Earnings Call: Q2 2018

Aug 2, 2018

Good afternoon, ladies and gentlemen. My name is Christian Stoehr. I'm the new Head of Investor Relations here at HUGO BOSS, and I would like to welcome you to our Q2 2018 financial results presentation. Today's conference call will be hosted by Yves Muller, 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, I would like to welcome all of you to our Q2 results conference call. In the next 25 minutes, I will present to you our Q2 operational and financial performance before opening, as usual, the floor to your questions. I'm very pleased to report that the strong momentum HUGO BOSS saw in the Q1 of 2018 continued in the Q2. Currency adjusted sales increased 6%, driven by high single digit sales improvement in Europe and Asia Pacific. In euro terms, sales grew 3% to €653,000,000 as we continue to experience a negative translation effect in Q2, following the appreciation of the euro against most major currency compared to the prior year period. The robust top line performance in the Q2 is proof positive that the implementation and execution of our strategic fields of action drive across drive growth across the entire group. It demonstrates that implementing and executing our 2 brand strategy based on 2 unique brand identities and targeting 2 distinct target groups is clearly paying off. This is no doubt that both BOSS and HUGO resonate well with our customers across all wearing occasions. And it also shows that we are improving our execution across our most important distribution channel. The strengthening of our operational KPIs in own retail and the strong growth of our online business are particular standouts in this respect. I am encouraged to see that our own retail business recorded another quarter of strong growth, with revenues up 5% on a currency adjusted basis. Despite a more difficult comparison base, comparable store sales also increased 5%, emphasizing the strong underlying momentum our brands enjoy globally. Consequently, all regions recorded comp store sales increases in the Q2. In particular, Asia Pacific continued the positive trend from previous quarters with comp store sales up in the high single digits. While comp store sales in the European market improved at a mid single digit rate, the Americas grew at a low single digit rate. Similar to previous quarters, comp store sales growth was mainly driven by better conversion rates as well as higher volumes. Average selling prices saw a decline compared to the prior year, mainly reflecting strategic measures to strengthen our footprint in casual and athleisure wear, where average selling prices are generally lower compared to formalwear. By retail format, growth was fairly consistent across directly operated stores and outlets. The online business, however, saw further acceleration versus Q1 and was up 47% in the 2nd quarter. This development clearly reflects that many structural changes we have made to our website's overall usability, our increased customer relationship management activities as well as the consistent alignment of BOSS and HUGO are leading to an improvement in conversion rates. At the same time, we are also seeing a steady increase in the number of registered customers who have identified our website as their preferred go to destination. We are confident that the overall favorable trends in the online business will persist despite a more difficult comparison base in the second half of the year. Beyond the further enhancement of our digital presence, we continue to gradually upgrade our store network by rolling out digital elements as part of our new physical store concept. In this context, during the Q2, we opened 3 new BOSS stores and remodeled another 4 stores. These stores do not only create a new environment for our customers as they incorporate fresh and modern architectural design elements. More importantly, they all offer a variety of digital services, among others, the so called experience tables that allows customers to browse through the entire BOSS collection. In this context, the particular highlight the quarter was the reopening of the newly designed BOSS stores in Singapore and Munich. The stores feature the latest BOSS men's and women's wear collections and convey the homey feel due to a more generous and comfortable seating area, integrated skylights as well as a granite flooring. The innovative interior concept inspire customers in various ways through interactive features. For example, digital mirrors can be transferred into touch screens through contact, thus providing the opportunity to discover and shop the newest collections. Another milestone during the Q2 was the opening of the first HUGO store with its unique store concept. The store opened its stores in early June in Leitsesbrat in Amsterdam, one of the Europe's most visited high streets. With its unconventional fittings and firmly integrated social media office, the concept speaks directly to HUGO's fashion forward customers. Further HUGO stores will be opened in selected European cities, including Paris and London in the second half of the year. Moving on to the wholesale channel, where revenues grew 10% in the second quarter. While our replenishment business was favorable overall during the quarter and thus provides evidence for the success of our new collections, it is important to highlight that the performance during the Q2 was also supported by delivery shifts. In particular, Europe benefited from these shifts and consequently recorded a 17 currency adjusted growth during the 2nd quarter. Asia Pacific increased 2% currency adjusted and the Americas ended the quarter below the prior year level, indicating that the market environment remains challenging. Ongoing traffic declines continue to put pressure on certain stationary retailers and larger department stores, in particular. Against this development, online wholesale partners continued to strongly outgrow physical retail by double digit currency neutral growth during the Q2. To finish on our distribution channels, currency neutral revenues in the license business were down 6% in the quarter. Similar to the Q1, this decline mainly reflects the anniversary of the takeover of our fragrance business by Coty at the beginning of 2017 as well as timing effects related to our license income. As we expect these timing effects to reverse in the second half of twenty eighteen, we are confident that our license business will return to growth. From a brand perspective, currency adjusted sales for our BOSS brand saw a slight acceleration, up 8% in the 2nd quarter. While this performance was driven by double digit growth in casualwear, also reflecting the quality investments we have made, I'm particularly pleased to see that our Formalwear business grew at a high single digit rate. This is proof positive that our Formalwear business continues to enjoy strong relevance for BOSS customers who want to be dressed in a classic yet modern and highly sophisticated way. Moving over to HUGO, where sales declined 4% in currency adjusted terms, in line with our expectations. While the brand's casualwear continued to grow at double digit rates, its formalwear business recorded sales decline in Q2. Strategic distribution changes aimed at fostering HUGO's clear fashion statement in the market resulted in the further reallocation space at both wholesale and own retail. While these initiatives had already left their mark during the Q1, they continued to weigh on HUGO's performance in Q2. By gender, our menswear business was up 7% in currency adjusted terms, whereas our womenswear business ended the quarter below the prior year level. The reallocation of retail floor space from womenswear to menswear was the main contributor to this development and is likely to impact the performance during the remainder of the year. Womenswear sales in the wholesale channel, however, continued to grow, reflecting healthy demand from wholesale partners, in particular in Europe. This makes us confident that our women's business will return to growth once the distribution cleanup has been finalized. Coming back to HUGO. At the beginning of July, the brand celebrated a bold return to Berlin to present its springsummer 2019 men's and women's collection at the Berlin Fashion Week. HUGO's spring summer 2019 collection is inspired by those who mix and match styles of different decades to create their own aesthetics. The collection promotes the idea of customization and self expression. In this context, the venue at Motor Werck Berlin was transferred into a techno club for the fashion show. Various models and influences, among others, Winnie Harlow and Lottie Moss, attended the event, while rapper Wiz Khalifa performed live on stage after the show. While we are still excited about the powerful messages that HUGO has provided during the fashion show, we are already looking forward to the upcoming BOSS fashion show taking place in New York City next month. So stay tuned for the next impactful brand event of BOSS in 2018. Coming back to the financials. From a regional perspective, currency neutral sales in Europe were up a strong 9%, driven by double digit growth in wholesale, where the delivery shift effects played a major role. Our own retail business increased 5% currency neutral with comp store sales growing at a similar pace. Overall, the U. K. Continued to outperform the rest of the region and was up 12% in currency adjusted terms despite a further moderation of tourism. While Vanellux also increased at double digit rate, France recorded a somewhat more moderate growth of up 11% and 5%, respectively. Our business in Germany returned to growth with revenues up 2%, despite the persisting overall weakness of the German apparel market. In the Americas, our business remained stable compared to the prior year period. In the U. S, by far the region's largest market, our business declined 1% on the currency adjusted basis. While our own retail business recorded further growth in the 2nd quarter, up at a low single digit rate, our wholesale business was negatively impacted by an overall decrease in consumer demand for formalwear. In addition, strategic distribution changes continued to weigh on our U. S. Wholesale business as we had converted parts of our casual and athleisure business into a concession model in the Q1 of 2018, which account for as now own retail. Speaking about own retail, trends continue to be very solid in the U. S, supported by changes athleisure, we leveraged favorable market trends, which in turn drove low single digit comp store sales growth in the 2nd quarter. Importantly, this comp store sales growth was achieved in a high quality manner. Following the strong start to the year in the U. S, we took the decision to run the springsummer sale period even more diligently and carefully than we have done in the past, reducing the depth and the length of the sale period. Therefore, Q2 is certainly not about a deceleration in momentum in the U. S. It's about driving quality growth in one of our key markets, and we are well on track to reach our full year targets. Last, but certainly not least, sales in Asia Pacific were up 7%, excluding currency effects, with growth across all major markets. Sales in Greater China increased 8%, driven by continued growth in Mainland China as well as double digit increases in Hong Kong and Macau. The 2 letter markets continued the recovery they had already started in the second half of last year with healthy underlying demand. Looking at the other major markets of the region, sales in Japan and South Korea increased at a double digit rate in currency adjusted terms, supported by a robust tourist demand. And in addition, currency neutral revenues in Australia increased at a low single digit rate. Now moving away from the top line, let's have a closer look at the remaining P and L items. Starting with the gross margin, which decreased 80 basis points in the Q2 to 66.9%. This development was mainly due to a less favorable channel mix, reflecting double digit growth in our wholesale business, as I've previously mentioned. This effect, however, is of temporary nature and expected to reverse in the second half of twenty eighteen as we anticipate an overall positive channel mix effect in 2018. In addition, quality investment had a meaningful impact on our gross margin in Q2. CFO, I am particularly pleased to see that we continue to diligently manage our operating expenses. A generally lower pace of retail expansion, together with the successful renegotiation of rental contracts, helped limit the increase in all retail costs during the Q2. Our marketing expenses, which due to some phasing effects saw an acceleration versus Q1, ended the Q2 broadly stable compared to the prior year level. And while general administration expenses saw an increase of 7%, let me point out that this increase largely reflects further investments in the digital transformation of our business model, which, as you know, is an important element of our strategy. Altogether, operating expenses increased a very moderate 2% in the Q2. As a percentage of sales, operating expenses declined 50 basis points in Q2. As a result, EBITDA before special items remained fairly unchanged at €106,000,000 Similar to the Q1 and as expected, currency translation effects had a negative impact of around €5,000,000 in the 2nd quarter. EBIT was down 8% in the 2nd quarter. This development mainly reflects the release of accruals in the Q2 of 2017. Tax rate amounted to 26% in Q2. Overall, these effects resulted in a net income decline of 7% to €54,000,000 translating into earnings per share of €0.77 From a geographical perspective, European margins improved by 280 basis points to 31.4% as a result of strong sales growth, which more than offset the slight increase in operating expenses. In the Americas, the margin dropped to 17.0%, largely due to the weakness of the U. S. Dollar compared to the prior year period. Margins in Asia Pacific ended the quarter at 22.2, down 110 basis points versus the prior year. This development reflects negative exchange rate effects as well as an increase in selling and distribution expenses. Now this brings me to our performance for the 1st 6 months of 2018. Group revenues increased 5% currency adjusted and 1% in reported terms to €1,300,000,000 The sales development was driven by a strong 6% comp store sales increase with improvements across all store formats, led by our online business, which grew at a strong double digit rate. From a regional perspective, all regions contributed to the robust sales growth during the first half of twenty eighteen, with Europe and Asia Pacific performing particularly strong as revenue grew 6% and 9%, respectively. EBITDA before special items remained stable compared to the prior year at €205,000,000 as the increase in gross profit helped to offset higher operating expenses. We ended the 1st 6 months of 2018 with a net income of €103,000,000 which is slightly below the prior year level. Now let me refer to our balance sheet and cash flow development at the end of June 2018. Starting with inventories, which showed a currency neutral increase of 16% at the end of June. There are few things on inventories that I would like to highlight. Firstly, let me remind you that inventory levels in 2017 were particularly low, hence a more normalized stock level and thus an increase in inventory was to be expected. Secondly, the increase in inventories will also support the strong momentum that our own retail business enjoys, in particular when it comes to online. And last but not least, inventory aging looks healthy, and I'm quite confident that we will see inventory levels come down as we approach year end. As a result of the higher inventory levels at quarter end, average trade net working capital increased 12% currency adjusted. And as a percentage of sales, however, average trade net working capital decreased 40 basis points to a strong level of 18.8%. Looking at capital expenditure. CapEx was down 10% in the 1st 6 months of 2018, mainly reflecting a different phasing of spending compared to the prior year. As already mentioned, back in May, this year's investment will largely be linked to the renovation of stores and shop in shops and mainly affect the second half of twenty eighteen. Consequently, we expect capital expenditure to increase over the coming months, getting us to the forecasted range that we have given for the full year. In terms of cash flow development, free cash flow amounted to €32,000,000 The decline compared to the prior year reflects the increase in trade net working capital. Now keep in mind that the first half of the year is traditionally less cash generative. We have confidence that the second half of twenty eighteen will show much stronger cash generation, and we continue to feel comfortable with the free cash flow guidance we have provided for the full year 2018. To finish on the cash flow statement, net debt came down to a level of €158,000,000 at the end of June, reflecting the cash generation of the last 12 months. The robust performance during the first half of twenty eighteen illustrates the strong underlying momentum of BOSS and HURO. This as well as the positive feedback we have received from our customers with regard to the upcoming fallwinter2018 collection reinforces our confidence in the aspirations we have set ourselves for the year. We therefore reconfirm our full year outlook and continue to expect currency neutral revenues to increase at a lowtomidsingledigit rate. Moving down to the bottom line, we continue to forecast EBITDA before special items to come in at a range between minus 2% and plus 2%. While we expect gross margins to improve during the second half of the year, mainly supported by a favorable channel mix and the annualization of quality investments, this improvement will be largely offset by higher operating expenses as we will continue to invest into our brands, our organization and the digitization of our business model. To conclude, ladies and gentlemen, the 2nd quarter results have fully met our expectations, and we are well on track to reach our targets for the full year. The robust top line performance is proof positive that the momentum has not only returned to our business, but is also strong enough to compete against more difficult comparisons. This speaks to the accelerated dynamic our brand enjoy, the strong perception of our collection and improvements in execution. It also speaks to the investments we make, be it from an organizational brand or distribution perspective. They form the foundation that help us to approach our customers in a more most impactful way, faster and with a higher level than ever before. Ultimately, they will also be the foundation to drive sustainable and profitable growth in 2019 and beyond. Our relentless focus, therefore, remains on further investing into the quality of our business, while at the same time executing on our strategic priorities. On the letter, my Board colleagues and I will update you later this year as we want to make sure you perfectly understand where we stand today and what our ambitions are for the future. Therefore, on November 15, we are inviting all of you to join us for the HUGO BOSS Investor Day 2018, which will take place in London. We will send out the official invitation, including registration form after the summer break in mid September. I kindly ask you to save the date and mark November 15 on your calendars. With this, ladies and gentlemen, let me thank you for your attention. And now I'm happy to take your questions. As we have a long list of participants in the queue and in order to be fair to all of you, I kindly ask you to limit the number of questions to 2. So 2 questions per person, please. Thank you, sir. We will now take our first question from Fred Spiers from UBS. Please go ahead, Mr. Spiers. Good afternoon, Ian and Christian. Two questions for me please. The first would be around gross margin guidance. We've seen H1 down 50 basis points and full year guidance is largely stable implying an improvement in H2. Given your inventory position at the H1 stage, do you still expect tighter rebates to be a positive tailwind for gross margin in H2? My second question then would be about category performance against plan. I'm conscious there are a lot of space allocation changes going on. So I'd be interested if you could talk about which areas are running perhaps ahead or behind your plan at this stage across the various categories. For example, if we look at Athleisure last year, it was up double digit. But for Q2, the release mentioned sales were only up slightly quarter on quarter. So a bit of color on how the category is progressing would be helpful too. Thank you. So thank you very much, Fred. So, first of all, your first question was reflecting the gross margin expectation. So, first of all, in H1 2018, we were showing that the gross margin decreased by 50 basis points. We still stick to our guidance to have our gross margin largely stable in 2018. And where is this coming from? First of all, it's coming from a positive we expect a positive channel mix effect in the second half of the year, especially when it comes to higher retail in term versus wholesale, of course. Secondly, we have the effect of the annualization of the quality investments. And thirdly, we don't expect ForEx headwinds in the upcoming second half of the year. So overall, we expect gross margin to be largely stable as we have originally guided. If it comes to space allocations overall, where we are standing now, Due to our strategic and our integration of BOSS Orange and BOSS Green into the BOSS brand, we are now focusing especially on casualwear, and we see a heavy underlying double digit performance when it comes to casualwear. We have been very successful. In addition to this, we were pretty much pleased that in our business, BOSS Business category, we have a high single digit growth. And this was actually this was a very positive development from our perspective. If we talk about reallocations, yes, there have been reallocations for HUGO, and that was expected. HUGO is minus 4%. And this is due to the fact that we shifted from the wholesale business some of the business from HUGO to BOSS because we were convinced that those spaces much better fits the BOSS bands. And since we are focusing and targeting to 2 different target groups, we clearly have to differentiate from a distribution point of view between BOSS and HUGO. And in addition to this, regarding space allocation, we reduced or we eliminated the hugo corners in the BOSS stores. So we took the hugo corners out of the BOSS store, clearly, to make sure that we have 2 different target customers. So overall, we reduced the space for HUGO with this regard. So this means the underlying performance of HUGO is positive. And we are now very curious to see our current performance for HUGO since we have opened in mid June our new store in Amsterdam, and we just opened 2 weeks ago our new store in Le Marins, Paris. So this will see the performance of HUGO in a new shape and in a new store concept. And when it comes to womenswear, there as well, we reduced especially when it comes to own retail, we reduced, in some cases, womenswear space. Why? Because in our own retail space, we are clearly focusing on sales productivity. And in some cases, we reduced womenswear in favor of more casual and athleisurewear for BOSS, and that was the reason why we reduced womenswear. And this is now happening in the different stores. It will be finalized during the year 2018. And regarding womenswear, we are satisfied that in the wholesale business, the womenswear business grew at the low single digit rate. Thank you. We will now take our next question from Suzanne Tuas from Berenberg. Please go ahead. Hello. I have two questions. The first one will be on gross margin. So it looks like well, the key drivers of the gross margin decline this quarter was obviously the channel mix and also the investments. But is there any chance you could actually quantify that and confirm that there was no significant change in the level of discounting in Q2? And also related to the same well, it's still the same question. Can you also remind us how much of your sourcing is dominated in Turkish lira? Because I think I remember you have the factory in Izmir. So would be helpful if you could tell us a little bit about hedging around that. And the second question will be around the phasing of marketing expenses you've mentioned. Given that this quarter had a little bit of that phasing plus the shift of wholesale orders from Q3, then in the second half, you have the less severe FX headwind. Can you tell us how you're thinking of profitability in the second half of guided range or the higher EBITDA guided range or the higher end? Any thoughts around that would be very helpful. Thank you. Regarding gross margin, still I can confirm that if you talk about the first half year gross margin effect, half of the effect was coming from half of this decline was coming from channel mix effect. And the other big part was the quality investments we were doing. And thirdly, it was ForEx. Discounts had only a minor effect regarding gross margin. Coming to Turkish lira. As you might know, 16% of our sourcing is coming out of Turkey. But the question overall is is the effect of the decline in Turkish lira versus the euro. So as you know, you see still high inflation as well in Turkey, and this translate into wage increases. And since we are hedging this, we have a kind of timing effect for the upcoming quarters and for the upcoming year. But overall, we judge the effect from the devaluation from the Turkish lira at a mid single euro amount for the next year. Regarding marketing effects, yes, there was one there was a shift from Q1, Q2. And this year and this quarter, the marketing was on prior year level. It was related to our Hugo Fashion Show and the Formula E investments we had in marketing. So this is well on track. And regarding EBITDA, we are well aware of our guidance of 2018, and we stick to our guidance. Be aware that we were saying in the beginning of the year for 2018 that we will concentrate on executing our strategic areas of focus that we will do them and that we are very much convinced that we are on the right track. And 2018 will be a year of accelerated growth. This is what we are seeing. We are reporting 5% at the moment for the 1st 6 months and secondly, a year of investment in order to make sure that we have a sound foundation to come back in 2019 for sustainable profitable growth because in 2019, going further, we want to make sure that our EBIT or EBITDA margin is growing faster than net sales. Perfect. Thank you very much. We will now take our next question from Mauricio King from Deutsche Bank. Please go ahead. Yes, good afternoon, Stephen and Christian. I've got a question on the inventory increase of 16% at constant currency. Could you talk about the reasons for your confidence that levels will normalize by Q4? Does that require higher rebates in the second half? And I just wonder whether the wholesale shipment timings had any impact on the end of quarter inventory level? Thank you. Well, overall, I don't expect that the rebates will be higher than last year. So overall, if it comes to the gross margin, I stick to my guidance that the gross margin will largely remain stable. Actually, one reason I pointed out during my speech is that the inventories in 2017 have been very low. And secondly, since we enjoy now very high momentum on the online sales, these are a lot of items that are very useful for our online business. So this is the major driver of the inventory level. Okay. But the sorry to come back on this. But the level of inventory was very low in the second half of twenty seventeen as well as the first half of twenty seventeen. So I don't see why that why the year on year increase should slow down in the second half. Managing this that the inventories will come down to a lower level because we want that the inventories are lower than they are at the moment. So that's the reason why we are reducing the inflow for the upcoming months, and that's the reason why inventory levels will come down. And actually, yes, we have an underlying performance that justifies the higher inventories level at the end of June. Got it. Thanks very much. We will now take our next question from Antoine Belge from HSBC. Please go ahead. Yes. Hi, Antoine. So, HSBC, two questions. First of all, overall, I mean, you've maintained your guidance and listening to everything you said, it seems that you're absolutely on track with your expectation on our side and we analysts forecasted a bit of a higher profit in Q2. So in terms of so on the assumption that everything is on track, maybe could you highlight what is actually ahead of expectation and which areas were maybe a bit disappointing or below your expectation? And my second question is on the Chinese market, which I think was up 8%. Given the current environment in China, which for a relatively broader consumer space is quite strong. I would say, is that disappointing or more like what do you need to do to maybe come back into a sort of more double digit growth rate in China? Thank you. Thank you, Antoine. So first of all, overall, regarding top line and bottom line, we were well on track and we were well on our own expectations. It's my first statement. And I think overall, we have been positively surprised by our online development when it comes to 47% in our own retail sales and as well if you take the development in the wholesale part the online wholesale part, which grew at a nice double digit momentum as well, we are very satisfied, and we see that our internal capabilities that we have hired in the recent months years that they are paying off, that we did the right investments in order to make sure that we can show positive and good momentum regarding online growth for the future. This was the positive surprise from my point of view. Your second question regarding Chinese market, yes, I think I still this is more or less on the overall 8% you were pointing out is on a like for like basis. Overall, we see potential regarding more stores in China going forward. And the other potential, big potential is actually the online business. When it comes to Tmall, when it comes to our own page and when it comes to JD, they all offer concession models, and we see their tremendous potential to improve our sales in the Chinese markets, especially when it comes to online and the connection between online and stationary business. Okay. So you didn't mention anything that was below expectation. But looking at Germany, aren't you encountering a bit more resistance to your higher price points in Germany. I mean, my feeling is that the initially, the first set of price increases were taken relatively well, but now it seems that it's maybe reaching a certain point when the second phase is maybe leading to a bit more pressure on volumes? Well, we did analysis and compared our current collections to the outlet performance. And actually, the performance is very much equal on a like for like basis. So taking this analysis, high level analysis, we don't see any tremendous effect from those price increases in Germany. Overall, you have to be aware that the overall German apparel market is very challenging at the moment. Thank you. We will now take our next question from Piral Dhatania from RBC Capital Markets. Please go ahead. Hi, thanks for taking my question. I'm just curious, I think, Yves, you were on tape earlier this morning confirming that you expect profit growth to be ahead of revenue growth next year. Could you just help us us understand how much firstly, what gives you that confidence if we expect the revenue growth rates next year to be consistent with what we're seeing at the moment? How much of the cost in your OpEx relate to one off investments that might kind of step down versus how much of your confidence in generating positive operating leverage comes from the top line dropping through, so to speak? That will be helpful just to understand kind of how confident you are that the margins will improve from next year? Thank you very much, Piral. So I think overall, I will point out to the Capital Markets Day that we were hosting on November 15, where I want to make it very transparent to everybody and understandable where we are going and where we see the operating leverage. Just to make clear what we have said so far. So far, we have been saying that from a top line perspective, for 2019 going off further, we have been saying that we will outgrow the market, and the market is perceived to grow between 3% to 4%. And in addition to this, we are convinced, and if I take the cost position that we are having, to outgrow the net sales by higher profit increase versus net sales in order to show operating leverage. And we will make this transparent in mid of November. Okay, great. Maybe just a follow-up for 2018 OpEx then. Obviously, there's phasing of marketing costs in the first half. Could you give us an indication of what you might expect to spend on a full year basis? Would it be comparable in relative terms to last year or potentially a little bit lower? The maximum is same to last year. In some cases, it can be a little bit lower because we see already some marketing efficiencies within the marketing budget. Our next question comes from Jurgen Kahl from Kepler Cheuvreux. Please go ahead. Yes, thank you. 2 ones. First on, I saw your the number of average employees increased by about 400 in the first half. Given that not too many new stores have been opened, I was wondering where you've been adding the employees and what do you expect for the full year? And then on the delivery shift from Q3 to Q2, I was wondering if you could give us an indication, is that just a technical issue or did retailers just simply want to have the merchandise earlier than last year? Regarding the development of the employees, there was one there are two reasons for this. One is actually, although the retail space remains stable, we have more retailers in our we have more workers on the sales floor. This is one, which drives higher conversion, which is coming from omnichannel services and where we can see actually the improvement in our comp store sales. This is one reason. And the other thing is that we invested into the digital capabilities. So overall, we hired people in the various countries, but especially here in the headquarter in order to have those digital capabilities when it comes to to be more specific, when it comes to content management, when it comes to CRM, when it comes to IT personnel and all this. And I think and overall, I think we are done with this kind of hiring of those people when it comes to the digitization. So this is one effect. And secondly, regarding the delivery shift, overall, we were very happy actually that replenishment business grew at a double digit rate. This means actually that the wholesale partners overall that they ordered more than they have originally expected. So this was one effect, but this is not the delivery shift effect. This was more from a technical reason point of view and has no actually economic reason behind this. Our next question comes from Thomas Chaves with Citi. Please go ahead. Thank you. Good afternoon, Yves and Christian. Two questions. Firstly, on retail LFL. If we strip out online from both Q1 and Q2, the growth was more or less the same. It looks like your brick and mortar LFL slowed down from 5%, 6% in Q1 to 3%, 4% in Q2. Could you confirm that the slowdown was largely due to the U. S? And if so, what kind of store based LFL are you seeing in July in your key market? Is it reaccelerating? I'm not so much interested about online here. Secondly, on the retail channel, full price stores have been outperforming outlets for several quarters now. Can you please indicate that the share of retail sales derived from outlet in H1 at group level, but also for the U. S? I think it used to be in the U. S. Around 50% a couple of years ago, if I remember correctly. And just to follow-up on category management in the HUGO strategy. Haven't visited the HUGO store in Amsterdam that's on your Slide 8. From the photo, it doesn't look like it carries a lot of formal wear. So are these HUGO standalone store largely casualwear low ASP driven, while maybe the formalwear will be found in normal store? Or are you planning to gradually downside or discontinue the Formalware of HUGO to leave Boss Black your main Formalware offering? Thank you. Thank you very much for your questions. First of all, regarding HUGO, no. It was, I think, depending on the picture, where the picture was taking from and which direction. So be aware that with the HUGO brand, formalwear part is even higher than the casual part, and the picture was taken into the casual part point of view. So this means, no, we stick to our strategy that HUGO targets to a different customer group, and we're both offering formalwear and casualwear for HUGO, that's for sure. Then regarding the outlet business, overall, if I take the H1 figures, if you take the freestanding stores, the full price business and the online business, we outperformed overall the outlet business, which is from a qualitative perspective, from my point of view, good news. And if we talk about the United States, yes, it has it's now getting since the normal collection business, full price business is performing pretty good, The outlet share is decreasing, and we decided overall that the outlet share will go down in the further coming years. And this is well in line with our strategy to have a high quality business in the United States, which has not been the part because of the open price wholesale business. I think we talked about this in the later conference calls. So overall What was the share of, please, of sales from outlet in total retail sales to the U. S. In H1? In H1, I would recall it in the 40s. 40% Coming down from 50%, yes. And regarding the comps coming only from online, this is not the case. So I didn't say that. I just it looks like it slowed down by a couple of percentage points quarter on quarter because of the U. S. Business. So I was wondering whether this was just a bit of weakness throughout Q2 for the U. S. And maybe reaccelerating in July? No, I think one important thing. If you compare Q1 versus was the existing performance in Q2. I think it's very interesting to do the 2 year comparison because in Q1, we have a comp store sales growth of 7%, whereas Q1 'seventeen was minus 3%. So the 2 year comparison was plus 4% altogether. And if you take the 2 year comparison for Q2, you actually see we had +3 in 2017 and now plus 5, so the 2 year comparison is plus 8. So I don't see any reasons for any deceleration regarding the comp sales. All right. Thank you. We will now take our next question from John Guy from MainFirst. Please go ahead. Yes. Thanks very much. Good afternoon, Yves and Christian. Two questions then, please. The first one on inventory. Could you talk a little bit about or highlight if there's been any sort of concentration of inventory in any particular market? Or is relatively balanced across your geographies? Yves, you mentioned that the aging and the quality of the stock was actually pretty good. Maybe you could just give us a little bit more color around that. 2nd question is going back to the gross margin and your expectations of a stronger gross margin into the second half of the year. If I'm rolling back into Q2, FX maybe around 10 basis points up, product quality down 40, rebates minus 10 and then minus 40 basis points on the channel mix. You mentioned that the channel mix would effectively annualize, so we're going to see a much stronger performance within retail. Where else are we going to see the benefits? I think product quality investments may continue into the Q3 at least. So if you could just clarify where you see the additional upside, that would be very helpful. Thank you. Thank you very much, John. Regarding the inventory concentration, I can clearly say it's very balanced. It's the dominant part is more or less in the central warehouse. And actually, there was a kind of product group investment going into jerseys, polos, T shirts and jeans, which you can sell more overall during the whole season and during the month. So this is overall well balanced. Secondly, if it comes to gross margins, I think your analysis is pretty good if it comes to Q1. So firstly, since we have a delivery shift, there will be a swing effect from the wholesale in Q3, which we expect. So overall, taking the current retail performance, we see this channel mix effect to be to reverse in the second half of the year in comparison to the first half year. Regarding equality investments, you're right. We will you will see this still in Q3, but from Q4 on, you will see the first signs of an annualization effect of the product investments that we have done. And yes, the ForEx, we don't see any ForEx headwinds for the second half of the year, which makes us confident that the that we will achieve our gross margin targets for the whole year. That's great, Yves. Can I just one very quick follow-up just on Europe wholesale? I think you said it was up 17% in the second quarter. What are your expectations for Europe wholesale for the second half, please? 17% was coming from those delivery shift as well, include plus the good replenishment. And overall, we stick to our guidance regarding wholesale business to be to grow in the low single digit for the whole year. Our next question comes from Edward Aukin from Morgan Stanley. Go ahead, sir. Yes. Good afternoon, Yves and Christian. Just one very quick question for me on your online business. If you could just please update us on the profitability of the business and when do you expect it to have any material impact on the group profitability? That would be great. Yes. Thank you, Edouard, for your question. The overall profitability in the online channel is very high. It's actually the highest that we are having in terms of channel mixes. And since the absolute number is still pretty low, any increase any incremental increase will drive overall the margin of the business. And secondly, be always aware that this is not a fixed cost business. It's a variable cost business. So in terms of risk return, we highly value this kind of online business, and we will keep on going and keep focusing on online growth. Okay, great. Thank you. Our next question comes from Volker Bose from Baader Bank. Please go ahead. Hello, Volker Bose from Baader Bank. Thanks for taking my question. First question would be on the wholesale segment, plus 10%. You already mentioned the delivery shift. Just for clarification, what would have been the wholesale sales growth excluding the shifts from Q3 to Q2? And the second question would be on your multichannel capabilities. How are you progressing with the group wide implementation of multichannel functionalities? What is still missing? What are the next steps? And how do you make sure to get access to the customer traffic on the leading online fashion portals? An update would be great. So if you thank you very much, Volker, for your questions. So first of all, if we would exclude the delivery ships effects, the underlying performance would be low single digit growth in the wholesale segment. So this is one. Regarding multichannel functionalities, we already show that in 12 different countries, we offer click and collect and order from store, and we are now expanding this to the United States. And in the upcoming year, we are expecting to roll these kind of services out to several countries. The next countries will be the Nordics, will be Ireland, will be Canada, Mexico and Australia. So we will be focusing on those rolling this out. I think the next functionality that is showing up and is ship from store. So when you can ship from store, actually, you might be able to deliver in a very speedy way to the customer from selected stores. So this is the functionality we are looking at. And if it comes to platforms, we are nicely present on various platforms like Zalando, like ASOS, like NEXT, and they grow at a high at a double digit rate at the moment. So we are very satisfied with this development. Our final question comes from Philip Bray from Warburg Research. Please go ahead. Hello, gentlemen. Two quick questions. Firstly, in your regarding your investments in digitalization that you mentioned, this increase in admin expenses, if you would split that into areas where you see an immediate payback like CRM investments or other other digital investments where you see a later payback. Is this more an investment into the future that is going to help us to see margin leverage in 2019? And secondly, on the overall selling and distribution costs drove the split between Q1 and Q2, You had a decline of 4% in Q1. Now in the second quarter, 1% increase. What would be your expectation in terms of underlying growth rate going into the second half of these figures? And are you seeing continuing to see an underlying decline of your rental expenses? Plan of what? Of your rental expenses for your stores? So taking the admin costs. So first of all, I think what we reported plus 7% increase in administration expenses in the 2nd quarter, and these are investments that pay off directly. So it's the I would say 5% of those is derived to those investments which have a direct payback, which is in between 1 year and which pays off directly. So I would view that the margin leverage will come from this. Regarding rental negotiation, I still see upside in the upcoming months and years to come to reduce our rental costs and to improve our rental expenses to sales. And regarding the selling expenses, I think the predominant part was coming in Q1 actually from the marketing expenses. So we see an underlying performance of we view that in terms of operating expenses, in terms of net sales, that they will slowly decline in the upcoming quarters. Very much. That completes our conference call for today. Our next reporting date will be November 6. And if you have any questions before that, obviously, please feel free to contact any member of the Investor Relations team.