Earnings Call: Q3 2019

Nov 5, 2019

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 will be a question and answer I must advise you this conference is being recorded today, 5th November 2019. I'd now like to hand the conference over to Christian Stuhr, Head of Investor Relations. Thank you. Please go ahead. Yes. Good afternoon, ladies and gentlemen. My name is Christian Stohr. I'm heading up the Investor Relations activities at HUGO BOSS. And I would like to welcome you to our 2019 Q3 financial results presentation. Today's conference call will be hosted by Marc Langer, CEO and Yves Muller, CFO of HUGO BOSS. As always, during the Q and A session, I kindly ask you to limit your questions to a maximum number of 2, so everybody gets a chance to ask his or her questions. And with that, let's get started and over to you, Marc. Thank you, Christian, and good afternoon, ladies and gentlemen. Welcome to our Q3 results conference call. The next 20 to 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 will 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 further deterioration in the Q3 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 euro terms, sales grew 1% to €720,000,000 as currency effects continue to provide a slight tailwind to revenues. So 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 Q3. This can be attributed to a number of challenges that all weigh on consumer sentiment in this market. 1st 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 puts 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 formalwear part of our business. Consequently, U. S. Wholesale sales were down by a double digit rate in the 3rd quarter. The aforementioned decline in the tourist spend also put a strain on our business in Canada, where sales were down 7% in the Q3, 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 Q2. While Mainland China once again drove regional sales growth with yet another quarter of double digit comp 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 Q3 as we were confronted with a sharp decline in tourism, which under normal circumstances represents between 70% 75% of our Hong Kong business. Consequently, sales in this market, which usually accounts for approximately 25% of Greater China revenues, were down 50% in the 3rd quarter. In Macau, the store renovations we flagged earlier this year have been largely completed. In the meantime, however, the Hong Kong protest also affected our business in this market as the usual tourist travel pattern is a combined Hong Kong Macao trip. In contrast, other markets of the Asia Pacific region posted healthy growth in the Q3, in particular Japan, where sales were up in the high single digit 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 comp 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 Elysees, 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 Messaging 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 weighing occasions from formal to casual wear and athleisure, it is also offering a broad selection of shoes and accessories. Without doubt, and 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 on retail, where sales grew 3% on a currency adjusted basis, reflecting a 2% increase in comp store sales as well as contribution from space of around 1 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 Q2. In Asia Pacific, however, comp 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 comp store sales growth in the Q3. Momentum was particularly strong in online, where currency adjusted sales growth reaccelerated to 36% in the Q3. The performance in the quarter benefited from robust sales increases via hugoboss.com as well as a further expansion of the concession business. The letter saw an important milestone in the Q3 as we successfully converted the vast majority of our BOSS Casualwear and AthletaWear 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 HUGO 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 1st 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 rightsizings. 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 Q3, 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 Elysees on October 5 represents an important milestone in this regard. Turning to the wholesale channel, where sales were down 5% on a currency adjusted basis. By 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 continue to suffer from ongoing traffic declines. Finally, our license business grew at a strong 14% in the 3rd quarter, driven by improvements across all product groups. The important fragrance business particularly benefited from the launch of BOSS's Scent Absolute, which was accompanied by a global marketing campaign starring model Birgit Karts 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 proforma brand. Starting with BOSS, where proforma wear performed broadly in line with casualwear in the Q3. However, 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 2 of the world's most important fashion metropoles, Milan and Shanghai. In September, BOSS showcased its upcoming springsummer 2020 collection in Milan. Only a few weeks later, BOS underpins the strategic relevance of the Chinese market by presenting its pre fall 2020 collection in Shanghai for the first time in 7 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 2 years. In line with the brand's positioning in the contemporary fashion segment, sales in casualwear 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 and L and balance sheet items before I will provide you with an update on our expectation for the remainder of 2019. Keith, over to you. Thank you, Marc, and 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 sales 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, 1st 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 €24,000,000 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 3rd quarter, together with the increase in operating expenses, resulting in a decline in EBIT and net income of 13% 12%, respectively. So 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 4 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 the 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 cost. Altogether, this increase amounted to a low double digit €1,000,000 amount. Secondly, higher marketing expenses reflecting the various initiatives that took place in the Q3 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 Zhao and Liam Payne, as well as various limited collections that were launched during the quarter, including the 2nd edition of Boss Meats portion. The increase related to these initiatives amounted to a mid single digit €1,000,000 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 €1,000,000 amount. This also includes a personal change for our business in the Americas, where Stefan 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 €1,000,000 amount. So as you can see, ladies and gentlemen, the Q3 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, has proved 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 4th 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'm not satisfied yet with where we stand in terms of inventories. As we continue to put the strong emphasis on tightly managing inventories, we are confident that inventories will finish the year at around the prior year level. And 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 1st 9 months. In line with our outlook for the full year, capital expenditure increased 37% to €131,000,000 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 the decline in operating profit, largely offset the improvements achieved during the course of the year when it comes to trade and capital. As a result, free cash flow amounted to €12,000,000 for the 1st 9 months and was thus at around the prior year level. With this, ladies and gentlemen, let me hand you back over to Marc, who will discuss the adjusted outlook for 2019 in more detail. Thank you, Yves. So 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 and as you are all aware of, we adjusted our financial outlook for 2019 on October 10. We now expect currency adjusted group sales for the full year 2019 to increase at the 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 Q4. 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 Miracars, 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 Q4. 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 the 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. 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 lowtomidsingledigitrate. This outlook is based on the assumption that comp store sales will grow by a low single digit rate. This in turn means that we do not expect an underlying improvement in comp store sales growth in Q4 compared to the 1st 9 months. Instead, it will be our non like for like business that will see an acceleration in Q4. Let me point out 2 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 1st 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 important holiday season is just about to start. Besides our flagship store on the Champs Elysees in Paris, we have also successfully completed the renovation and relocation of our Makara store at the Galaxy Hotel and the renovation of our biggest store in Singapore in NGN 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 and 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 the 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 deceleration in top line growth and the non recurrence of last year's one offs, the magnitude of around high single digit €1,000,000 amount. As a consequence and excluding the effects of IFRS 16, EBIT is expected to come in at a range between €330,000,000 €340,000,000 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 year 2019 results in March next year. Ladies and gentlemen, before we start with the Q and A session, let me conclude by emphasizing that we obviously are not satisfied at all with regards to the financial performance in 2019. Clearly, we had planned a different start to our mid term strategy, which we introduced to you almost exactly 1 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, this 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, but at the same time also structurally improves the profitability of our company. In this context, I'm encouraged by the fact that despite the worst challenges in Q3, all of our 4 strategic growth drivers, the online business, China, HUGO in store productivity, continued 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 visavis Chinese consumers and increasing the productivity of our store network. But 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 are facing with high discipline, strong focus and utmost passion in order to be successful in the long run and to live up to Europe and our expectations. We fundamentally believe in the strong untapped potential that both BOSS and HUGO have to win the consumer and ultimately becomes the most desirable premium fashion lifestyle brand. And 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 Your first question today is from the line of Juergen 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, still maybe some words on that one. And in this wake, could you please also break down the ecom growth in the Q3 of 36%, how much was really driving the concession business, how much was dotcom really? And secondly, we've had this profit warning. We've heard, 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? Thanks, Volker. Let me start with the last one, and I think that's a very relevant point. And I think I finished my comments exactly on this element. So yes, we are clearly disappointed with our performance in the Q3. But reviewing the elements of our strategic growth plan until 2022, the 4 growth elements, we are very pleased that despite the headwinds and maybe some glimpses in execution in some regions that we mentioned also as part of the crawl, we do see that along these 4 top line and profitability drivers, we are on track and we even seen an acceleration, in particular, in ecom. I will come to your question in a second and Hugo, but at the daytime, I can assure you we are there's a relentless focus on productivity improvements and capturing 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 a tight overhead cost measurement in the Q3 and can assure you we remain committed to that not only to the Q4, but also as a base as we move 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 in the midterm base. Clearly, there's a lot of questions around what does it mean in a specific year. I think that's an important question we need to answer and we will come back to that as part of our next Capital Market Day. But 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 ecom business. Well, honestly, the takeover of the athleisure and casualwear segments was easier task than the initial start with concession at the beginning of the year with Zalando where we introduced clothing dress furnishing because this was already 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 with we had a very smooth transition from wholesale to retail concession in the Q3. So we were able to build on the momentum that we were we have established over the last 2 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 percent between dotcom and concession. But we also have seen clearly because it's not like 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 its expansion into Scandinavia and Ireland, but we have seen a significant improvement from the concession expansion, predominantly Zalando, but there were also other partners, which contributed growth in the Q3. Yes. Thank you. Thank you, Parker. Yes. Jorgen, sorry. Thank you. Question is from the line of Antoine Belge from HSBC. Please go ahead. Hi, it's Antoine Belge, 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. I mean, especially, I think, there were 2 months between your Q2 publication and then the profit warning. So I understand that your lower sales leads to less profit, but the I would say that on average, I think you've downgraded the guidance by around 10% in terms of EBIT for a decline of around a reduction of 2% in them to say. So were there any sort of unexpected cost or incremental cost that you are not aware of early August? That's my question. Second question relates to the there are various management changes. And maybe I don't know if you've mentioned all of them, but can you distinguish maybe with between the management change that people are just leaving the company and others where you felt you really had to change something? And actually just I know it's only 2 questions, but just in terms of you mentioned the next capital market, 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? Well, we have not saved the date, but we recognize a lot of question that we should come back to you rather than the first half of 2020, and this is our plan. But please bear with us that we will share in due time the timing for Capital Markets Day. We'll first be in Paris in a few days for our 2019 field trip, but we recognize there are more midterm questions to be answered and they will be addressed by Capital Markets Day that we plan to host very likely in the 1st 6 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. However, with the change to the top management on the executive board, but also a major change in one of our largest market in the U. S. These were the 2 relevant and major ones. Reflect them also had additional cost impact that we want to highlight. 1st, it needs to be clear that we take decisive and quick measures to address areas where we are not happy with the performance, but we also see this as of a certain magnitude that we need to flag it as part of our cost development, which 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 because 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 position. So this has been not a surprise what we have been expecting a stronger recovery in the Q3. This was part of our conference call 3 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 mean, I think you mentioned inventory valuation impact. I think it was a positive sorry, it the negative number last year and a positive this year. Will it be possible to have the positive the negative impact from last year as a reminder the positive of this year? So Antoine, the positive effect of the reversal of the inventory valuation is about 80 basis points. But what I said during 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. And can you remind us, 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? So last year, the inventory valuation had around how I recalled it now, it was like 1 year over. I think it must be like the same magnitude of 80 basis points or was negative. And the other was more driven by more markdowns of 120 basis points, and we couldn't revert this kind of markdown part of this. The next question is from the line of Thomas Chauvin from Citi. Please go ahead. Good afternoon, Mark and Yves. Three questions, please. The first one, Mark, in a media interview this morning, there were a few headlines that suggested you're sticking to your medium term EBIT margin of 15%. But 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. And 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 and whether that's rents or NP or anything else? And just finally, housekeeping on the tax rate. Can you give us the €1,000,000 amount of the provision for tax audit you've now identified that seems to drive your 32% tax rate? So will that be all booked in Q4 and no P and L impact next year? Just want to understand how this works and what's the amount? Thanks. Yes. Let me start with the first term and on the tax rate, I will hand it over to Yves. I mean, clearly, it was a disappointing moment for all of us to revise our 2019 outlook, our 1st year, delivering against our 2022 target. However, based on what we achieved in the 1st 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, 9 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. And 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's 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 repercussions 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 structure profitability target. And I can assure you we'll do whatever it takes to deliver against this target. We understand that this is not 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 it's a midterm target. And 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 twenty twenty. With that, I would hand it to you, Yves, on the tax question from Thomas. So Thomas, regarding the tax implications, yes, we will book in the Q4 regarding the tax fuel audit, and so we will come at around an overall tax rate then for the year 20 19 of around 32 percentage points. And I mean, going forward, we're living in kind of uncertainties, and you never know what's happening regarding new fiscal policies. But overall, we are expecting being back on the tax rate of around 26% in the years to come. Thank you. The next question is from the line of Pirro Dardania 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 early November? I would perhaps the ability to sell autumn winter product at full price may have improved in some of your key markets. So any flavor on that would be very helpful indeed. And secondly, just around 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. 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. So we see strong growth both from our dotcom 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 Q4 now any takeovers that also the digital concessions that we started to operate also in North America positive growth. So 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, it's in both channel, a high promotional market. It's where promotions quickly spread through across all sales channels. And our focus on protecting full price business has a price to pay as we've seen on our Q3 performance also in North America. On the trading on the Q4, 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. But the trading we have seen and especially on the retail side in the 1st couple of weeks reassures us that the revised guidance that we have given on October 10 will be delivered from the group. So it's our commitment to the market and what we have seen as trading trends both from the 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 Terry Costa from Societe Generale. Please go ahead. Yes. Good afternoon, Mark, Eve and Christian, and 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? And linked to that, what kind of OpEx inflation you see in Q4 and early next year? And 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 sort of 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 be broadly stable also for the Q4. So we do see and we expect this trend to accelerate with the renovations of France L'EZ was basically no impact in the Q3 from the new store, which was partially closed for a couple of months to fully materialize. So without giving you the exact numbers, the non like for like part on the 4th quarter retail development is clearly to accelerate as part of our expectation. But we will not give you a quarterly guidance on the non like for like growth on our retail business. But we expect this to be accretive. And clearly, you're absolutely right, there's a related increase in costs, 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 kick in. But given the sales momentum, we believe that the expansion on our non like for like will be EBIT accretive in the Q4, thus delivering the acceleration on improvement in EBIT in the Q4. 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 midterm, 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. But 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. So on the midterm, 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, Darren. 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 €358,000,000 Are you happy with consensus at this level? And my second question is on the store modernization program. And how many stores were shut for refurbishment in Q3? And do you expect more stores to be shut in Q4? Thank you. Well, we'll check 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 that you both are right now on delivering on our revised guidance on 2019, which already includes delivering against acceleration in our or improvement in our EBIT performance to deliver €330,000,000 to €340,000,000 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. But 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. The renovation question? Yes. I think it was a question related to openings and closure, what is the net effect. So how I understood this. So we had in Q3 2019, we had 8 openings and 4 closures. And for the Q3, we expect Q4, sorry, we expect 10 openings and 2 closures. Okay. So you said that you refurbished a store in Paris, for example. How many stores were shut for refurbishment in Q3? So we renovated 10 stores in Q3. Okay. 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. And well, if you look at the €27,000,000 selling expense increase in the quarter that you had, You outlined €5,000,000 or mid single digit higher marketing, which basically means €22,000,000 explained. Then your €5,000,000 probably from 2% from currency effect and you have an increase obviously from higher online concession fees, etcetera and cost of your online business, but could be hardly more than €4,000,000 So you basically arrive somewhere at probably around €13,000,000 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. Philip, that's me. It's Yves. So 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 €24,000,000 And we concluded there is a mid single digit €1,000,000 amount due to ForEx, a mid single digit €1,000,000 amount due to management changes, and there is a mid single digit €1,000,000 amount due to marketing expenses. So there is a low double digit number we're dating for retail costs. And 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. So what I'm saying is the cost incurred, whereas the net sales just started actually to kick in, in August. This is point 1. Secondly, we finalized the 4 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 mid of August. And there was clearly one special effect, which was due to the wind down of our metzing outlet. We had higher personnel costs due to this kind of transition period. And I would rate this to be a low single digit €1,000,000 amount as a kind of special operational moment. So in the end, you're saying basically there is a certain significant aperiodic and onetime portion in your increase in retail costs. Is that fair to say? Well, they are not from our perspective, they are still operational. So in the old terminology, I would not call them 1 offs because they are still operational. But if you would assume a kind of run rate, yes, there are some extraordinary items in there. Okay. And may I have a second question on your cost savings? And obviously, it looks from the chart that you presented that cost savings in the quarter have been a bit around a mid single digit €1,000,000 amount. Is that fair to say? Or to look a bit further, EUR 160,000,000 2020 target in terms of cost savings. How should we what sequence in a development of this cost savings should we expect? So if you look at the administration costs, we could not have lowered the administration costs if we would not have savings out of the efficiency program. And I would clearly say that a mid single digit million savings contributed in Q3 to our results. Okay. And 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 Fluke from JPMorgan. Please The 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 or actually was the same on a much easier base. So 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, do you read that's not what it is in Europe, please? Was there pressure, notably from wholesale, but also you have a big exposure to 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 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. And then on the concession take back, 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 3 times that in quarter 4 given you are consolidating the whole of Santander over that period plus had a few store large store openings in the period? Thank you very much. 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 on the non like for like part of our e comm growth, it's the majority is coming from the first time impact from the takeover of former wholesale business into retail concessions. Zalando is the largest, but not the only one. We have multiple other opportunities. Some of them actually will only kick in, in the Q4 because they were not part of the base in the Q3, but the largest one is on concession. So we do expect an increase from what'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. But we are not able to quantify or we will not quantify that beyond that is an acceleration versus the trend you've seen in the Q3. In North America, I would give quite some credit also for the current management team, because already in the last 2 to 3 years, they have taken decisive measures to discontinue off strategy distribution. And we have walked away from 3rd 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 markets. And I mentioned 3 major renovations that will come in effect in the U. S. In the Q4. But we have to take the 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 still relied much stronger than any other market on the formalwear business. So the North American business has not benefited from our strong growth in casualwear, also in HUGO and BOSS as we experienced in Asia and in Europe. And Stephan Born brings 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 for BOSS in the category segment. So for me, he is a living proof to our ability to be a very strong, if not a leading player in menswear, casualwear. And we, again, with this team to tap this enormous opportunity for us in the U. S. Market. So you see, we have a clear plan on what to focus, what needs to be done to rebuild the U. S. Business. But you're absolutely right, it has to happen probably without or with very limited support from an underlying market and then has to be driven quarter after quarter by a sequential improvement. And 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 turnaround the situation in U. S. And I can assure you we're extremely committed to achieve that. On the retail trend on Retail trends in May. So if you talk about Europe, we saw if you take retail, we saw an improvement in Q3 at the mid single digit rate, but it was different in different countries. So we saw a very good development in U. K, which was even up double digit. But on the other side, there were 2 markets where we had negative development that was France and Germany, and that was due to the renovation we did, especially with a big store, Champs Elysees, that was then reopened on October 5. And the other thing was the wind down of the missing outlet. So these two effects somehow were hurting our net sales in the retail environment. And overall, in EMEA, we had like plus mid single digit amount in Q3. And in addition to this So it's relatively easy, right? Last year, if I recall well, notably September had been very warm. Until very late, you didn't see the fallwinter season arriving. So the reason why you're not accelerating on an easier comp is actually because of the renovations in your view? This is what you would Yes. That was because of tremendous efforts that we did in terms of investing into other business. But we were talking about current trends, and we were very satisfied with the trading in the beginning of Q4, actually, especially in EMEA. Okay. You're very satisfied with the trend in EMEA in the beginning of the Q4. 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 and Yves. A couple of questions from me as well. Firstly, I wanted to go back to the gross margin development, and I wanted to better understand the implied guidance for the Q4, 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, but at the same time, in theory, you should have a stronger benefit from the e concessions given that you're going to have 3 full months under these new agreements. So what are the moving parts? Because I wanted to better understand how much of this improvement in the Q4 could be carried forward into 2020 given that the benefits from the e concession are going to be in there for at least another half year in 2020? That's question number 1. Question number 2, 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%. And 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? Or 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 are committed to this target? And still part of this question, maybe, is there something more that you could see happening in your business, for example, the discontinuation of womenswear or a rethinking of the design approach, stronger network rationalization. So anything that you could share would be very helpful. Thank you. Thank you very much, Elena, for your questions. So I start with the gross margin development. So 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. So the moving parts is, yes, you're right, because of the e concession expected to grow and retail to grow, we will see a positive channel mix effect. On the other side, we rather stay conservative when it comes to markdown management, especially in the U. S. So overall, we expect this to be flattish in Q4 overall. But how much 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? Well, 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. So let me go back to the segment of your question. The confidence that we also confirmed today is clearly coming that we see very tangible and positive results from the 4 strategic growth drivers that we discussed with you as part of our Capital Markets Day 2018. And we're particularly pleased with the progress we see with our Chinese consumers within Mainland China, also traveling abroad, we are tapping much better than the path into this growth potential and especially with the repatriation of consumption, the kind of consumers we see, the BOSS brand in particular outperforming many competitive brands on the mainland China with a double digit like for like improvement. And as somebody already mentioned today, the structural profitability of this market, China remains today and in the future our structurally most profitable market. So 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 the structural profitability. 2nd, our strong focus on sales productivity improvements, which is demonstrated by rolling out the new highly performing 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 comes to driving structural profitability to the group. Nothing pays as much to improving structural profitability than like for like improvement in our existing network. And both elements, we do see progress and we are confident that also on 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 9 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 with on the operational side. And coming from today a small base already many parts of our business, our online business, be it on concession or dotcom, is accretive to our overall retail business. So we see an element of our retail business, which is also a healthy contributor to our midterm financial targets. And 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 Q3 with the 6% growth. So HUGO as a brand already with today with an important profit contribution to the overall group, we 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 the tight cost management. We believe we have the elements in place to improve on a sustainable structural profitability level to 15% on the midterm, but we will provide you more details on the growth drivers, the timing and the time exact timing when to achieve this objective as part of our next Capital Markets Day. But 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. So just to summarize, given that all these elements were 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. Here's Volker Bosse from Baader Bank. Two questions, left from my side. First on Americas, you're running through tough times for 3, 4 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. But I would come back to the brand perception. How do you see the brand perception of FUGO BOSS to differ in the U. S. From as from the brand perception in China? So are there more challenges in regards to brand perception than initially expected? And the second question would be on the online business. Thanks for all the details, but I would be curious to get an indication about the time schedule of the international rollout of your dotcom website first and the international rollout of Zalando concessions going forward as I now stood so far. Germany is full onboarded now at Zalando concessions. Germany, I said, but more markets are to come, right? Yes, there are. And Iq 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. But you're absolutely right that some of the off equity distribution that we entertained is still resonating in terms of brand perception. And 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 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 Metzing is a global benchmark for all of our global outside operations. This is also true in the U. S, but 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 3 years measures to cut off distribution at wholesale partners that we see diluting the brand equity. It's the continuous high level of promotional activities. So that's just a fact in the U. S. Market. I think 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. But 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 because that's a relative comparison base you should take here. And 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. So there is 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. But this can only be the base to establish a profitable business. This 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. So regarding online and the dotcom business, so for sure in the upcoming year, in the next year, we will add 2 more countries, which will be like Canada and Mexico in the middle of the year. This is what's going to happen regarding dotcom. And to put more color on Zalando International, so we are now trading in Germany, in Austria and Switzerland, Benelux, Italy and France. We are not trading in the U. K. And in Spain for the time being because of Brexit and Spain because of some other factors, which are not relevant because Zalando is not so strong in Spain. And in the next quarter of 2020, we will do Scandinavia from Zalando's perspective. This is what we do from Zalando for the upcoming months to come and what we are trading. Okay. Perfect, Volker. And thanks, everybody, for joining today's conference call. This completes the call for today. And if you have any further questions, as always, please feel free to contact any member of the Investor Relations team. And 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.