Earnings Call: Q3 2018

Nov 6, 2018

Good afternoon, ladies and gentlemen. My name is Christian Stoehr. I'm heading up the Investor Relations activities at YUGO BOSS, and I would like to welcome you to our Q3 2018 financial results presentation. Today's conference call will be hosted by Yves Miller, CFO of HUGO BOSS. So without further ado, let's get started. And over to you, Yves. Thanks, Christian, and good afternoon, ladies and gentlemen. Also from my side, a welcome to all of you who joined us for our 3rd quarter results conference call. In the next 20 minutes, I will present to you our operational sure you have noticed that our performance during the Q3 was sure you have noticed that our performance during the Q3 was negatively impacted by the challenging market environment, which affected the broader apparel industry. Before we take a closer look at our Q3 financial performance and the outlook for the remainder of the year, let me start by highlighting some operational developments that we have achieved over the course of the last few weeks. Starting with a major achievement that we have made on the distribution side. To further strengthen our digital services, we agreed with Zalando, our largest online wholesale partner, to intensify our successful partnership going forward. The focus of the new cooperation model is the use of the Zalando partner program, which enables us to serve customer requirements even better than before. As of October 11, we are now independently managing the presentation and distribution of BOSS Businesswear, which is available at Zalando for the first time. Importantly, the new partnership with Zalando does not only offer commercial opportunities, it's also an important step forward in taking more control over the distribution of our brand in the online space, from pricing to presentation to fulfillment. We are very excited about this move and look forward to further strengthening our partnership with Zalando in the years to come, while at the same time increasing our control distribution in the online world. Back in September, BOSS took center stage at the New York Fashion Week, where BOSS Menswear and BOSS Womenswear presented their springsummer 2019 collections under the theme California Breeze. Taking inspiration from coastal cities and the modern houses overlooking the Pacific Ocean, the seamless overlap of beach and metropolitan life has influenced a fresh new collection, incorporating a relaxed and serve inspired vibe. The event was attended by several superstars filling up the front row, including supermodel Barbara Apalvin, actor Jamie Dornan and basketball player Tim Hardaway Jr. At the same time, the event left a strong mark in the digital world, where we reached more than 50,000,000 fans and followers throughout our various social media and brand channels. On the HUGO side, we continue to make strong progress in strengthening the brand store network across metropolitan areas. This Q3 has seen a total of 5 store openings in metropolitan cities, among others, London, White City and in Paris, in Le Marais. In total, we now have almost 20 HUGO stand alone stores across the globe, which speak directly to the fashion forward customer. Expanding HUGO store network is an important element in order to further sharpen the brand's unique positioning in the contemporary fashion segment. We will therefore continue to open HUGO freestanding stores in key metropolitan areas over to the coming quarters. To conclude the operational highlights during the Q3, let me also highlight a major achievement in the area of sustainability, which, as you know, is a firm part of our group strategy. In September, HUGO BOSS was included into the Dow Jones Sustainability Indexes World for the 2nd consecutive year. As such, the group is one of 4 companies in the Textiles, Apparel and Luxury segment to have qualified for the index this year. Further inclusion of HUGO BOSS in this index does not only underscore the progress made in implementing and executing our sustainability strategy, it also shows that our guiding principle, acting responsibly, is generating value for the company, its employees, shareholders, customers, business partners and the society alike. With this, ladies and gentlemen, let me finish my quick review on the operational highlights by emphasizing that we are encouraged by the further progress we have achieved regarding our strategic priorities, which will shape the future of our company. It is important that we continue to push and proceed with our strategic initiatives independently of short term developments as there is no doubt they will be all contributing to the long term success of our company. With this being said, let's change perspective and take a detailed look at what drove the financial performance during the Q3. Overall, currency adjusted group sales increased 1% in the quarter as robust growth in the Americas and Asia Pacific was largely offset by a slight decrease in Europe, where the challenging market environment was a major constraint for the region. In euro terms, sales remained stable at €710,000,000 as we continued to experience a slight negative translation effect in the Q3 following the appreciation of the euro against several currencies compared to the prior year period. So let's go straight into regional performance, starting with Europe, our largest region, where the extraordinary long and hot summer, along with a late start into the fallwinter season, put a strain on the overall apparel market. In particular, traffic in Continental Europe was below our own and market expectations, with increasing promotional activity putting additional pressure on that region. Consequently, Germany and France experienced a sales decline of 13% and 8%, respectively. This development was in part due to the aforementioned market conditions, resulting in comp store sales of minus 4% and plus 1%, respectively. In addition, delivery shifts from the Q3 into the Q2 had a meaningful negative impact on the wholesale business of both markets. In contrast, Great Britain continued its strong momentum from the previous quarters and was once again the strongest market in Europe with currency adjusted sales growth of 11%. Altogether, our own retail business in Europe recorded a low single digit sales increase in the Q3, driven by low single digit comp store sales growth. Looking at our wholesale business, sales declined at a mid single digit rate in line with our expectations, reflecting the negative impact of delivery shifts compared to the prior year. In the Americas, our business returned to growth with sales up 5% in the 3rd quarter and all markets contributing to sales growth. While we recorded particularly strong improvements in Latin America, up low double digit, our business in the U. S. Also grew at a robust 5% on a currency adjusted basis. The development in the U. S. Was supported by double digit sales increase in wholesale, where delivery shifts had a positive impact on our business. Despite an overall promotional market environment, we recorded solid comp store sales improvements in our own retail operations during the Q3, up low single digits versus the prior year. This development was largely driven by a strong double digit growth in our own online business, where we continue to leverage our digital capabilities and the changing customer behavior towards casual and athleisure wear. Last but not least, Asia Pacific continued its strong performance from previous quarters and recorded a currency adjusted sales increase of 7%. While all major markets contributed to this development, the performance in the important Chinese market was once again a particular standout. Double digit comp store sales increase in Mainland China were a driving force behind the region's overall performance, signaling ongoing repatriation of local consumption. Speaking about China, let me also be clear that we do not see any signs of a slowdown in this important market. Instead, we continue to experience strong demand from Chinese customers, and we remain absolutely confident about our short- and long term opportunities in this market. Looking at Asia Pacific, other major markets, sales in Japan and South Korea also continued their strong momentum and recorded high single digit and low double digit currency adjusted growth, respectively. Moving over to the performance of our channels and starting with our own retail operations. Group wide, own retail sales increased 2% on on retail sales increased 2% on the currency adjusted basis in the Q3. This development was driven by a 3% increase in comp store sales with all regions contributing to this improvement. Asia Pacific, as just mentioned, continued its stellar performance and recorded high single digit comp store sales increases. In addition, Europe and the Americas recorded low single digit comp store sales improvements. Unchanged from the pattern witnessed during the first half of the year, a strong increase in conversion rates and higher volumes drove growth in the Q3. Average selling prices, in contrast, declined, reflecting strategic measures to strengthen our footprint in casual and athleisurewear as well as the promotional environment in Europe and the Americas during the Q3. By retail format, growth was fairly consistent in cross directly operated stores and outlet. The online business continued its strong momentum from previous quarters. At 38 currency adjusted growth, our own online business recorded its 4th consecutive quarter of strong double digit sales increase. We continue to enjoy strong traffic increases on our hugoboss.com website, following several improvement measures we implemented earlier this year, including the clear differentiation between BOSS and HUGO. In addition, conversion rates have started to improve substantially, reflecting easier navigation and better usability of our website, thus enhancing the overall shopping experience. Turning to the wholesale channel, where 3rd quarter sales declined 2% on a currency adjusted basis. Double digit increases in the Americas and in Asia Pacific were more than compensated by the expected sales decline in Europe, where delivery shifts from the Q3 into the second quarter had a negative impact on that quarter. Within our global wholesale business, online continues to clearly outperform the physical channel, While our business with large marketplaces and online platforms of leading department stores grew at double digit rates, sales with stationary retailers were down in the light of the pressure they are facing from ongoing traffic declines. To conclude on the online to conclude on the top line performance in the Q3, let's have a look at the development by brand and gender. Sales for the BOSS brand increased 3%, excluding currency effects, supported by growth at both BOSS Casual and BOSS Businesswear. We are particularly encouraged by the mid single digit growth at BOSS Businesswear as it shows that Formal Wear is and remains an important part of the premium apparel market and a segment where we can build on the heritage and the strength of the BOSS brand. Thiurgo sales declined 11% in currency adjusted terms. While the brand's casualwear business continued to grow at double digit rates, ongoing distribution changes once again had an adverse impact on HUGO's businesswear in the Q3 of 2018. As already highlighted earlier this year, these changes aim at sharpening HUGO's fashion forward contemporary positioning in the marketplace by focusing on those distribution channels where the brand proposition is a better fit for the HUGO customer. By gender, our menswear business grew 1% currency adjusted in the 3rd quarter, driven by high single digit increases in casualwear. Our womenswear business saw a currency adjusted decline of 7% during the quarter, mainly reflecting the further reduction of retail selling space. Womenswear sales in the wholesale channel, however, continued to develop nicely, reflecting ongoing healthy demand from major retail partners in the Americas and Europe, where BOSS holds a leading position in the market. Turning below the top line. The gross margin saw a decline of 240 basis points to 62.5% in the 3rd quarter, mainly reflecting the challenging market environment, which resulted in greater than expected promotional activity, particularly in the Americas and Europe. Consequently, around half of the gross margin decline is related to less favorable pricing mix, reflecting inventory relation effects as well as higher markdowns. The other half is a result of ongoing quality investments as well as negative currency effects. The channel mix was broadly neutral in the quarter. Moving on to operating expenses, where we continue to have a tight focus on operating cost management. Selling and distribution expenses declined 1% year on year, driven by a slowdown in retail expansion and further progress in renegotiating rental contracts. Strict cost management also limited the increase in administration expenses, up only 1% versus the prior year, despite continued investments in the digital transformation of the business model. Altogether, operating expenses declined 1% year on year and, as a percentage of sales, were down 30 basis points. Strict operating cost control, however, was not enough to offset the gross margin decline. As a result, EBITDA before special items declined 12% compared to the prior year quarter, amounting to EUR 126,000,000 Importantly and contrary to our initial expectation, currency effects had a negative impact on EBITDA of €5,000,000 EBIT and net income declined 20% 18%, respectively, also reflecting a swing in the other operating income and expense line. From a regional perspective, the sales decline in Europe, coupled with a slight increase in operating expenses, led to an adjusted EBITDA margin decline of 300 basis points to 30.8%. In the Americas, the increase in sales did not result in operating leverage as the overall market environment continued to be promotional, And consequently, the EBITDA margin of the Americas saw a decline of 6 60 basis points to 14.7%. Asia Pacific, however, experienced a significant increase in the adjusted EBITDA margin, up 400 basis points to 17.8%. This development is mainly due to the strong top line development as well as a slight decline in operating expenses. While so far my comments have related to the performance in the Q3, let me also quickly summarize where we stand after the 1st 9 months. Group sales were up 4% currency adjusted and 1% in euro terms, with all regions contributing to this performance. Europe was up 3% and the Americas grew 4%, both in currency adjusted terms. Asia Pacific clearly outperformed both regions and recorded strong currency adjusted sales growth of 9%. By tight operating cost management, resulting in a 600 in the 60 basis points operating leverage expenses, the decrease in the gross margin of 120 basis points led to a 5% decline in EBITDA before special items, amounting to €331,000,000 Let's now move on to the balance sheet. At the end of September, inventories were up 20%, both in euro and currency adjusted terms. While the majority of the inventory growth aims at further supporting the positive sales momentum, especially in our own retail business, let me be also be clear that the like for like performance in the Q3 was obviously somewhat weaker than initially expected, reflecting the unusual long and hot summer in Europe. As a result, inventory levels are higher than expected and clearly not at the level I want like them to be. To ensure that inventory levels come down towards year end, we have taken immediate action and implemented short term well as structural measures. In this context, we have not only adjusted the merchandise buying for the remainder of the year, we also realigned our internal processes to further optimize demand planning going forward. Based on the measures taken and the expected acceleration in top line growth in the 4th quarter, which I will speak about in a moment, I remain confident that inventory levels will see a normalization towards the end of 2018. Despite the increase in inventories, trade net working capital saw a modest increase at the end of September, up 11% compared to the prior year. This development reflects our strict discipline in trade terms management as well as concerted collection efforts. As a percentage of sales, average trade net working capital was up 10 basis points to a level of 19.4%. Looking at our investment activity, capital expenditure increased 12% in the 1st 9 months, largely driven by the anticipated step up in store renovation. This continues to be a strong focus area of investments, not only in 2018 but also beyond. The increase in capital expenditure, together with higher cash outflow from the inventory changes, resulted in a decline in free cash flow down to €13,000,000 at the end of September. Nevertheless, we continue to forecast free cash flow for the full year to reach the initial targeted range of between €150,000,000 €200,000,000 as we forecast a significant increase in free cash flow in the 4th quarter. This will be driven by the anticipated earnings increase and cash flow following the reduction in inventories. Now ladies and gentlemen, after reviewing the financial performance of the Q3 and the 1st 9 months, let me spend a few minutes on our outlook for the remainder of the year. Despite these challenging market conditions in the Q3, we remain confident of reaching our full year top and bottom line guidance as we confirmed this morning. We continue to expect currency adjusted sales to grow at a lowtomidsingledigitratein2018, supported by midsingledigitcomp store sales increases. The gross margin, which we had initially forecast to remain broadly stable year on year, is now expected to decline between 50 and 100 basis points as we account for the gross margin decline during the Q3. Lastly, we continue to forecast EBITDA before special items to be within our guided range of minus 2% and plus 2% compared to the prior year as we expect operating expense leverage to compensate for the gross margin shortfall, reflecting our strict cost management. Importantly, the confirmation of our full year top and bottom line outlook stems from our conviction that the Q4 of 2018, which traditionally is the strongest in terms of sales, will see a significant improvement in sales and earnings. We expect the top line momentum to accelerate in the 4th quarter, driven by robust comp store sales improvement in our own retail business. This assumption is supported by a positive business development in our own retail operations in October. We are particularly encouraged by the strong performance of our Chinese business during Golden Week, which was not only well above last year, but also represented one of the most successful golden weeks in our history in China. In addition, we forecast our wholesale business to improve relative to the performance seen during the 1st 9 months. Our gross margin is expected to improve during the Q4 compared to the 1st 9 months as we forecast a reduction in markdowns. In addition, we will annualize quality investments, which had started back in the Q4 of 2017 and which will provide a further tailwind to the development of the gross margin. Lastly, we will continue to strictly manage our cost base during the Q4 to ensure that we continue to generate operating expense leverage as we approach year end. In this year, the Q3 has already shown our high level of cost discipline. Together with my Board colleagues, I will ensure that this discipline will be lived and acted upon each and every quarter from here on. And while I have every confidence that we will reach our full year 2018 guidance, more importantly, I also remain convinced that we will return to sustainable profitable growth as of 2019. As we consistently pursue our strategic initiatives, we see plenty of opportunities for our business that will enable us to grow in a sustainable and profitable manner in the years to come. On that front, my Board colleagues and I will give you a detailed update during our upcoming Capital Markets Day next week. And with that, ladies and gentlemen, I'm now happy to take your questions. Thank We will now take our first question from Antoine Belge of HSBC. Please go ahead. Your line is open. Yes. Good afternoon. It's Antoine Belge at HSBC. Three questions. First of all, regarding the performance in Q3, I know it's always difficult to isolate the impact of weather, but is it fair to say that July August had been maybe up mid single digit in terms of retail like for like before September was weaker? I mean, I'm not expecting you to give the exact number, but maybe giving a bit of a trend throughout the quarter. 2nd question relates to your guidance for the full year in terms of top line, which is unchanged overall. Could you confirm that you've kept each of the regional assumption unchanged as well? And maybe a comment especially on the U. S. Wholesale, which is particularly strong. So how do you see U. S. Wholesale ending up 2018? I think you've done very good job in the U. S. In recent years. And finally, with regards to the inventories, which, as you said, are up 20% at the end of September. So what's the quality of the inventories? And can you how can we be sure that you won't need additional provision or depreciation at the end of December? So have you taken a relatively conservative approach at the end of September? Answers. First of all, you try to we try to exclude the answers. First of all, you try to we try to exclude the weather impact. Actually, if you take the comp store sales, we would say that we would be actually in the in our overall guidance if we would not have this weather impact, which is supposed to be mid single digit increase. So this was the impact. The second question was related to Q4 Q4 and the net sales expectation. I think it's worth to mention that if you take already the October performance in Europe, you can see that in the Q3 that we have experienced really this kind of weather impact and that we see a kind of positive momentum in Europe to pick up from the net sales losses we experienced in the Q3. So the October figures for Europe were pretty prominent. In addition to this, the wholesale U. S. Wholesale performance was very good in the Q3, and we continue here our good relationship, especially with Nordstrom and Bloomingdale's in the wholesale. So we remain positive regarding the U. S. Overall performance for the Q4. And regarding the inventories, you were talking about the quality. I can confirm that the majority of the inventory increase that we are having at the end of September is mainly coming from the majority is coming from NLS products, so never out of stock products. So we are very confident that we can sell these products. They have all the high quality, predominantly coming from body wear and hosiery and these kind of products and not, I would call them, heavy products, which are too fashionable. So we are confident to sell them. Maybe 2 follow ups. So my question regarding the sales by region, I was mentioning the overall full year 2018 guidance by region, is it the same as it was last time you communicated in August? And also the on wholesale, so the overall guidance, I think, is up low single digit. So what would be the figure for the U. S? I imagine it would be a bit better than the global average. So overall, the regions, I can confirm that the full year guidance for the regions, which we talked about in August, will remain stable. So we will pick up especially when it comes to Europe. And regarding wholesale, we don't give any we don't disclose any specific wholesale performance. I think what is worth mentioning is that in 2017, we had some delivery shifts from Q4 to Q3. So overall, we expect a good wholesale performance in Q4 for 2018. Okay. Thank you very much. We will now take our next question from Susanna Pouz. I have three questions, please. So first of all, to follow-up from Antoine's question. So you've mentioned that there has been some unfavorable impact of discounting on gross margin. But can you could you please confirm if that was simply driven by customers choosing to buy products which were marked down just because of the weather? Or was there also a higher level of promotions offered in stores to attract more traffic, if you know what I mean? Secondly, on your like for like growth, in case I missed it, could you please tell us what is the ASP and volumes within that? And also on China, so you mentioned that there was a you had a very strong golden week, which sounds quite promising, especially given that now there is so much noise in the market around China. So could you please confirm if these strong trends in China actually have continued? I mean, do they still continue now actually? And do you believe that this is brand specific? Or is it just simply the repatriation of demand? Would you benefit from any color around that would be very helpful? Thank you. Yes. Thank you very much, Zara, for your questions. Your first question related to the gross margins and the markdowns. So especially where were the markdowns coming from? The markdowns were coming from the fact that we already had the fallwinter collection in our stores. And actually, due to the hot summer, we were predominantly selling still the items from the springsummer collections, which were already in the sales period. And this kind of delaying effect led to the impact that the markdowns finally went higher. So this is a kind of delaying effect, and this is what we are seeing now that the fallwinter collection is selling off once the temperatures are coming down, especially when I talk about Europe. So this was the overall it was more a kind of delaying effect. Especially when it comes to like for like performance overall, we saw if you talk about the average selling prices, the average selling prices was down due to 3 effects. It was one effect is the shift towards more casual athleisurewear. This is one effect. The second effect is the global pricing. And the third effect was actually the further markdowns. So the average selling prices went down. But overall, if you take the 1st 9 months of the like for like performance in our freestanding stores, it's plus 4%, and we overall overcompensated this by higher volumes and higher conversion rates. And the final question regarding China. Yes, we had really a very good golden week in China, and we do not see any movements of slowing down the business in China so far. I think we, as HUGO BOSS, with our brand BOSS, we have very good momentum since we overall decreased our prices over the year. As you know, we are have now the right global pricing level. As you might recall, we are now 30% to 40% ahead of the European prices, and I think we are very good positioned. And as I noticed or as I spoke about this in previous calls, we have a higher customer base, and I think we are benefiting from this kind of momentum of higher customer base and selling BOSS products. Perfect. Just to follow-up on the like for like composition. So is there any way you could quantify that? Because I may be wrong, but I kind of remember on the back of my head that for 6 months, I think you saw 5% decline in average selling price. So is there any exact number you could actually give for Q3 just to get an idea of the underlying volume growth? Directionally, the average selling prices decreased by high single digit, and the conversion rate was up low double digit, and the frequency was up low single digit, and the net sales we were selling is up low single digit, net sales per transaction. So this is the overall indication and all finally end up into plus 4%, like for like of freestanding stores, which is the best indication actually for the current collection. Okay, perfect. Thank you very much. Thank you. We'll now take our next question from of RBC Capital Markets. Please go ahead. Thanks. Good afternoon, everyone. I have three questions as well. Starting with weather, perhaps you could explain to us the learnings from this summer and the Q3 performance. What's being done to make the supply chain and delivery cadence of product as you transition from springsummer to autumnwinter more flexible? Secondly, could you provide an indication of the HUGO standalone store performance relative to average? I think some of your pilot stores have been open for over 12 months now. You have 20 in total. If you could provide any initial indications as to how those stores are doing, that will be very helpful. And then finally, on rental contract renegotiation, you flagged it this time around and a couple of quarters prior as well. And given you have lowered your gross margin guidance but left your EBITDA growth guidance unchanged, could you perhaps just specify or give an indication of the magnitude of the savings you're seeing there and other potential OpEx offsets to be able to maintain the EBITDA guidance? Thank you very much. Yes. Thank you very much. Regarding this weather issue and the learnings, what we achieved, I think we will outline this during the Capital Market Day, especially when it comes to speed. But to give you an indication, I think the learnings must be to make the switch. If you talk about the collections, 2 plus 2 collections, it's about the sizing of this collection. This is one issue. How big are the in between collections. I talk about pre spring and pre fall collections, which are especially in this period of February, March July, August. And secondly, it's about what is the role of the online channel when it comes to long tail. What I'm saying is still selling small pants, shorts, for example, in July August in the long tail in the online channel. So actually, omnichannel and the capabilities of playing this offers you a lot of possibilities going forward to mitigate the risks of weather and to play the different channels. If we come to HUGO and the stand alone performance, be aware that we have now 2 different models in place. We have almost 20 HUGO stand alone stores. So if you take the old stand alones and the old store concept, they have a positive like for like performance overall. And the new ones, they just opened 2 months ago. So it's really early to call regarding the HUGO performance because with opening ceremonies and all these things that are happening, it's too early to give you a kind of real realistic indication for this. And regarding cost savings, yes, I think rental negotiations, they will go on. We have the issue of pay to sales ratio to be optimized going further, which has a tremendous part and overhead expenses as well. So these are the cost items we will see in Q4 and even going forward 2019, where I see as being new to the company, we see tremendous potential to reduce the cost on this side. Thanks, you to limit your questions to a total number of 2 because we still have a long list of people who want to ask questions and we want to be fair to everybody. So 2 questions per person, please. Thank you very much. Thank you. We will now take our next question from Thomas Chauvet of Citi. Please go ahead. Good afternoon. Two questions, please. The first one on the Americas profitability. Can you come back Yves on the significant margin pressure? I think in the 9 months, the profitability is the EBITDA margin is at 14%. It's more than half of what it is in Europe, for instance, despite healthy growth in the Americas. I know there are structural reasons for the lower profitability, but do you have initiatives into next year to return to a more acceptable margin level in this important market? And secondly, on HUGO, down 11% in the quarter, understand it's largely self inflicted. Can you reconfirm that the reduction of HUGO's presence in wholesale in some of your freestanding stores and outlets will be over by year end? And when you say you want to sharpen the brand's presence, do you have you engaged in a discussion with different type of wholesale partners to sell HUGO where perhaps the brand or the future brand should belong to in that kind of maybe more contemporary segment? Yes, Perk, starting with your last questions regarding HUGO. I think, yes, you're right, and we pointed out that there have been a lot of distribution changes regarding HUGO because we clearly want to focus on the fashion forward contemporary segment, and that was the reason why we had to somehow focus on the clear proposition of the HUGO brand. There were 3 measurements. First of all, it comes to the sale of outlet channel. We reduced this one, firstly. Secondly, we took the HUGO Corners out of the BOSS store in order to clearly differentiate between a BOSS customer and a HUGO customer, we did this. And finally, and this was a big part as well regarding wholesale partners, where we shifted back from HUGO to BOSS because especially one big client in Germany, there was much better brand fit for BOSS than HUGO, so we remigrated from HUGO to BOSS with this regard. And this overall distribution changes, they are now executed, and they will be largely over at the end of 2018. And from 'nineteen, 2019 on, HUGO is supposed to grow again. But these measurements were strategically necessary to clearly differentiate between the different brands. And in addition to this, I think we have a very good comparison because you were talking about this in the online work with Zalando in the wholesale format for the brand HUGO? This is 1. And secondly, we have just like you indicated in your questions, we have just changed the HUGO positioning into the fashion forward floors with Galeries Lafayette, for example. We have just changed this in September, for example, to be on the right floor where we find the fashion forward brands. So this was done. The first question is related to the Americas and the profitability. I think overall, yes, you are right, and we are overall not satisfied with the profitability in the Americas, especially when it comes to the U. S. And we have initiated several measurements to come back and to improve the profitability, especially in the United States. This will take some time, but we are well aware that we have to improve the profitability in the United States. Thank you. We will now take our next question from Melanie Flauquet of JPMorgan. Please go ahead. Yes. Hi, good afternoon. I have 2 questions. So my first question is regarding your gross margin guidance for the full year in comparison to the 9 months trend. If I'm not mistaken and depending where Q4 of course lies, you're guiding for between minus 50 bps and plus 130 bps improvement in gross margin, so quite a wide range of guidance. I'm just wondering and trying to understand in quarter 3, the markdown and the write downs were half of the pressure, so they were 120 bps down. How come you're going to have less impact in quarter 4 in your anticipation than you did in quarter 3? Is this because the excess inventory is going to be actually eroded over several quarters? Markdown activities in quarter 4? So that's my first question. And my second question, in your full year target, you're clearly compensating gross margin pressure in quarter 3 that was bigger than expected with cost control in Q3 and in quarter 4. What are the pockets of costs that you identified that enabled you to compensate these gross margin pressure? And are they sustainable? I don't know if I get your last question. You're talking about the cost measurements that we have to compensate the gross margin loss, right? That's correct, yes, and whether they're sustainable. Yes. Yes. Okay. Thank you very much. Okay. Coming to your first questions. First of all, you were relating to the markdown in the Q3. Yes, half of this was coming from inventory devaluations and markdowns. And if I come to Q4, we don't see that this will come back or will incur in Q4 again. Be aware that in the Q4 2017, we had high markdowns in 2017. So actually, we see a kind of markdown improvement for the Q4 2018, and that's the reason why we see an improvement overall in our margin in comparison to the 1st 9 months. And regarding the cost items, I think there will be a lot of sustainable cost measurements. First of all, it's the slowdown of the retail expansion, which goes overall more into remodeling the stores less CapEx. 2nd of all, it's about the renegotiation of rental contracts, which make a big part. Thirdly, it's about optimizing our retail excellence with pay to sales ratio that we can optimize and to inject more retail experience there to have a tighter control in the paid to sales ratio. And fourthly, it's about overhead costs, which still can be reduced going forward. So these are the major drivers. And there's one issue regarding marketing. We are now more in Formula E instead of Formula 1, so there's a shift from marketing expenditure into 2019. But overall, the marketing spendings are stable in comparison to last year. If I can, and a follow-up, sorry, on your comment on the gross margin. So you're not expecting as many markdowns pressure, but the inventories are up 20%. So does this mean you're expecting these inventories to not require a significant markdown and to be to tail off over time rather than at the end of this year. And sorry, also the follow-up on the cost lines. The ones you the cost savings you're identifying seem to have been quite long term initiatives. I'm just wondering what came in, in Q3 and Q4 that enabled you to compensate the gross margin pressure that you did not expect in your cost line. 1st 9 months already, we experienced an operating leverage of 60 basis points when it comes to costs. So these are the measurements that are taking place and that are increasing over quarter on quarter, and that's the reason why they will be coming in Q4. And your first question was regarding the margin, right? And yes, first of all, yes, we have an increase of 20%. But as I pointed out, these are predominantly NOS products, and they will turn rather quickly. And we will come to an acceptable level at the end of year end, and there will be no further markdowns necessary to sell the inventories off. We will now take our next question from John Guy of MainFirst. My first question is with regards to your increased cooperation agreement with Zalando. Could you maybe sort of flesh out and quantify where you think the sales and margin opportunities might be? I mean, certainly noticing from a channel mix perspective, you said that the impact was neutral in Q3. I would have thought that given the wholesale decline and a very strong online, we would have seen maybe a slightly more positive contribution from a channel perspective. So can you talk about what opportunities are with an improved cooperation agreement with Zalando? And secondly, just going to the free cash flow guidance of the €1 €50,000,000 to EUR 200,000,000, the unchanged guidance on free cash flow. I mean, clearly, you're expecting an improvement in inventory. You're probably there's a slightly lower CapEx guidance and you're probably looking for an increase in earnings to get you there. But I mean going to this inventory issue, even if we adjust for the timing and phasing of wholesale inventory would have still been up 17%. And I appreciate that you've got roughly seasonal sales of just around 60%, 20 years fashion and the rest is never out of stock. But I still don't understand how you're going to be able to phase down the inventory that quickly in order to see less than 120 basis points of gross margin impact in the Q4. So if you can help me with that, that would be great. Thank you. Coming to your first question regarding Zalando, yes, I think we have been a lot talking already in the 1st 9 months about this kind of concession model, and now I'm happy to announce that we finally made it and have signed this kind of contract. So be aware that I won't be too specific today because in this Q3 conference call, I think we will be very explicit next week in London. But just from an indication point of view, yes, we will change for the brand of BOSS. We will be changing from a wholesale model to a retail model. So this gives you, 1st of all, additional net sales. This is one effect because we encountered the full net sales and not the wholesale sales. And secondly, this will be gross margin accretive going forward. And Euripasis is right that the overall gross margin then will be increasing. So as a kind of indication, but we will give you more color on this the next week. And following free cash flow, yes, you're right, higher earnings, lower CapEx and lower inventories. I think that will come in in order to make sure that we reach our guidance of €150,000,000 €200,000,000 free cash flow. And what I think what be aware that we noticed already that pretty early in July that we are suffering from a not expected like for like performance, and that was the reason that we were decreasing the merchandise buy in order to decrease the inventories. So we had immediate action. I think this is our task management, immediate action to take the inventories down. And that was this one major driver that the inventories will go down at year end and will so far will, as a consequence, lead to a higher free cash flow. Sorry, Yves, just on that. I mean, inventories were up about 16% constant FX in the first half of the year, 20% unadjusted for the timing of wholesale in Q3. And you took action back in July, and I appreciate that there's a timing effect, but we haven't seen any decrease yet. So where do you think inventory as a percentage of sales gets to by the end of the year? I think at the year end, we will experience an inventory level that is slightly above the low last year level and the mid single digit rate at year end. So and be aware that a lot of those items, I mean, inventories is not equal to inventory, so there are different inventories in the books. I think finally, we talk about here at year end a lot of never out of stock articles, which turn very fast. And I think this is the difficult part you have to get at the end. And in connection with the merchandise buying, that was decreased. That was these are the major factors why the inventory level will be going down. But be aware that the quality of the products is sustainable at 30 September. Thank you. We will now take our next question from Juergen Gald of Kepler Cheuvreux. Please go ahead. Yes, thank you very much. First of all, you mentioned, Yves, that October started off very promising. If I'm not mistaken, I think last year October was particularly weak. So the momentum was obviously stronger in October. But if you could fill us in how November December last year developed, was that also a rather weakish month for you so that you're coming off from a relatively low base? First one. And secondly, you mentioned that you're planning are you doing some work on a better forecasting models or forecasting program. Could you give us some support or some idea as to what that means? And is that something that kicks in already short term? Or is that just a mid- to longer term project? And what do you exactly do there? Thank you. Actually, we don't disclose any monthly development. I think here it's I think important that we had a very good October in contrast to last year. And I think this underlines this will be underlining our guidance for Q4. And over the time, November December will get a little bit tougher, but we are confident that we can make this. And if I see the 1st days in November, we are all promising that we can achieve our guidance. And secondly, when it comes to inventory levels and the forecasting, I'm talking about immediate action in terms of approval process. Once the merchandising comes in, they have to be approved. The buy has to be approved by controlling in the 4 and 6i principle, and this will have immediate impact for future inventory developments. Thank you. We will now take our next question from Elena Mariani of Morgan Stanley. Please go ahead. Hi, good afternoon. A couple of follow ups from me. I apologize. This line is again on your inventory level. As part of your short term and structural measures, are you also planning a different usage of outlets? And in particular, with regards to Q4 and the measures you're going to take, are you planning to move some of these items to outlet in a more like, let's say, massive way? I apologize, but I still don't understand how you can talk about these items as being high quality because I would imagine that there are some leftovers that are not going to be sellable in the coming quarters. So if you could further clarify, that would be great. And then my second question is on your like for like trajectory. If we exclude the weather in the current quarter, you said that you were basically on track to have a mid single digit like for like. Thinking about next year, and I appreciate you're going to give further details next week, but is it fair to say that with the like for like in the low to mid single digit camp, you're going to definitely be able to achieve operating leverage and margin expansion given all the initiatives that are going to annualize by the end of this year and also the cost savings that you've talked about? Thank you. Yes. Coming back to your second question regarding like for like, I think this will be one of the big issues next week when we talk about the Capital Markets Day about operating leverage. But overall, this is what we always said that we envisage to have a low single to mid single digit any like for like development and that this is enough to for operating leverage, so finally to have sustainable profitable growth from 2019 on. So this will be enough because there's still more to come from the cost side. But be aware, we will be very explicit next week. And just to give you an indication, we won't give any guidance for 2019. We talk about midterm guidance next week. And regarding your first question. Mid term would be a 3 year guidance? More than this. We would talk about this next week. And regarding the inventory level, I think your explicit question was whether we want to put those items into outlets, a clear no because these are not any fashionable items. As I pointed out, they are predominantly NOS items that can be sold in wholesale. There's a lot of items that are replenished items, which go to wholesale partners, which can be sold in our own retail full price store at a full price. And so there is no indication that these items go to the outlets, and we will not shift them in Q4 to the outlets. Thank you, Elena. Thank you. Thank you. We will now take our next question from Philip Frey of Warburg. Please go ahead. Hello, gentlemen. Just two quick questions. Firstly, can you update us on the number of stores converted to the new store format? And how the new store formats with a bit more time of experience, how the format is performing right now? And secondly, regarding the strong increase of the double digit increase of replenishment business in wholesale. Do you consider this to be more a function of the cautious ordering of retailers or really generally substantially better performance than the collection of deals? First question, Philippe, I have to refer to the Capital Markets Day. We will be explicit on this next week regarding store format because I think this is a measurement that is long lasting and does not refer actually to Q3. And regarding replenishment, I think there are 3 major effects. 1 is, I think, due to the structural effect in the wholesale, the wholesale preorders, they really they get more prudent. So you have an inherent effect to a higher replenishment business. Secondly, yes, we had a better performance relative to our peers. That is the second one. And thirdly, we have a very good body wear and hosiery business, which is growing double digit in this specific business. So this from a product point of view, these are the major drivers of a double digit growth in replenishment business. Thank you. That concludes today's question and answer session. At this time, I'll turn the conference back to the host for any additional or closing Okay. Ladies and gentlemen, that completes our conference call for today. As you know, on November 15, we will be hosting our 2018 Investor Day in London, and I would like to invite all of you to join us on the day. If you have any questions with regards to the registration process, please feel free to contact any member of the AR team. And with that, I would like to thank you, and I would like to thank Yves for your participation and wish you a very good day. Talk to you again next week. Bye bye.