to improvements in our overall retail business in Germany and, to be more precise, the non-like-for-like part of it. With this, let us move on to our sales channels, starting with own retail, where sales grew 3% on a currency adjusted basis, reflecting a 2% increase in Comparable store sales, as well as contribution from space of around one percentage point. Comp store sales were up at a low single-digit rate in Europe and remained stable in Americas, hence broadly in line with the performance seen during the second quarter. In Asia Pacific, however, Comparable store sales growth slowed down to a mid-single digit range in Q3, reflecting the aforementioned sales decline in Hong Kong. Importantly, both our brick-and-mortar business as well as our own online business contributed to Comparable store sales growth in the third quarter.
Momentum was particularly strong in online, where currency adjusted sales growth re-accelerated to 36% in the third quarter. The performance in the quarter benefited from robust sales increases via hugoboss.com, as well as the further expansion of the concession business. The latter saw an important milestone in the third quarter, as we successfully converted the vast majority of our BOSS casual wear and athleisure wear business on Zalando from wholesale to retail. The intensification of our successful partnership under the Zalando Partner Program enables us to serve customers' requirements even better than before, while at the same time taking more control over the distribution of our BOSS brand in the online space. Finally, to conclude on online, the successful rollout of hugoboss.com to Scandinavia and Ireland in mid-August made initial contributions to online sales growth in Q3, although to a lesser extent.
Allow me to once again point out that the further expansion of our online concession business, as well as the rollout of hugoboss.com to new markets, will contribute first and foremost to growth of our non-like-for-like business, particularly in the short term. The same is true with regard to our ongoing store optimization initiatives, which include store renovations, relocations, and right-sizings. In particular, the rollout of our new BOSS store concept continues to play an important role when it comes to the persistent modernization of our brick-and-mortar store network. In the third quarter, we renovated and upgraded 10 BOSS stores, bringing the total numbers of stores offering the new shopping experience to a total of 68 BOSS stores worldwide. The reopening of our BOSS flagship store on the Champs-Élysées on October 5th represents an important milestone in this regard.
Turning to the wholesale channel, where sales were down 5% on a currency adjusted basis. While currency adjusted revenues in Europe decreased 1% and were hence in line with expectations, sales in the Americas were down 20% on the prior year, primarily reflecting the previously mentioned weakness of the U.S. wholesale market in Q3. From a global perspective, and similar to previous quarters, Q3 saw ongoing strong momentum with either online marketplaces or online platforms of leading department stores up at a double-digit rate in total, while stationary retailers continued to suffer from ongoing traffic declines. Finally, our license business grew at a strong 14% in the third quarter, driven by improvements across all product groups. The important fragrance business particularly benefited from the launch of Boss The Scent Absolute, which was accompanied by a global marketing campaign starring model Birgit Kos and actor Jamie Dornan.
In addition, our eyewear business saw strong growth in supported by the recent renewal of our license agreement with Safilo. Let us conclude on the top line with a brief review of the performer brand. Starting with Boss, where formal wear performed broadly in line with casual wear in the third quarter. It is important to note that the slight decline in total sales for our Boss brand is purely attributable to the challenges experienced in North America in Q3. Elsewhere, our Boss brand continued to enjoy robust momentum with sales increases both in Europe and Asia Pacific. On the marketing side, over the last several weeks, Boss took center stage twice in two of the world's most important fashion metropoles, Milan and Shanghai. In September, Boss showcased its upcoming spring/summer 2020 collection in Milan.
Only a few weeks later, BOSS underpinned the strategic relevance of the Chinese market by presenting its pre-fall 2020 collection in Shanghai for the first time in seven years. The feedback on both shows and the accompanying social media campaigns was overall very positive. Thanks also to the close involvement of international bloggers and influencers. Moving over to HUGO, where the positive trend from previous quarters continued in Q3. Currency-adjusted sales growth accelerated to 6%, representing the strongest quarterly performance for HUGO in more than two years. In line with the brand's positioning in the contemporary fashion segment, sales in casual wear continued to grow disproportionately, and were up at a strong double-digit rate. Besides ongoing strong momentum around HUGO's logo-inspired product offering, various events as well as product and marketing campaigns focused on HUGO's new brand ambassador, British singer Liam Payne, supported brand heat in Q3.
Ladies and gentlemen, this concludes my discussion on the top line. Let me now hand over to Yves to guide you through the remaining P&L and balance sheet items, before I will provide you with an update on our expectation for the remainder of 2019. Yves, over to you.
Thank you, Mark. Good afternoon, ladies and gentlemen. As always, let's start with the gross margin development, which increased by 80 basis points to 63.3%, mainly due to the reversal of negative inventory valuation effects. With retail stronger than wholesale, we also recorded a slightly positive channel mix effect in Q3. This, however, was largely offset by negative currency effects. While all other factors were broadly neutral in the quarter, I would also like to highlight that markdowns have not turned into a tailwind in Q3, reflecting the ongoing promotional environment that we continue to see in some of our markets, first and foremost in the U.S. All in all, the gross margin development in Q3 was not able to deliver the improvement we had initially expected for the quarter. Operating expenses increased 7% or EUR 24 million in Q3.
While selling and distribution expenses were above the prior year level, administration expenses declined slightly, despite some one-off expenses related to management changes. The muted top-line growth in the third quarter, together with the increase in operating expenses, resulting in a decline in EBIT and net income of 13% and 12%, respectively. Let's take a closer look at the individual cost items to explain what ultimately caused the increase in operating expenses. In particular, there are four elements that resulted in the increase in operating expenses in Q3. Firstly, higher retail costs, mainly associated with the ongoing modernization and sequential expansion of our brick-and-mortar store network over the past 12 months. This also includes higher depreciation as well as an increase in rental and payroll costs in brief.
In addition, expenses associated with a further expansion of the online concession business, as well as the ongoing rollout of the hugoboss.com website globally, also contributed to the increase in retail costs. Altogether, this increase amounted to a low double-digit million EUR amount. Secondly, higher marketing expenses reflecting the various initiatives that took place in the third quarter to drive further brand momentum for both BOSS and HUGO. This includes large brand activation initiatives such as the BOSS fashion show in Milan or the HUGO brand event in Berlin, new collaborations we entered into with brand ambassadors such as Mark Chao and Liam Payne, as well as various limited collections that were launched during the quarter, including the second edition of Porsche x BOSS. The increase related to these initiatives amounted to a mid-single-digit million EUR amount.
As we project brand and marketing investments to also grow in the final quarter, we now expect marketing expenses as a percentage of sales for the full year to be slightly above the prior year level. Thirdly, one-off expenses related to several management changes on the executive board and regional level amounted to a mid-single-digit million EUR amount. This also includes a personal change for our business in the Americas, where Stephan Born, currently managing director of our U.K. market, will take over responsibilities from November onwards. Last but not least, negative currency effects due to the devaluation of the euro against major currencies also impacted operating expenses by a mid-single-digit million EUR amount.
As you can see, ladies and gentlemen, the third quarter was, generally speaking, an OpEx-heavy quarter, and we clearly took the decision not to cut down on brand and distribution expenses, despite the weaker-than-expected top-line performance in Q3. We decided to do so because we fundamentally believe that investing in our business is crucial in order to drive brand desirability in the long run. This said, I would also like to point out that our tight overhead cost management approach, in combination with our initiatives to optimize the organizational structure of our company, of which some have been implemented at the beginning of the year, have started to yield positive returns. The fact that general admin costs were kept stable in Q3, despite the already mentioned one-off costs related to management changes, is proof positive in this context.
Let's now turn to the balance sheet, starting with inventories, where we have been able to reduce inventory growth for the fourth consecutive quarter. At the end of September, currency-adjusted inventory growth amounted to 1%, despite the lower-than-expected sales growth in the quarter. However, let me point out that I am not satisfied yet with where we stand in terms of inventories. As we continue to put a strong emphasis on tightly managing inventories, we are confident that inventories will finish the year at around the prior year level. Be assured that inventory management will also remain a focus area for us in 2020, and it is our clear goal to reduce inventories in absolute terms over the coming months. Turning quickly to Trade net working capital, which at the end of September remained stable year-on-year.
As a percentage of sales, trade net working capital grew 110 basis points to 20.5%. Moving on to our free cash flow development in the first nine months. In line with our outlook for the full year, capital expenditure increased 37% to EUR 131 million, reflecting the ongoing focus on optimizing our store network as well as further strengthening our IT and digital capabilities. The increase in capital expenditure, together with a decline in operating profit, largely offset the improvements achieved during the course of the year when it comes to trade net working capital. As a result, free cash flow amounted to EUR 12 million for the first nine months and was thus at around the prior year level. With this, ladies and gentlemen, let me hand you back over to Mark, who will discuss the adjusted outlook for 2019 in more detail.
Thank you, Yves. Let's change perspective and look ahead at our expectations for the remainder of the 2019 fiscal year. Against the backdrop of the persistently difficult market environment, as you are all aware of, we adjusted our financial outlook for 2019 on October 10th. We now expect currency-adjusted group sales for the full year 2019 to increase at a low single-digit percentage rate. Before moving on to the bottom line, let me give you some more color on our top-line expectations, what this means from a regional perspective. For Europe, we forecast sales growth to accelerate in the fourth quarter. While we do not expect the underlying market environment in key European markets to change fundamentally versus most recent trends, we project that important growth stimuli will come from the non-like-for-like part of our business.
In particular, we expect positive effects from the successful conversion of online partners to the concession model, as well as the recent completion of large-scale retail projects. For the full year 2019, Europe is expected to deliver low to mid-single digit growth. For the Americas, we expect recent weakness to persist also in the final month of the year. In particular, we project that the overall weak U.S. consumer sentiment will most likely continue to lead to traffic declines as well as ongoing high promotional activity, and thus also weigh on our sales performance in the fourth quarter. For the year as a whole, we therefore expect sales in the Americas to decrease in the mid to high single-digit percentage range. Finally, Asia-Pacific is expected to grow at a mid-single digit rate in the full year 2019.
We expect Mainland China's dynamic momentum to continue into Q4, supported by various execution measures, both in brick-and-mortar retail as well as via our online partnership with Tmall and JD.com. At the same time, we are mindful of the ongoing weakness in the Hong Kong market, which is expected to remain a drag on our performance for the region as a whole. From a channel perspective, we now expect to grow retail sales in 2019 at a low to mid-single digit rate. This outlook is based on the assumption that Comparable store sales will grow by a low single-digit rate. This in turn means that we do not expect an underlying improvement in Comparable store sales growth in Q4 compared to the first nine months. Instead, it will be our non-like-for-like business that will see an acceleration in Q4.
Let me point out two factors that will be decisive for the anticipated acceleration in non-like-for-like growth in the final quarter. Firstly, the expansion of the concession model within our online business will push sales growth in the remaining quarters. New e-concessions and those we initiated back in 2018 will clearly contribute to a strong double-digit growth in our own online business also in Q4. As you all know, our Zalando partnership will play a key role in this regard, as Q4 2019 represents the first full quarter in which we are running the BOSS business on Zalando by ourselves. Secondly, we will continue with our initiatives to modernize our global store network. In recent weeks, a number of strategically important BOSS stores have been upgraded to the new store concept and reopened on time as the important holiday season is just about to start.
Besides our flagship store on the Champs-Élysées in Paris, we have also successfully completed the renovation and relocation of our Macau store at the Galaxy Hotel and the renovation of our biggest store in Singapore in Ngee Ann City. We are right on track to also finish renovation at important stores in key U.S. cities such as Chicago, San Francisco, and Atlanta in the coming days. With this, let us move further down the P&L to complete our expectation for fiscal year 2019. Starting with our gross margin, which we expect to remain broadly stable for the full year 2019 as well as for Q4. This implies that we expect a positive effect from a more favorable channel mix in Q4 to be broadly offset by slightly higher markdowns in the Americas.
Operating expenses, however, are expected to slightly improve in Q4 as we expect some operating leverage driven by the anticipated acceleration in top-line growth and the non-recurrence of last year's one-off in the magnitude of a high single-digit million EUR amount. As a consequence, and excluding the effects of IFRS 16, EBIT is expected to come in at a range between EUR 330 million and EUR 340 million for the full year. For net income, we expect a decline at a mid to high single-digit percentage rate. This includes our assumption of a tax rate of around 32% for the fiscal year 2019, as the ongoing tax field audit we highlighted earlier this year has just been completed. In light of the anticipated decline in net income for fiscal year 2019, allow me to say also a few words about the dividend.
While it is too early to talk about the detailed implications, I would like to point out that the managing board of Hugo Boss is clearly committed when it comes to the absolute dividend for 2019, as we recognize the importance of a reliable dividend for our shareholder base. As always, we'll lay out all details around that with the publication of our full 2019 results in March next year. Ladies and gentlemen, before we start with the Q&A session, let me conclude by emphasizing that we are obviously not satisfied at all with regards to the financial performance in 2019. Clearly, we had planned a different start to our midterm strategy, which we introduced to you almost exactly one year ago. Nevertheless, we have to accept that the underlying macroeconomic trends have deteriorated in some of our core markets.
As macroeconomic uncertainties will most likely remain high in the short term, it is absolutely crucial that we remain focused when it comes to successfully executing our strategic initiatives. I'm absolutely convinced that we have the right strategy in place to ensure that we further increase brand desirability in the years to come, while at the same time also structurally improve the profitability of our company. In this context, I'm encouraged by the fact that despite the various challenges in Q3, all of our four strategic growth drivers, the online business, China, HUGO, and store productivity, continue to grow disproportionately. This is particularly evident around our online business as well as HUGO, where growth rates have clearly accelerated in the quarter. In addition, we continue to make strong strides when it comes to gaining further relevance vis-a-vis the Chinese consumers in increasing the productivity of our store network.
Of course, there is more work ahead of us, and I can assure you that together with my board colleagues, we will tackle each and every challenge that we're facing with high discipline, strong focus, and utmost passion in order to be successful in the long run and to live up to your and our expectations. We fundamentally believe in the strong untapped potential that both BOSS and HUGO have to win the consumer and ultimately become the most desirable premium fashion and lifestyle brand. With this, ladies and gentlemen, Yves and I are now very happy to take your questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will take a few moments. If you wish to cancel your request, please press the hash key. Once again, that's star one to ask questions. Your first question today is from the line of Jürgen Kolb from Kepler Cheuvreux. Please go ahead.
Yes. Hi there. Thanks very much. Two questions from my side. First of all, from your first findings of your switch to the concession business with Zalando, maybe you can share some thoughts with us, what you've learned, what you've seen in terms of product demand, in terms of customer traffic and so forth. I know it's still early times, but still, maybe some words on that one. In this wake, could you please also break down the e-com growth in the third quarter of 36%? How much was really driving the concession business? How much was hugoboss.com, really? Secondly, we've had this profit warning. We've seen the reasons, and you mentioned the reasons for that.
Maybe any findings, any conclusions that you want to put into your strategic outlook, that you might want to change something of what you've outlined in the last capital market days or some internal adjustments that you might see necessary in order to arrive at your longer-term targets. Thank you.
Thanks, Jürgen. Let me start with the last one, and I think that's a very relevant point. I think I finished my comments exactly on this element. Yes, we are clearly disappointed with our performance in the third quarter. Reviewing the elements of our strategic growth plan until 2022, the four growth elements, we are very pleased that despite the headwinds and maybe some glimpses in execution in some regions that we have mentioned also as part of the call, we do see that along these four top-line and profitability drivers, we are on track, and we even seen an acceleration, in particular in e-com, I will come to your question in a second, and HUGO.
At the same time, I can assure you there's a relentless focus on productivity improvements and capturing the potential of Asian consumers in their home region, but also outside of that. We have tightened the screws when it comes to the cost management, and we believe we can see already first results with the tight overhead cost management in the third quarter. I can assure you we remain committed to that, not only to the fourth quarter, but also as a base as we move in 2020. We will provide you with more details on our update on the midterm plan in terms of also timing of achieving certain important milestones. We confirmed our 15% EBIT target, also on a midterm base. Clearly, we have a lot of questions around what does it mean in a specific year. I think that's an important question we need to answer.
We will come back to that as part of our next Capital Markets Day. Today, we want to reassure you that we believe that our growth drivers are healthy and in place and they are delivering, and that we are committed to making progress towards our midterm profitability target. Maybe a few words on the e-com business. Well, honestly, the takeover of the athleisure and casual wear segments was easier task than the initial start with concession at the beginning of the year with Zalando, where we introduced clothing plus furnishing, because this was already a well-established, strongly growing business on the wholesale side already for a couple of years. And as we gained experience and attraction with our own fulfillment, I think both partners were very happy that we had a very smooth transition from wholesale to retail concession in the third quarter.
We were able to build on the momentum that we have established over the last two years with Zalando. We have been able to accelerate that, and I'm very happy that with the expansion into more markets where we now operate with the concession, we have seen the expected acceleration in our e-com business. We don't break down the overall growth rate of 36% between .com and concession, but we also have seen clearly, because it's a like-for-like number, it's a smaller growth rate in our hugoboss.com on a comparable base. This business also benefited from growth from the expansion into Scandinavia and Ireland. We have seen a significant improvement from the concession expansion, predominantly Zalando, but there were also other partners which contributed growth in the third quarter.
Yes. Thank you.
Thank you, Parker.
Jürgen.
Jürgen. Sorry.
Close enough.
Thank you. Question is from the line of Antoine Belge from HSBC. Please go ahead.
Yes. Hi, it's Antoine Belge at HSBC. Two questions. First of all, when it comes to the evolution of cost in Q3, I was a bit surprised by the magnitude of the OpEx evolution. Especially, I think there were two months between your Q2 publication and then the profit warning. I understand that lower sales leads to less profit. I would say that on average, I think you downgraded the guidance by around 10% in terms of EBIT for a decline of around a reduction of 2% in terms of sales. Were there any sort of unexpected cost or incremental cost that you were not aware of early August? That's my question. Second question relates to the various management changes.
Maybe, I don't know if you've mentioned all of them, but can you distinguish maybe between the management changes, like people just leaving the company and others where you felt you really had to change something? Actually just, I know it's only two question, but just in terms of you mentioned the next Capital Market Day. Is it something that should happen more at the end of next year or more something maybe after you've published your full year 2019 numbers?
We have not set a date, we recognize a lot of question that we should come back to you rather in the first half of 2020, and this is our plan. Please bear with us that we will share in due time the timing for our Capital Markets Day. We'll first be in Paris in a few days for our 2019 field trip. We recognize there are more midterm questions to be answered and they will be addressed by a Capital Markets Day that we plan to host very likely in the first six months of 2020. On the management changes, you're absolutely right. An international group of our size will always have changes to top management position. I mean, this is part of the previous year.
With the change to the top management on the executive board, but also a major change in one of our largest market, the U.S. These were the two relevant and major ones. Reflect them all. They had additional cost impact that we want to highlight. First, it needs to be clear that we take decisive and quick measures to address areas where we are not happy with the performance. We also see this as of a certain magnitude that we need to flag it as part of our cost development. If you look at our overall development, and I think Yves already gave a lot of color to that, we remain focused on building brand desirability, investing into important marketing events, be it partnership, be it fashion events. We have to recognize that our online concession expansion will come with an increase in selling and distribution expenses.
As we convert this business from wholesale to retail, there's clearly an uplift on the top line, but also additional concession fees that we have to pay, while at the same time, all other administrative expenses have been flat despite a spike in restructuring charges when it comes to top management positions. This has been not a surprise. We're expecting a stronger recovery in the third quarter. This was part of our conference call three months ago. We expected a better performance, not only in Hong Kong, which was clearly affected by the demonstration, but also from the effect we have seen in the North American market, which was clearly below our initial expectation back in August of this year.
Maybe just another follow-up. I think you mentioned inventory valuation impact. I think it was a negative number last year and a positive this year. Would it be possible to have the negative impact from last year as a reminder on the positive of this year?
Antoine, the positive effect of the reversal of the inventory valuation is about 80 basis points. What I said here in the presentation at the end regarding gross margin, we clearly expected more, but we didn't fulfill on the markdown management because of the promotional environment in the United States.
Can you remind me, last year the gross margin was down more than 200 basis points and if you have that in mind, maybe the negative impact of the inventory valuation last year.
Last year, the inventory valuation had around, how I recall it now, it's like one year over, I think it must be like the same magnitude of 80 basis points. It was negative and the other was more driven by more markdowns of 120 basis points. We couldn't revert this kind of markdown part of this.
Thank you. That's very clear.
Thank you. The next question is from the line of Thomas Chauvet from Citi. Please go ahead.
Good afternoon, Mark Langer and Yves Müller. Three question, please. The first one, Mark Langer, in a media interview this morning, there were a few headlines that suggested you're sticking to your medium-term EBIT margin of 15%, it seems you said not by 2022 as planned. Can you perhaps elaborate on what you actually said? There were no such comments in your press release. Are you still thinking the drivers of EBIT margin increase will be balanced between gross margin and cost efficiencies? Anything incremental on the cost you can extract in Q4 next year. Secondly, on what has changed since the CMD a year ago. You're blaming the macro in Q3, that's understandable looking at the U.S. and Hong Kong.
Do you think something has intensified also in the environment for premium apparel brands beyond the macro, whether that's the promotional environment in retail, the endless pressure on traditional wholesale, the rising cost of doing business, whether that's rents or OpEx, or anything else. Just finally, housekeeping on the tax rate. Can you give us the EUR million amount of the provision for tax audit you've now identified that seems to drive your 32% tax rate? Will that be all booked in Q4 and no P&L impact next year? Just want to understand how this works and what's the amount. Thanks.
Let me start with the first two and on the tax rate, I will hand it over to Yves. It was a disappointing moment for all of us to revise our 2019 outlook, our first year delivering against our 2022 target. Based on what we achieved in the first three quarters and how the growth drivers that we presented to you in detail at the last Capital Markets Day have delivered over the last, I would say, nine to 12 months, I'm absolutely confident that our focus on the Asian Pacific market, our focus on retail productivity rather than expansion, tapping the potential in the HUGO contemporary segment, and to be focused on the online business are today as right and have proven successful for the group as they were 12 months ago.
What we clearly have to do, we have to continue to run a very tight cost base to prepare ourselves to weather for a more or less supportive market environment. You're probably right to assess that we as a upper premium player are less immune to some of these macroeconomic risks than pure luxury players. I think that is something we from a Hugo Boss have to stay true to our knitting. We are not a luxury group, we are upper premium and maybe our segment, and that's obviously a fact that we have to take into consideration, has not as able to weather these repercussion as maybe some other players are able to do. However, we believe that the 15% EBIT margin has and can and will remain our midterm structured profitability target. I can assure you we'll do whatever it takes to deliver against this target.
We understand that this has to be more precise. Again, be as precise as we presented it to you last year. It was a 2022 target. We have become more vague on our timing because we classified the 15% EBIT target now as a midterm target. I would ask for your understanding that we will be more precise on the timing to achieve this target as part of our Capital Markets Day that I already mentioned earlier, which we expect to host in the first half of 2020. With that, I would hand over to Yves. Hand it to you, Yves, on the tax question from Thomas.
Thomas, regarding the tax implications, yes, we will book in the fourth quarter regarding the tax field audit. We will come at around a overall tax rate then for the year 2019 of around 32 percentage points. Going forward, we're living in uncertainties and you never know what's happening regarding new fiscal policies. Overall, we are expecting being back on the tax rate of around 26% in the years to come.
Thank you.
Thank you. The next question is from the line of Piral Dadhania from RBC Capital Markets. Please go ahead.
Hi. Good afternoon, everyone. Thanks for taking my question. The first one just relates to current trading, if I may. Are you able to give any more, or give any color as to what you've been seeing in October and early November? I would argue that perhaps the weather trends have normalized a bit and perhaps, the ability to sell autumn/winter product at full price may have improved in some of your key markets. Any flavor on that would be very helpful indeed. Secondly, just around e-commerce development in the North American market. Appreciate e-commerce was strong at the headline level, some of which was impacted by concessions and perimeter expansion. Could you just help us understand the online versus offline evolution of the retail channel in North America, and whether you're seeing any divergent trends there? Thank you.
Now, let's start with the e-com question. Yes, the North American market is more advanced. We see also many of our brick-and-mortar partners to be already moving very successfully to convert their customers from a brick-and-mortar business to online business. We see strong growth both from our .com platform. We see strong growth from our partners that operate hybrid models, and we see also in North America, even so we haven't seen in the fourth quarter now any takeovers, that also the digital concession that we started to operate also North America, positive growth. The shopping behavior on consumers is moving globally and it's moving probably the fastest in the North American market. Unfortunately, and this is true both in the physical world and the digital, in both channel, a high promotional market. It's where promotions quickly spread through across all sales channel.
Our focus on protecting full price business has a price to pay, as we have seen on our third quarter performance also in North America. On the trading on the fourth quarter, I will just ask again for your understanding. It's too early to comment on a quarter which is just a bit more than a quarter through it. The trading we have seen and especially on the retail side in the first couple of weeks, reassures us that the revised guidance that we have given on October 10th will be delivered from the groups. It's our commitment to the market and what we have seen as trading trends, both from a retail and from the wholesale business confirms that we will be able to deliver against the revised guidance.
Okay. Thank you very much.
Thank you. The next question is from the line of Thierry Cota from Société Générale. Please go ahead.
Yes. Good afternoon, Mark, Yves and Christian, thank you for taking my questions. I'd like to come back on retail sales. Can you quantify for us the space effect that you expect as a percentage of retail sales in Q4 and in H1 2020, including online, of course? Linked to that, what kind of OpEx inflation do you see in Q4 and early next year? The other point was, given the level of rebates you see this year and you saw last year, do you think that we're currently at a fair level given the brand, given the environment and the market it is in, or do you think there could be an improvement going forward and help boost the improvement of the gross margin? Thank you.
Let me take the first one. You're absolutely right that we expect the like-for-like momentum by region to stay broadly stable also for the fourth quarter. We do see, and we expect this trend to accelerate with the renovations. Champs-Élysées was basically no impact in the third quarter from the new store, which was partially closed for a couple of months, to fully materialize. Without giving you the exact numbers, the non-like-for-like part on the fourth quarter retail development is clearly to accelerate as part of our expectation. We will not give you a quarterly guidance on the non-like-for-like growth on our retail business. We expect this to be accretive. Clearly, you're absolutely right. There's a related increase in cost, be it concession fees when it comes to the full year effect from our new digital concession.
Same is true also in some of our brick-and-mortar, where with the opening of the new stores or renovated stores, additional depreciation will take in. Given the sales momentum, we believe that the expansion on our non-like-for-like will be EBIT accretive, in the fourth quarter, thus delivering the acceleration on improvement in EBIT, in the fourth quarter. The second question was on?
On rebates, if you think that where you stand today could be sustained going forward or whether you believe that you could improve it and help the gross margin rise.
Well, on the short term, we guided for a flat development. We believe that as we drive our full price business, as we become better retailers, that on the mid-term, that margin improvement, gross margin improvement should be helped from a better management of TPR, but we don't expect a short-term impact to that. It's part on the building blocks that we will detail in more color and more level of details as part of our road to the 15% EBIT target as part of the next Capital Markets Day. On the mid-term, you're right, it has to be one of the building blocks to achieve a higher structural profitability for the group again.
Okay, great. Thank you very much.
Thanks, Thierry.
Thank you. The next question is from the line of Jaina Mistry from Deutsche Bank. Please go ahead.
Hi, good afternoon. I've got two questions. My first one is on 2020. I appreciate it might be too early for you to comment on this, but full year 2020 consensus has margin expansion of 50 basis points or EBIT of EUR 358 million. Are you happy with the consensus at this level? My second question is on the store modernization program. How many stores were shut for refurbishment in Q3? Do you expect more stores to be shut in Q4? Thank you.
We take on the second part. Christian is just checking the numbers on that one. You probably expect these answers. We will not be able to comment on consensus or own expectation for 2020 at this point in time. All eyes at Hugo Boss are right now on delivering on our revised guidance on 2019, which already includes delivering against acceleration or improvement in our EBIT performance to deliver between EUR 330 million-EUR 340 million EBIT for this year. We will provide you with more details on our top line and EBIT expectation for 2020 as part of our March balance sheet presentation. I would ask for your understanding that we are not able to comment on market consensus or any outlook from our side on 2020 at this point in time. On the renovation question?
Yeah, I think it was a question related to openings and closure, what is the net effect? How I understood this, we had in Q3 2019, we had eight openings and four closures. For the Q3 we expect Q4, sorry, we expect 10 openings and two closures.
Okay. You said that you refurbed the store in Paris, for example. How many stores were shut for refurbishment in Q3?
We renovated 10 stores in Q3.
Okay. Thank you.
Thank you, Jaina.
Thank you. The next question is from the line of Philipp Frey from Warburg Research. Please go ahead.
Hello, gentlemen. I still try to get my head a bit around the increase in selling expenses for the quarter. Well, if you look at a EUR 27 million selling expense increase in the quarter that you had, you outlined a EUR 5 million or mid-single digit higher marketing, which basically means EUR 22 million explained. Your EUR 5 million probably from 2% from currency effect, and you have an increase obviously from higher online concession fees, et cetera, and cost of your online business, but could be hardly more than EUR 4 million. You basically arrive somewhere at probably around EUR 13 million underlying cost increase with a retail network that's just increased 1% in size. Can you comment, is there something special due to the ramp ups or the movement of your Metzingen outlet, some special costs or how much of this increase was underlying? Still just don't understand that.
Okay. Philipp, that's me, Yves. What I explained to you in my presentation, I was trying to explain the increase of 7% in operating expenses, which is like an increase of EUR 24 million. We concluded there is a mid-single digit EUR million amount due to Forex.
A mid-single digit million EUR amount due to management changes.
There is a mid-single digit EUR million amount due to marketing expenses. There is a low double-digit EUR number relating to retail costs.
You have to be aware of the fact that we included several projects, for example, the conversion of Zalando. That was during the month of August. What I'm saying is the cost incurred, whereas the net sales just started actually to kick in in August, this point 1. Secondly, we finalized the four countries for the hugoboss.com. It's the same logic. The cost incurred completely in Q3 and actually the net sales came in in the middle of August. There was clearly one special effect, which was due to the wind down of our Metzingen outlet. We had higher personal cost due to this kind of transition period, and I would rate this to be a low single digit million EUR amount as a kind of special operational moment.
In the end, you're saying basically there is a certain significant aperiodic and one-time portion in your increase in retail cost. Is that fair to say?
Well, from our perspective, they are still operational. In the old terminology, I would not call them one-offs because they are still operational. If you would assume a kind of run rate, yes, there are some extraordinary items in there.
Okay. May I have a second question on your cost savings? Obviously it looks from the chart that you presented that cost savings in the quarter have been a bit around a mid-single digit EUR million amount. Is that fair to say? Or to look a bit further, your 160 million EUR 2020 target in terms of cost savings, what sequence in the development of this cost savings should we expect?
If you look at the administration cost, we could not have lowered the administration cost if we would not have had savings out of the efficiency program. I would clearly say that a mid-single digit million EUR savings contributed in Q3 to our results.
Okay. Is it fair to say that this is going to pick up in 2020 or?
We are clearly working on this to improve our profitability and the efficiency program and cost savings is one big part of this.
Thank you and all the best.
Thank you.
Thank you. The next question is from the line of Melanie Flouquet from JP Morgan. Please go ahead.
Yes, good afternoon. Thank you for taking my questions. First one is regarding retail sales trend. If I go back to your retail sales trend, Americas actually didn't really deteriorate this quarter, but Europe did deteriorate on a, or actually was the same on a much easier base. Would it be fair to remark that probably the markdown pressure was across markets rather than being only U.S. driven and also, what is the pressure due if that's not what it is in Europe, please? Was there disruption from stores or anything we should be aware of? That's my first question. My second question is, in total, clearly Americas has been under a lot of pressure, notably from wholesale, but also you have a big exposure to outlets in this market and you have a pretty low profitability now in this market.
Is now a time, in your view, to take much tougher action on this market and actually reset it? It's probably too early to say that having changed your management, but just if you can share anything with us on this subject. On the concession takeback. There was only a 1% contribution of the non like-for-like in this quarter. Is it fair to assume that there will be more than three times that in quarter four, given you are consolidating the whole of Zalando over that period plus had a few large store openings in the period? Thank you very much.
Thanks, Melanie. Let me start with the second questions on North America and the concession takeover. I think the question we discussed a bit earlier, you're right that from the non like-for-like, a part of our e-com growth, the majority is coming from the first time impact from the takeover of former wholesale business into retail concessions. Zalando is the largest, not the only one. We have multiple other opportunities. Some of them actually will only kick in in the fourth quarter because they were not part of the base in the third quarter. The largest one is on concession. We do expect an increase from, it's often called space expansion, which is not actually true when we talk about digital concession, but it's from the non like-for-like. We are not able to quantify or we will not quantify that.
Beyond that, it's an acceleration where it is a trend you've seen in the third quarter. In North America, I would give quite some credit also for the current management team, because already in the last two to three years, they have taken decisive measures to discontinue off-strategy distribution. We have walked away from a third-party off-price distribution that was part of our business until 2016. We've cleaned up the distribution. The management team has pushed strongly for upgrading and renovating stores in the markets and I mentioned three major renovation that will come in effect in the U.S. in the fourth quarter. We have to take next level. Clearly, we have to up our game in terms of our retail operations. We have to regain lost market share when it comes to major department stores. Their business model is changing rapidly, and we have to follow them.
I believe one of the things we have to refocus quickly on the U.S. market, this was on a market where we so far have to still relied much stronger than any other market on the formal wear business. The North American business has not benefited from our strong growth in casual wear, both in HUGO and BOSS, as we experienced in Asia and in Europe. Stephan Born brings a particular expertise with him because he has driven the outperformance in Europe that he delivered in the U.K. and Scandinavia by very aggressively and successfully tapping this potential for BOSS in the casual wear segment. For me, he is a living proof to our ability to be a very strong, if not the leading player in menswear, casual wear. We came with this team to tap this enormous opportunity for us in the U.S. market.
You see, we have a clear plan on what to focus, what needs to be done to rebuild the U.S. business. You're absolutely right. It has to happen probably without or with very limited support from an underlying market. It has to be driven quarter after quarter by sequential improvement. We will provide you with updates on the performance on the more details to our plans in North America as part of our capital markets day. Clearly, the North American underperformance has taken central attention from the management, not only from the leadership, but also in the market, but also from us, from the managing board, because our midterm success is very much depending on turning around the situation in U.S. I can assure you we're extremely committed to achieve that.
Weaker trends in EMEA. If you talk about Europe, if you take retail, we saw an improvement in Q3 at a mid-single digit rate, but it was different in different countries. We saw a very good development in U.K., which was even up double digit. On the other side, there were two markets, where we had a negative development that was France and Germany, and that was due to the renovation we did, especially with the big store, Champs-Élysées, that was then reopened on October 5th. The other thing was the wind down of the Metzingen outlet. These two effects somehow were hurting our net sales in the retail environment. Overall in EMEA, we had a plus mid-single digit amount in Q3.
In addition to this.
The comps were relatively easy, right? Last year, if I recall well, notably September had been very warm, until very late you didn't see the fall/winter season arriving. The reason why you're not accelerating on an easier comp is actually because of the renovations in your view.
Yeah, that was the effect because of tremendous efforts that we did in terms of investing into all the business. We were talking about current trends, and we were very satisfied with the trading, in the beginning of the fourth quarter, actually, especially in EMEA.
Okay. You're very satisfied with the trend in EMEA in the beginning of the fourth quarter. Is that what you're saying?
Yes. That's what I said.
Okay. Thank you.
Thank you. The next question is from the line of Elena Mariani from Morgan Stanley. Please go ahead.
Hi. Good afternoon, Mark Langer and Yves Müller. A couple of questions from me as well. Firstly, I wanted to go back to the gross margin development. I wanted to better understand the implied guidance for the fourth quarter, which would mean approximately 20 basis points of improvement just to get to a flat gross margin for full year 2019. Can you help us understand what are the underlying moving parts you've mentioned that you would expect to be more promotional in this market? At the same time, in theory, you should have a stronger benefit from the e-concessions given that you're going to have three full months under these new agreements. What are the moving parts?
Because I wanted to better understand how much of this improvement in the fourth quarter could be carried forward into 2020, given that the benefits from the e-concessions are going to be in there for at least another half year in 2020. That's question number one. Question number two, I wanted to go back to your EBIT margin target for the medium term. You seem to be absolutely convinced that you're going to get to 15%. I understand that timing is now a little bit unclear, but what gives you confidence on this 15%? Do you expect to go back also to the 5% to 7% organic growth? That was what you were planning last year.
Would you see perhaps a low single-digit organic growth as more feasible and therefore to get to the 15% EBIT margin, you would need to be more aggressive on the cost side of things. What are the underlying parts that you see moving given that you're committed to these targets? Still part of this question, maybe, is there something more structural that you could see happening in your business? For example, the discontinuation of womenswear or a rethinking of the design approach, a stronger network rationalization. Anything that you could share would be very helpful. Thank you.
Thank you very much, Elena, for your question. I start with the gross margin development. What we expect actually in Q4, that margin more or less remains stable and comes in overall stable for the remaining of the year and in Q4 in specific. The moving part is, yes, you are right because of the e-concession expected to grow, and retail to grow. On the other side, we rather stay conservative when it comes to markdown management, especially in the U.S. Overall, we expect this to be flattish in Q4 overall.
how-
Let me pick up on this.
Obviously, they are compensating each other, but what would be the positive effect in your view from the positive channel mix and e-concessions, if you could share that with us?
We do not provide any further details on Q4 actually at this, just to give you an indication on the moving parts.
Okay. Thank you.
Let me go back to the second part of your question. The confidence that we also confirmed today is clearly coming that we see very tangible and positive results from the core strategic growth drivers that we discussed with you as part of our Capital Markets Day 2018. We are particularly pleased with the progress we see with our Chinese consumers within mainland China, but also traveling abroad, we are tapping much better than the path into this growth potential. Especially with the repatriation of consumption, the kind of Chinese consumers we see, the BOSS brand in particular, outperforming many competitive brands on the mainland China with a double-digit like-for-like improvement. As somebody already mentioned today, the structural profitability of this market, China remains today and in the future, our structurally most profitable market.
The growth in China itself that we are now starting to tap into is clearly accretive, not only from a top line, but even more importantly, from a structural profitability. Second, our strong focus on sales productivity improvements, which is demonstrated by rolling out the new highly performant new store format by focusing our collection and merchandising processes to allocate budget and spaces in our stores to drive sales densities is one of our most important drivers in terms of structural profitability improvement, because it focuses on our biggest lever when it coming to driving structural profitability to the group. Nothing pays as much to improving structural profitability than like-for-like improvement in our existing network. Both elements, we do see progress, and we are confident that also in the midterm perspective, as we said, they would deliver on these as well.
On online, we also gained a lot of confidence over the last nine months that we are able to grow this important sub-segment on our own retail business with the infrastructure that we have built, with the competencies we have on the operational side. Coming from, today, a small base, already many parts of our business, our online business, be it on concession or hugoboss.com, is accretive to our overall retail business. We see an element of our retail business, which is also a healthy contributor to our midterm financial targets. Clearly, HUGO, in an overall market segment on the premium market, where some market segments or product categories are more challenged, we continue to see strong demand for this contemporary brand, which is now seen one of the strongest acceleration in growth in the third quarter with the 6% growth.
HUGO, as a brand already today with an important profit contribution to the overall group, will contribute with an over-proportional growth also in the year to come to drive absolute and relative profitability. Add to that, continuous, not only Q4, but for the outer year, strong focus on OpEx leverage and a tight cost management. We believe we have the elements in place to improve on a sustainable structural profitability level to 15% on the mid-term. We will provide you more details on the growth drivers, the timing and the exact timing when to achieve this objective as part of our next Capital Markets Day. There's no additional measures or other measures that we're currently contemplating. We remain committed to deliver and execute on the strategy we presented to you almost a year ago.
Okay. Just to summarize, given that all these elements were already there in your last year's business plan, you would argue that you can still get there without other big changes or transformations in your business model.
With the exception that we have removed the target year of 2022.
Okay. Understood. Thank you very much.
Thank you.
Thank you. The next question is from the line of Volker Bosse from Baader Bank. Please go ahead.
Hello, gentlemen. Yes, Volker now. Volker Bosse from Baader Bank. Two questions. The left from my side, first on Americas. You're running through tough times for three, four years now. Business still declining, so it seems that there are also structural problems. Thanks for your indication what's going to change going forward. I would come back to the brand perception. How do you see the brand perception Hugo Boss to differ in the U.S. as from the brand perception in China? Are there more challenges in regards to brand perception than initially expected? The second question would be on the online business. Thanks for all the details, I would be curious to get an indication about the time schedule of the international rollout of your hugoboss.com website first and the international rollout of Zalando concessions going forward.
As I understood so far, Germany is full on boarded now at Zalando concessions. Germany, I said, but more markets are to come, right?
Yes, they are. Yves will take the question on the rollout, not only Zalando. Let me answer the question on the Americas. There's a strong substance, especially for the BOSS brand, because we have a long heritage in the market. You're absolutely right that some of the off-equity distribution that we entertained is still resonating in terms of brand perception. This is not only on retail distribution, where we still have to further improve the quality of distribution, particularly to focus on the right factory outlets to operate. This will be also in the future a market where factory outlets will play an important role, but we have to ensure that also our factory outlets, an important one like Woodbury Common, that we have a first-class execution. The benchmark here in Metzingen, it's a global benchmark for all of our global outlet operations.
This is also true in the U.S. There's still work to be done. One part which is more difficult for us to control, and we have taken already in the last three years, measures to cut off distribution at wholesale partners that we see diluting the brand equity, is the continuous high level of promotional activities. That is just a fact in the U.S. market, I think, and that's not a Hugo Boss particular impact, which clearly diminishes our ability to achieve a high percentage of sales at full price relative to the other markets. Taking all these factors together, you're right in your assessment that we see stronger brand equity scores for BOSS in Europe and China. Our comparison is not a BOSS brand equity score in U.S. versus China, but how do we score relative to our important peers within the U.S. market?
That's a relative comparison base you should take here. Here, we see that our relative performance in the U.S. is relatively good to some of our key competition, but we're absolutely not happy with our current financial performance. It's a strong base. There's an extremely high brand awareness. There's already first measures implemented in terms of discontinuation of certain off-strategy distribution, investment into high-class and new modern stores. This can only be the base to establish a profitable business that is also able to weather storms and slowdowns like we have now experienced with. There will always be temporary slowdowns in domestic or international demand, but we are not happy with the underlying structural profitability, and this needs to be addressed with the new management team.
With that, I would ask Yves to give you more color on the online rollout from the hugoboss.com and the concessions.
Regarding online and the .com business. For sure, in the upcoming year, in the next year, we will add two more countries, which will be Canada and Mexico in the middle of the year. This is what's going to happen regarding .com. To put more color on the Zalando International. We are now trading in Germany, in Austria, in Switzerland, Benelux, Italy, and France. We are not trading in the U.K. and in Spain for the time being because of Brexit, and in Spain because of some other factors which are not relevant because Zalando is not so strong in Spain. In the next quarter of 2020, we will do Scandinavia from the Zalando perspective. This is what we do from Zalando for the upcoming months to come, and what we are trading.
Okay. Thank you very much.
Okay, perfect, Volker. Thanks everybody for joining today's conference call. This completes the call for today. If you have any further questions, as always, please feel free to contact any member of the investor relations team. With that, I would like to thank you for your participation and wish you a very good day. Thank you very much. Bye-bye.
Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.