Hugo Boss AG (ETR:BOSS)
Germany · Delayed Price · Currency is EUR 36.93
+0.16 (0.44%)
May 8, 2026, 6:13 PM CET
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Earnings Call: Q4 2017
Mar 8, 2018
Afternoon, everybody, and welcome here in Metzing to our group headquarters and also to our presentation of our 20 2017 financial results. Very happy to see so many familiar faces here on-site, but I also want to take the opportunity to greet those who are following us on the web or on the phone. Today, in today's presentation, I will update you on the progress in key areas of our strategy and discuss our financial outlook of 2018. Our presentation will ensure that you have a good understanding of our plans for the next 12 months. I will share the presentation with Yves Muller, who joined our Managing Board as the CFO in December last year.
Before coming to Hugo Boss, he held the CFO position at Tivo, a German coffee and non food retailing company for more than 11 years. Yves, welcome to Hugo Boss. When we presented our annual results a year ago, I talked about the year of stabilization when I refer to 2017. It was our goal to stabilize sales and profits and to initiate strategic changes in order to return to sustainable and profitable growth. Today, I'm pleased to say we achieved our goals.
We met or even exceeded our financial targets and made good progress in key areas of strategy. Our position in core markets have clearly improved. In our largest German market, we defended our leading position. Sales remained stable compared to the prior year level, a good achievement against the declining market backdrop, at least in physical apparel retailing. In the U.
K, our 2nd largest market, we continue to go from strength to strength. In 2017, sales increased 9%, excluding currency effects, representing the 8th consecutive year of least high single digit growth. Solid demand from tourists who took advantage of the weakening pound still contributed to this performance, but more importantly, also local demand remained a driver of growth. In the U. S, we staged an impressive comeback over the course of last year.
Demand in our own stores picked up noticeably, in particular in the second half of twenty seventeen, recovering from the declines we suffered from in the prior year. In a market environment still marked by traffic declines and high levels of promotional activity, especially in department stores, our online and physical full price business outperforms the outlet channel, pointing to improvements in retail execution and growing brand strength. However, overall U. S. Sales were still down 1% because of declines in the wholesale business.
Finally, performance in our largest Asian market, China, tied in with the end of the prior year as the momentum generated by our price repositioning and growing digital focus carried over into 2017. Full year sales in this market were up 8%. The success in the latter two markets where we had been under enormous pressure before speaks to the effectiveness of the measures we took in 2016. As painful as they were, it was right to eliminate all pure off price distribution formats in the U. S.
Wholesale. And it was equally the right measure to right size regional price gaps so that Asian price levels align closely with the rest of the world now. With this short term corrective action behind us at the beginning of 2017 already, we were able to focus fully on the heart and soul of HUGO BOSS, our brands and their repositioning to better reflect the needs and expectations of today's consumers. BOSS is an iconic brand based on its strength in tailoring a notion of success, ingrained in its collection is communication. Over the past 12 months, we made sure to adapt its values to the mindset of the modern man.
BOSS rests as a drive refers to our desire to outfit the ambition of men on their way to greatness, extending the brand relevance beyond just regarding BOSS as a business or suiting brand. The integration of the former BOSS Green and BOSS Orange lines into the BOSS core brand has been an important step in this direction. We no longer target 3 different, but just one customer who we dress 24 hours, 7 days a week. We introduced this change in creative direction with a fashion show in summer 2017 in New York, showcasing a collection as easy as relaxed and as casual as none before. Since then, casual and athleisure have become key elements of the Boss look, which overall has become more modern and more sophisticated.
We equally focused on our women's wear offering. The Bosswoman does relate to success, confidence and style too, however, in a different way than men do. She works in her own way, she speaks in her own voice and she moves in her own space. Our women's wear dress is exactly this customer, with collections that have become more modern, including some surprising elements that break with the rest. The integration of the former BOSS Orange brand line has clearly strengthened the casual elements of the collection.
And while the fashion part has been largely limited to the high end of the collection in the past, we have now made it an integral part of the entire collection so that it becomes more accessible also to a younger consumer. The presentation of our first gallery collection in Berlin last July, which marks the starting point of our new course in womenswear, was received extremely well. Finally, we firmly repositioned HUGO in contemporary fashion. HUGO is a platform of self expression addressing an audience that lives a very individual lifestyle. A spirit of adventure, purpose and opportunity drives this consumer.
Kewa celebrates this ambition, globally engaged, always curious and authentically expressive. The collection we showed in Florence in June last year brought this message to life in a powerful way. The abandoned factory was the ideal scenery to present Hubert's springsummer 2018 collection marked by progressive and unconventional looks bearing our competencies in terms of quality, innovation, fit with the nonconformity that BAWK HUGO stands for. Today, we are all the more confident that the positive response to the new brand strategy will also become manifest in a strong consumer demand. Our confidence has grown as a result of the fact that some elements of the new brand strategy already contributed to the significant improvement in retail performance over the course of 2017.
The BOSS fashion statement had started to evolve already with the FallWinter collection. Coupled with an expansion of the Athleisure offering in our stores, for screen was added to 80 more stores in shop in shops in the past 18 months. This drove a consecutive improvement of comp store sales performance. While we still suffered from declines at the beginning of 2017, performance picked up markedly over the course of the year. The 7% increase in the 4th quarter was the strongest growth of this metric for more than 5 years.
Our online business made a significant contribution to this improvement. This was not obvious at the beginning of the year when we suffered from the repercussion of the website relaunch in fall 2016. The relaunch had clearly elevated brand experience through a better product presentation and the improved linking of content in commerce. However, the design and navigation changes negatively affected the site's usability. In addition, the merchandising was not in sync with the needs of our online consumer.
At the start of the year, recognizing these problems, we brought together the relevant business and IT functions with a brief to solve these issues, a cross functional approach that we have institutionalized in the meantime. Just mentioning a few measures out of a long list, we shortened the page loading times, changed the site's layout and navigation to make it more intuitive for users and better balance the mix of our offering. As a result, online sales returned to growth in the 2nd quarter, increased by more than 40% in the final 3 months of 2017. In the full year, we delivered on promise our business was up 8% to reach €79,000,000 Let me come back with our future plans in this and other areas after Yves Muller's presentation of the financial numbers. Thank you.
Yves please.
Thank you, Mark, and good afternoon, ladies and gentlemen. Before I begin, let me just quickly say what a pleasure it is to be here today. Marc and the entire HUGO BOSS team, I think they have done an incredible job the past year. And we are coming to my first 100 days with the company. And while I'm still getting up to speed, I greatly look forward to working with you and the entire investment community and I will do my best to answer each questions I might have after the presentations.
So talking about 2017 and talking about the financial performance in 2017, the strategic measurements that we initiated returned HUGO BOSS to growth in 2017. Group sales increased 3% on a currency adjusted basis. So the appreciation of the euro had a negative impact on sales performance in euro terms and the group's reporting currency, the euro, the revenues were up 1%. They amounted to more than 2.7 €1,000,000,000 From a regional perspective, and this is important, sales increased on a broad basis. Europe was up 2% in currency adjusted terms driven by the U.
K. The Americas exceeded original expectations with sales growth of 1% on a currency adjusted basis and double digit growth in Canada more than offset a 1% sales decline in the U. S. In this market, HUGO BOSS deliberately reduced off price business in the wholesale channel to underline the premium positioning. And looking at Asia and the surrounding markets, the region recorded a 6% increase after adjusting for exchange rate changes.
And the momentum in China remained robust throughout 2017, resulting in high single digit growth. In Japan, a very relevant market, had a bright spot in the region, delivering high single digit growth as well. By distribution channel, own retail sales were 5% up the prior year level and on a currency adjusted basis. On a comp store basis, means like for like, all in retail sales were up 3%, including a significant improvement quarter to quarter. In all three regions, we're up about the same rate with growing with growth being mainly driven by a significant improvement of the conversion rate and to a lesser extent, an increase in the number of units sold per transaction.
As expected, currency adjusted sales in the wholesale business decreased 2% in 2017. This was primarily due to the Americas, where more than half of the 10% decline in this channel related to the deliberate discontinuation of off price business in the U. S. To further establish the upper premium position. And in addition, we converted shop in shops from wholesale to own retail to further enhance brand presentation.
In Europe, channel sales were up slightly and the German business, broadly representing the force of global wholesale sales remained on prior year's level in a very difficult market environment. And finally, the licensing business continues to be an important sales driver. The business generated 14% growth in the reporting period, driven by double digit increases in the largest category, Fragrances. Completing my discussion of top line trends, Sales with the BOSS brand increased 3%, excluding currency effects in 2017. And this performance was particularly strong in Athleisure, which still retailed under name of BOSS Green.
Here, sales grew at double digit rate. Business wear and casual wear revenues were broadly unchanged compared to the prior year. Kugel sales grew 5%, driven by double digit growth in the casualwear segment. Especially in the second half of the year, distribution changes started to have an impact. These changes relate to some department stores where BOSS is taking over space from Huber in certain categories because its brand proposition is a better fit with the customer.
And in addition, we are reducing HUGO's exposure to the outlet channel. We are convinced that this distribution alignment is necessary to sharpen HUGO's fashion forward contemporary proposition. And by gender, the 4% growth of our menswear business was driven by improvements in the collection as well as the shift of marketing expenditures. Womenswear sales declined by 2%, mainly coming from a reduction of its retail floor space. Moving below the top line, let me discuss the development of the margin, major cost positions and the group's profit performance.
The group's gross profit margin increased 20 basis points to 66.2% in 2017. The positive effects from better growth in the higher margin owned retail channel and lower discounts in our Asian owned retail business were partly offset by negative currency translation effect. On the cost side, selling and distribution expenses were up 2%. Own retail costs continued to be tightly controlled, benefiting from our focus on renovations rather than new openings as well as the successful renegotiation of rental contracts. In addition, the closure of 15 underperforming stores announced in summer 2016 was completed at year end.
With this cost line, marketing expenses increased 3% in absolute terms and amounted to 6.8% of group sales. The expansion of digital activities as well as investment in fashion shows drove this increase. The growth of G and A expenses largely related to IT, where we invested in the rollout of omni channel services as well as the successful turnaround of our online business. And as a result, EBITDA before special items remained stable compared to prior year. It amounted to €491,000,000 resulting in a margin of 18.0%.
Net income was up a robust 19%. This was due to a significant swing in the other operating income expense line, primarily related to the non recurrence of store closure costs in the prior year. These effects more than compensated a higher tax rate, which rose from 24% to 30%. We forecast 2 percentage points of this increase to be structural, resulting from permanent changes in the taxation of the group's license income in Germany. The other 4 percentage points were mainly attributable to one off non cash tax expense in connection with the revaluation of deferred tax assets in the U.
S. And we do not expect this effect to recur going forward. If we look at the margins across our regions, Asia generated the best margin improvement in 2017. In Europe, operating profit was up on an absolute basis, but slightly down relative to sales due to higher expenses in marketing and on retail. In the Americas, the discontinuation of off price business in the wholesale as well as investments in IT and logistic compressed margins by 230 basis points.
In Asia, however, the operating margin increased by 2 20 basis points. Positive sales momentum, less discounts and lower rental costs drove this improvement. On the following slides, I'll discuss some key balance sheet and cash flow trends. We had a very positive net working capital development at year end. We kept trade networking capital under tight control and significantly improved our cash conversion cycle.
Supported by the positive sales momentum, the inventory position was below prior year's level throughout the period, predominantly due to declines in the Americas and Asia. At year end, inventories were down at 5%, receivables decreased 9%, reflecting the sales decline in this wholesale channel as well as strict collection. Trade payables were up 5%. Trade net working capital improved in absolute and relative terms. And based on the average of the last four quarters, it amounted to 18.6% on 2017 sales, a decline of 120 basis points compared to the year end of 2016.
Investments decreased compared to 2016 due to fewer store openings and takeovers as well as the deliberate postponement of store renovations to 2018 due to the development of a new store concept. In 2017, investments amounted to €128,000,000 around €30,000,000 below prior year's level. The group's own retail business continued to be the focal point of investment activity accounting for almost 2 thirds of the total budget. CapEx spend on new store openings slightly exceeded the investment in renovation, the situation which we expect to be the other way around in 2018. The remaining third of the budget was largely dedicated to IT.
Investments in the area of over €30,000,000 underline the importance of the digitization of the group's business model, in particular the omni channel integration and the digitization of the group's own retail activities. The declines in working capital and CapEx boosted cash flows more than originally expected. Free cash flow increased by a third to 2 €94,000,000 in 2017. However, it would have been around €20,000,000 lower excluding the timing effect in trade payables position. As a consequence of high free cash flow, net debt reached the lowest level in more than 15 years.
At €7,000,000 the company, HUGO BOSS, was almost debt free at year end of 2017. I would also like to take this opportunity to state our commitment to providing attractive returns to shareholders. Accordingly, we proposed a dividend per share of €2.65 for the 2017 financial year. This represents a 2% increase compared to the prior year and a payout of €183,000,000 At 79%, the payout ratio normalized in line with our dividend policy. Ladies and gentlemen, in this context, I would like to reconfirm the key principles of our financial management as HUGO BOSS.
We remain firmly committed to the goal of generating sustainable profitable growth. The role of the finance function and myself will be to co pilot the business on this journey. We target to improve sales productivity in our own retail, which includes the acceleration of sales growth in our online business. And in addition, we strive to generate cost efficiency to free up capital for future growth and to ensure margin improvement. In all retail, measures will include the continuous optimization of the store portfolio through openings and closures as well as the cost efficient remodeling of successful stores.
Beyond our retail operations, we also aim to reduce collection complexity following the simplification of the brand portfolio and at digitization, key processes along the entire value chain to make them faster and more efficient. Profitable growth will be a key driver of free cash flow maximization, the ultimate goal of financial management as HUGO BOSS. However, we will evaluate the change of group's key profit metrics from EBITDA before special items to EBIT to better capture the group's value creation, taking also the effect of investments into consideration. Expect an update in this respect over the further course of the year. Finally, there will be no changes regarding the use of free cash flow.
As reflected in our proposal for 2017, we will continue to pay out a dividend amounting to between 60% 80% of consolidated net income. Exchange rate volatility had a significant negative impact on the group's profit. Let me give you some more background on our thoughts for 2018. To date, currency risk management at HUGO BOSS mainly focuses on the hedging of the group's internal financing activities. By doing so, we limit the cash impact from exchange rate fluctuations to a minimum as demonstrated in the financial results statement in 2017.
And we also benefit from the natural U. S. Dollar hedge provided by the fact that our U. S. Dollar denominated sourcing activities more or less balance our sales exposure in this currency.
However, the significant swing of exchange rates in the reporting period has also highlighted the effect that the simple translation of foreign subsidiary results can have on the group sales and profit performance, in particular when it comes to currencies such as the British pound and the Chinese yuan in which we do not source. As a result, we have a long exposure in these currencies, including the operating expenses related to our business in the UK and China. We do not hedge the associated translation risk with derivatives, primarily due to the largely non cash nature. Instead, we focus on operational hedges such as the regular adjustment of selling prices. In 2017, however, we decided not to adjust prices in light of our ambition to better align global selling prices.
This meant that the depreciation of currency such as the British pound and the Chinese yuan not only resulted in a negative sales impact of around €40,000,000 in 2017, the strength of the euro also lowered reported EBITDA by around €20,000,000 in 2017, even factoring in the benefits on the COGS and operating expenses line. And based on the prevailing exchange rates, we expect operating profit in 2018 to suffer from an impact of around €10,000,000 as well. Now with all that said, I would like to look forward and provide you with our financial outlook for 2018. Most importantly, sales growth is set to accelerate. On a currency adjusted basis, group sales should increase to a low to mid single digit rate and all regions are expected to contribute.
We project that Europe will perform in line with the overall group and that sales in the Americas should increase at a low single digit rate excluding currency effects. And we expect that Asia will outperform the other two regions. The license business is forecasted to be up to the mid single digit rate too. By distribution channels, all in retail sales should increase at a mid single digit rate, driven by a better performance in existing spaces. This includes online where we expect double digit growth.
Store openings and closures should have a net neutral effect on channel sales. We are also forecasting low single digit growth in the wholesale business, supporting and supported by improving trends in the order for the fallwinter collection, which we just completed last week. The group's gross margin is expected to remain broadly stable in 2018. Positive channel mix effects from higher growth in own retail should contribute positively. In addition, we will shorten sales periods in the European and American owned retail business so that lower discounts will have a beneficial impact on gross margin performance.
These benefits will be offset by an upgrade of the value proposition of our collection, including a double digit million investment in product quality. In addition, negative currency translation effects will hurt margin performance. Gross margin development is therefore likely to be negative in the first half before improving in the second half of the year. Operating expenses will increase moderately because of our measures to drive the group's digital transformation, to invest in customer relationship management and omni channel as well as our ambition to ensure premium brand and shopping experience. In sum, EBITDA before special items is expected to perform within the range of -2% to plus 2%, including the aforementioned negative currency impact of around €10,000,000 We project net income to increase at a low to mid single digit percentage rate despite the non recurrence of the one time benefit related to the release of store closure provisions in 2017.
Profit growth will be supported by the normalization of the group's tax rate as discussed before. Investments will increase to between €170,000,000 €190,000,000 largely reflecting the renovation of around 150 own retail points of sales in 2018. The investment into the opening of 50 to 20 new freestanding stores, including 10 HUGO stores, will be comparatively much smaller. We will also incur the first cost related to the relocation of our signature outlet here in Metzing where we will open a new far more central location in 2019. And aside from own retail, the remainder of investments will largely focus on IT again.
In addition to higher investments, higher working capital needs, partially related to the reversal of the timing effect in trade payables, will also affect free cash flow generation. We therefore expect free cash flow to amount to between €150,000,000 200,000,000 Thank you very much so far for your attention. I will now turn back to Mark Langer. He will give you more details on the operational drivers of the financial outlook and the future strategic measurements. Marc?
Thank you, Yves. So 2018 will be another important milestone in the implementation of the strategic changes that we outlined 1.5 years ago. The first collections, following the new brand strategy, hit the stores at the end of 2017. While it's still early days, we are very satisfied with the initial response from our consumers based on trading in On Retail in the 1st weeks of 2018. Our wholesale partners also reacted positively.
Since the presentation of the very first new collection in summer last year, their confidence has clearly grown further. The order performance of the FallWinter 2018 collection speaks a clear language in this respect. The presentation of this collection during the New York Fashion Week at the beginning of February picked up on the theme of sports tailoring. The fashion press received a fusion of tailoring and athleisure very positively. Commentators highlighted the sharp statement of the collection, which successfully combines the brand's heritage in formalwear with modern Athleaner styles.
We prepared a video, so please see for yourself. Quite impressive. But only a few days later, we presented the 2nd edition of the Gallery Collection in New York too. Following the enormous success of the launch at the Bernin Fashion Week in summer last year, this collection drew inspiration from the post work of the minimalist artist Robert Morris and focused on bold interpretation of tailoring, a key component of the BOSS DNA. The collection also presented that we presented also Mark Jason Wu's final as Artistic Director of Womenswear.
In the past 5 years, his signature style has significantly shaped our womenswear collection. We are very thankful for Jason's creative input. It has been an inspiration for all of us and the entire creative team of Cross Women's Wear, which will now continue his work under the leadership of Ingo Wiltz. There are also many things moving at HUGO. Based on the brand's trend and fashion focus, we aim at developing a new operating model, which takes customer engagement, speed and responsiveness to a new level.
Customer research has clearly documented the far greater online affinity of the HUGO customer. So it's only logical to make the brands the group's digital speedboat in terms of product development and also distribution. A strong digital platform that supplements the brand's physical touch points will ensure that we foster a deep understanding of our customers and interact with them on equal footing. The transformation is going to take some time. It will also include the discontinuation of some undesirable distribution as Yves outlined.
However, the momentum around HUGO's reverse logo product in casualwear is clearly building. HUGO is enjoying strong growth in online partners like Zalando in Germany and ASOS in the U. K. In addition, we are pleased by the trust that many department store partners place in the brand. Exemplified by the growth in space that accounts such as Breininger in Germany again and Holger Fraser in the U.
K. Are allocating to HUGO. 2 weeks ago, we brought HUGO back to Berlin with a new store. In total, we will open around 10 HUGO stores in 2018. All openings will be supported by extensive regional marketing activities with the brand Heat and key European fashion capitals.
All our work in 2018 is 1st and foremost meant to drive performance in On Retail. In 2017, we improved retail sales productivity by 2% to €11,100 per square meter. This represents good progress, but there's still some room and some way to go to achieve our target level of EUR 13,000 per square meter by 2021. So let me highlight the main drivers in this respect. First, we will gradually expand our BOSS Casualty offering in stores in the next 12 months.
In doing so, we are benefiting from the significant upgrade of the former BOSS Orange offering, which has been a particular focus of the quality investments we made across all of our collections. The springsummer 2018 collection is the first reflecting these investments. Similar to the fact that the enlargement of the BOSS Green offering on retail had in 2017, we expect the greater representation of casualwear to have a beneficial impact on traffic and conversion rates. 2nd, we will roll out our new BOSS store concept. In 2017, we have started with 3 pilots in Birmingham, Geneva and Dubai.
Performance in all three stores is very encouraging and above pre renovation levels. Consumers gave positive feedback on the clean and modern design as well as the inviting ambiance. In addition, digital elements connect the store with the online world. The new concept is also more functional. Drawers and hidden compartments, for example, ensures a quick availability of styles and sizes not on display.
The new concept will be deployed in all stores that we will open or renovate in 2018. 3rd, we have invested in service. When my Board colleagues and I recently held fireside chats with some of our most important key consideration for the choice of our brand. That is why we invest in retail trainings, but also the personalization of the entire customer journey. This starts with communication where we are now increasingly personalizing e mail newsletter to customers based on their purchasing history and personal preferences.
This is also true now for our hugoboss.com website, which now adapts to the user's navigation history, for example, when it comes to the selection of key stars on the landing page. 4th and final, we will complete the rollout of the full range of omni channel services in all European online markets by mid-twenty 18. These services include click and collect, order from store, that means online ordering in store and return in store. The role ties in with the implementation of the new store concept, which features a digital table that allows the store assistant to browse the online offering together with the customer. In the U.
S, all stores offer Click and Collect already and the full range of omni channel services will be available by the year end. Obviously, we also want to carry the momentum that we built in our online business at the end of last year into 2018. In less than a week from now, we will adapt the hugoboss.com website so that it fully reflects the focus on BOSS and HUGO. Changes in the site structure and layout will create 2 distinct brand worlds. As a result, in particular, HUGO will be far more visible than today in terms of its product offering as well as relevant editorial content.
Consumers with a Kia brand preference will arrive directly at either the BOSS or the HUGO landing page by following the boss.com or thehugo.com link that we highlight in our print advertisement. However, we also want to make sure that consumers without a clear brand preference may browse the entire offer by product group, independent of a single brand and can easily change back and forth between the two brands. Hand in hand with the further optimization of the hugoboss.com website, we are also upgrading the presentation of BOSS and HUGO on the sites of partners. In the future, this may mean that we take full control of the business via concession models. Where this is not possible or economically sensible, we still strive to ensure maximum consistency with our own standards.
To this end, we have just launched a new portal for wholesale partners to support them with detailed presentation guidelines, product information as well as product marketing and image material. Of course, digitization goes beyond just distribution. We aim to digitize key operational processes along the entire value chain where this generates efficiencies. One such example in collection development is the 1st digitally designed HUGO capsule collection that we launch in late summer. It will consist of 29 styles across various product groups and casual wear.
HUGO has started to making use of virtual prototyping already some seasons ago. We intend to make such capsule collection a regular part of the HUGO offering. Thanks to much shorter lead times compared to a regular collection development process, they ensure constant newness, a key competitive advantage in contemporary fashion. It's only logical to sell such a collection primarily online. This is even true for the HUGO wholesale business, where we are rolling out the differential showroom launched in Metzing in 2017 across Europe.
In a few weeks from now, wholesale partners in London and Paris will be able to order the new HUGO Collection fully digital too. Toward the end of 2018, we will then make the first steps to adapt the device also to the needs of the BOSS brand. You can clearly read from my comments that HUGO brand that the HUGO brand serves an important purpose that goes beyond its commercial and financial contribution. KUGO is the group's digital speedboat. It is doing pioneer work in fields where we have not been active before.
In doing so, it is benefiting from its relatively small scale and organizational independence of the far larger BOSS brands, which allows greater flexibility and speed. We are using agile management techniques built on the principles of co creation, iteration, distribution of distributed authority as part of the HUGO transformation. Every success achieved with the application will hence increase the openness of the rest of the organization to embrace these changes. Let me now sum up the key points of today's presentation. We clearly made good progress in the strategic realignment of HUGO BOSS.
The significant acceleration of top line trends over the course of 2017 has made us even more confident that the refocusing of both brands is on track. First sellout results of the new collections and the feedback from wholesale partners on our fall winter collection point in the exact same direction. Of course, we will not stop here. We have identified further drivers of continued growth that will unfold in 2018 and beyond. These drivers include the further refinement of our collections, following the new brand strategy, but also considerable improvements in retail execution online and offline.
These improvements come with ongoing investments, which, coupled with adverse currency effects, will limit our profit growth in 2018. We are actively driving these investments because we know that they will help us building further brand momentum. At the same time, we acknowledge that we will have to finance these investments with further efficiency improvements. I'm confident that we will be able to achieve both so that we will generate sustainable and profitable growth in 2019 and beyond. Now we are very happy to take your questions.
Good afternoon, ladies and gentlemen. I think those in the room will know me. My name is Dennis Weber, Head of the Investor Relations activities here at HUGO BOSS. Maybe those on the phone won't know me, so that's why. The usual rule, please state your name and your organization and please limit your questions to 3.
The first question is from Lukas Holter from Exane.
Yes. Good afternoon. Lukas Holger from Exane BNP Paribas. I'm interested in understanding more how the off price portion of your business is shaping up, its contribution to top line and operating profit as well as its contribution to organic growth that you recorded this year at record levels? Thank you.
So what has changed in 2017 that any off price business is now under our direct control. You remember that this was something that we had to address and we took the decision already back in 2016 not to allow any third party to operate off price pure place distribution. Of course, the importance of our off price business varies by market. So this is relative to group average. It's still under proportion most of Asian markets.
Europe is more or less on group average and we still have a higher share in the U. S. However, we highlighted this as part of the presentation. We consider stronger growth in our online and full price business as important metrics to assess brand desirability and brand strength. And we are very pleased that we have seen for the last two quarters that we reported back to that on a global scale, in particular also in the U.
S, we have seen stronger growth in the full price business in our online. Clearly, there is no right balance between off price and full price business. We acknowledge the fact that as an apparel company, we will be not be able to implement similar strategies like some accessories pure plays. However, we are pleased with the progress we have seen. We have not given the market a target number of split between full price and off price, but also today we reconfirm our commitment to drive our overall retail growth, both in like for like growth in absolute numbers rather by full price distribution in online than the off price, recognizing that this is an integral part of our business.
In terms of profit, just to complete your question, it varies. It's not that our full price business or online is by definition more profitable than our off price because we just have higher gross margin due to the fact that we clearly sell predominantly at full price. This is being offset at least partially by the lower cost of operation with factory outlets, sales densities play a role, but it's not major differences in sales channel profitability that drives our decision. It's purely driven from the eye of the consumers that we have a well balance between these two sales channels.
Volker Bose, please.
Yes. Volker Bose, Baader Bank. Thanks for taking my question. I would like to start with your online business. Congratulations to your online improvements.
Nevertheless, I see a bit reluctant to join 3rd party web pages, be it with your online wholesale or be it with your own online activities on marketplaces. So is my impression wrong? Or could you please say a bit more strategic insight what you plan to do here and what you have achieved and to have a bit more vision in that field of your online strategy? And second question would be on your expansion. You have 15 to 20 new stores.
I think that's on a net basis. So perhaps an idea regional wise where to expect and also the 10 HUGO stores where we can those expect? And then welcome, Mr. Muller, on stage. My question would be, what is your first impression?
What was your strategic focus in your 1st days? And yes, what do you think? Where do you see fields for improvements? And perhaps one final one as a clarification. The tax rate, you mentioned it in your presentation already.
Just as a reminder, what is the tax rate we should put in our model for 2018? Thanks.
So just on the online distribution, we recognize that in certain markets, multi brand online distribution is an important distribution platform for us. And basically, the same principles apply in the online field as we apply in the physical world. So if the brand mix is right, if the brand presentation is what we like to see from those partners, we are very committed in this partnership. You might have seen that we were one of the key brands to participate in the Zalando Bread and Butter event last summer in Berlin, demonstrating the very close and beneficial relationship we have with these smarty brands online pure place, for example. We also work very closely with many department stores that are coming from more physical background like we might be as well, which are now making progress also to serve their customer base via their e commerce offering and we are very happy to be present on the nordstrom.com or Selfridge's website.
So there is a customer who has like in the physical world who has found BOSS as her or his prime source for all wearing occasion, these customers will probably also in the e commerce world use our enhanced and improved e commerce performance. And you rightly pointed out, coming from an admittedly lower base, we have seen strong momentum in the second half of the year. So that's one customer group. The ones who are not as brand loyal yet, we need to introduce them to the superior offer that we think we can offer Boson Schuh and Bos via multi brand sites. These need to be the right ones, as I said, in terms of content that we provide.
So many of these partners ask us, please provide us with your picture material, your storytelling. You have such a great story to tell with all the sponsorship activities that you have. So, we are willing to share these in an efficient way with our partners, like we do it again also in the physical world of the department stores to grow this business. And ultimately, we have not announced any of these deals, but we are in advanced negotiations with many partners. We believe now with our build competencies, operating e commerce at least in the U.
S. And the European markets, it could be now also an opportunity to go into digital concession agreements where we basically just tap into the traffic of these partners and operate the business. We would not speak about such business models if we don't see a likelihood of realization, but it's as concrete to be announced. Just on the expansion, then I would hand over to the specific question you addressed to Yves Muller. So it's a 15 to 20 gross openings that we expect with 3 standing stores.
The 10 HUGO stores we have to be realistic will be predominantly based where HUGO is known best. So we will not start in Argentina, but we don't have even a sales subsidiary, but it's a key Western European market, the U. S, where we see the biggest potential for HUGO where it's established via today's presence, but also via our license business, where we will start to expand with 10 JUGO stores in 2018.
And talking about your questions, just start with a specific question about the tax rate. 26% should be the right tax rate, I think, for the future. As I pointed out, this 4% is non recurring from the United States, but this 2 percentage points is an increase from 24% to 26% due to a new taxation law regarding licensing costs, the Werberstrode has to be included in Germany. So talking about this. The second point is, yes, I'm really great to be here.
I talked about my first 100 days and I really get into the strategy. It has been pointed out even before the due diligence that I did before I joined Marc and his team and I'm really up to the strategy now and I'm really supporting this. Taking one example, I think one big issue is in retail in the future is retail productivity. And this is what we are driving for. I think the big driver in the P and L will be increasing the density euros per square meter and saying clear this is the main driver of the P and L.
And it's actually to say what's right, something there will be, of course, some white spots. There will be, of course, some new openings here and there. But I think the real focus will be on remodeling. And remodeling has 2 big advantages. 1 is, you know the location already, you know if it's running or not.
And secondly, the remodeling costs are much more efficient and lower to a new investment. So I'm very much in favor of this retail productivity and we will accelerate this in 2018 and going forward. And finally, I think we will speed up, as Marc pointed out, the online growth. I think it's a lot of big potential that we have here. And being a new rookie on the Board as well and being responsible for IT, I was really impressed what we can offer in omni channel services.
I was in the stores and since October, for example, in omni channel, we are able to order from store. We have the IT capabilities to have the retail access to our inventories, I think this gives us a kind of competitive advantage that we have. We are offering the service since October and I think with rolling out to further countries, this has good potential for the future as well.
Andreas Schimmel, please. Andreas Schimmel, Commerzbank. Two questions from my side. First one on the U. S.
Business. The business is doing much better now. Can you help us and explain, is it the market recovery to a certain extent? Or is it BAW specific, such as full price sell through? So any comment on the U.
S. Business? And second one, 2018, you speak about 250 store renovations, digital investments. So it seems like 2018 is a year where OpEx and CapEx to sales ratios could peak. 2019 profits and cash flow should start to grow again.
Is that the right observation? Or would you say these increased investments could become permanent investments?
Let me start with the second part of your question, even so it's clearly more difficult to predict in all details the year 2019 compared to 2018. But it's clear that we expect to return to absolute and relative profit growth as of the year 2019 and we strongly reconfirm this target. But we need to do the right things and we can't delay the necessary investments, be it on the CapEx or the OpEx side to build a superior business model, especially since we have seen now even stronger proof than we initially initially met 18 months ago with some skepticism. And we have done the right adjustment to our new strategy. You still remember that was initially met 18 months ago with some skepticism.
And now as consumer discover this collection, like we have seen now this strong acceleration like for like, I'll come back to your U. S. Question in a second, we see this is something that is superior to many other apparel players that we compete with. So as we recognize that this is now a business model with the capabilities that we had already for a longer period in terms of IT background system logistics strength of the brand, now bringing this together with omni channel capabilities and now with a sharpened brand strategy. I am confident that this is now the time where many of our competitions are also struggling not to take market share.
This is what many wholesale partners also provide us with the feedback, what real estate operators will tell us, in particular in these markets where we have staged impressive comeback, be it partners in China, be it partners in North America, the time is now to retake market shares. And where needed, be it on the marketing side, be it in the rollout of certain services, we're willing to step up our product because different to some other that might be in a downward spiral, we have now also the top line momentum to report on these investments. Unfortunately, this comes together with the time. I mean, you know that we have been reluctant in the past to provide you with the upside or the downside from currency fluctuation. I've been doing EASE jobs for 7 years and I avoided throughout these years to quote the impact exchange rate had on the bottom line because they were much smaller now.
And we're talking about a €30,000,000 negative impact compared to when we first highlighted our financial targets back in November 2016. The pendula will swing both ways. We have to accept it. We actively opted against aggressive price adjustment to compensate that. I think Yves explained it very well today.
So there is a dampening factor that we have not envisioned into this extent 12 or 18 months ago. We have to deal with that. We will also look carefully into price adjustments over the next 12 to 18 months. But we believe with this momentum being that's building, that we see a further acceleration not only top line, but then also in the EBIT or EBITDA development in 2019 and beyond. How high is high?
Too early to tell. Clearly, we have stabilized the business at current profitability level, but we are committed to drive higher profitability levels going forward. What I now just start on a more global scale, especially you can translate it back to the U. S. Business.
So we have come back to important entry price points, something where we lost our U. S. Consumer because our offering on retail was just too expensive to what U. S. Consumers were expecting from us.
We have placed a much stronger focus. The importance of the casual segment, which was a positive globally, but it was even more important in the U. S. Where the smart casual trend is even stronger than any other market. So, we were in desperate need to reintroduce these categories to your business and I think we mentioned this also as part of presentation, the U.
S. Comeback was the strongest market surprise that we recorded in 2017 because second half of twenty seventeen was still the old collection basically. What we were only doing is to reintroduce some of these styles, compared to Eglance and both athleisure, casual wear not at all. This is only feasible as of now 2018. Let's see how high is high.
We just have a few weeks of trading, but we see the momentum in the U. S. To be on our side. But Luca is right. The U.
S. Is clearly a market where promotional activity is right. You have to be sure that you are not creating any risk to your full price business by the action from your wholesale partners. So it's not an easy market. Even so, I would also say the market is bottling out in terms of activity.
So we also have to say that we probably have benefited from a business environment that has not further deteriorated in the U. S. In the second half. You have probably seen some of their data also for the holiday season, which were better than initially expected.
Alberto Dagniano from Goldman Sachs. On your store portfolio, I was just wondering, number of stores pretty much flat, but some YUGO openings. I expect the YUGO stores to be a bit smaller than the BOSS stores. So are you implying that you're going to close some larger stores and is your selling surface overall going down? And another question is on your online concessions.
I appreciate the advantages that this provides in terms of not having unsold inventories with your retailers and the better presentation of your product. Just a question on the economics. Is it better than wholesale once you allocate the costs? Thanks.
Okay. I'll take the question on the concession economics, then I go back to the stores.
Okay. Regarding online concessions, I am very much in favor of online concessions. Why? Because you control the brand and you control the prices, control the offerings and you control the assets. And I think in our business model, this is crucial, especially in this online where it's when it comes to price downs, you can control this.
I think this is crucial and has strategic importance. When it comes to margin, I think it's more or less because you're talking to existing customers, I think it's a more or less give and take and a risk and return issue because then you are responsible for your own inventories, therefore you have a higher risk. So this is a kind of risk return thing and point of negotiation actually.
It should be a win win situation. If we can't add run this business with higher productivity, then we probably shouldn't touch it. But as we have demonstrated in the physical work where we have seen sometimes tremendous increases due to the capabilities that we brought to the partners that Yves just described, It can be beneficial for both if we bring it from 100 to 100 plus x if we run this business in terms of concession. In terms of number of stores in space, I think you pointed out a very important part to it. I think on a half year basis, we provide you also an update on the size of our retail network in terms of square footage.
Of course, we see increase of e commerce, it becomes a bit distorted. But part of the restructuring that we started in summer of 2016 was also to either closed on things that were beyond repair or just oversized. Not always easy, but the significant improvement that you saw in the Asian profitability is at least to some degree also due to the fact that we were able to give back some spaces that were just excessive. So we right sized stores of 600 and more square meter to something that's more fitting to our capabilities, 350 to 400. So it's not necessarily seen in the number of stores because it's still counted as 1 U.
S, but it's a dampening factor for 1 square footage. However, there are still white space expansion like you're right with your assessment, smaller HUGO stores that we opened, they will on average smaller than the BOSS store, but there will be white space addition to it. And we continue to have at the small scale some concession takeovers. So I think it was an example from Canada in 2017. But on a much smaller scale than in the period between 20122015, where we benefited in a larger degree from concession takeovers, we expect takeovers in white space expansion to contribute on the small single digit amount to our retail momentum in the years to come.
Thanks. Jurgen from Kepler Cheuvreux. Mark, let me challenge you again on a little bit of a further outlook, what Andreas already tried to get on
to you.
The idea, I mean, let's ask that 2 ways. The benefit is you've seen this business already pre Premier. Mean, you've been with this company for some time. How has, 1st of all, the business changed and the whole operating model changed from the days before when BOSS obviously was differently organized to now when you try to bring back a little bit of the old BOSS going forward and the cost of doing this business, how has that developed? And in this wake, when I look at your projects that you're trying to invest, is there do you think that by the end of 2018, some of these projects just cut off and that's it?
And then we're coming now to a level where the operating expenses can be better leveraged. You have 5% like for likes and all of a sudden the margin kicks in? Or do you think the ongoing investments into digital, at the same time, the physical store renovation and so forth, will continue to have a dampening effect on the margin progression going forward? First one.
And secondly, yes. Not easy, but philosophical. Okay.
Second one, very easy one. The wholesale, you said, will return to growth. Where is this growth coming from? Is that maybe also pure online players or is that just Google maybe? And lastly, customer traffic in the stores?
So let me start with the easy ones then and when and you tell me then if you do the time out, you say, well, we are not interested in 20 years history of you. It was 50 now. That's my history as a company. So let's start with traffic numbers. We have seen in some markets already even a stabilization in traffic, but it was not a positive contribution from traffic that has improved driven our like for like improvement, even the acceleration.
And we looked at these numbers over a longer period of time. It's a structural change in the business. So when you compare to the peak when we where we stood a couple of years back, there's a permanent decline of probably 20% of traffic to our stores and it will not come back. So I'm already hinting a bit to your first part of your question, history will not repeat itself. We are now in a completely different industry setup than we were doing Bruno Zeltzer or Werner by the Sereny Times.
But I will answer this part of your question. So our aim is to via omni channel services, via providing services, be it customization with other information. So the interesting things that we test now with the HUGO pop up stores where we bring music, where we bring entertainment also into stores, I mean, you have seen this promise also from some multi brand environments. We need to give a reason beyond seeing the product to drive people to store, because a lot of the educational, the inspirational part is now happening in spread via Instagram, our own platforms. So this traffic to discover the collection will never come back.
And as the new generation of millennial customers will come there, the Haysh where how to discover brands and the shop will not come back. Your question on the midterm outlook is something that we haven't answered. The commitment in terms of where we want to take this company so far in terms of quantitative terms only answer to the degree that we are laser pointed or sharply pointed on driving sales densities, because we know that's the first and most important metric to maintain and to drive group profitability from an absolute and relative terms. That's why we highlighted this already so much as a key performance metric when we outlined the new strategy that it's ultimately all has to go through the filter, does this add to sales productivity in our own retail operation, it in terms of expansion, introducing services, everything they do with our collection, space allocation between brand lines, it's all determined by just one factor, is this contributing to sales densities. Euros 13,000 per square meter, as I said, there's ways to go.
We need to accelerate to the full year effect in 2017. As I said, we it was also a strong boost of morale internally that we delivered 7%. I mean, this was 5 years. You have to remember, that's almost like a very long period in the world of fashion that we were at these levels in a still difficult market environment, which gives us a lot of confidence that we have to maintain this momentum to the degree. Will every quarter deliver 7% or more?
Clearly not, and it's not needed to hit on the 13,000, but it demonstrates that a lot of things are in place. Now your question, it's an intelligent new way how you ask it, but it will be not more concrete in the answer. We just don't know how high is high. We know that 18% EBITDA margin is already a good metric in our industry. We know there are other apparel players that are higher.
Nobody is right now operating at the 25% that we some years back and I was part of the team thought was feasible. And I think it was you or some colleagues who said in 2013 where we improved 500 bps within 2 years isn't 25 even a modest target. Well, we learned our lessons. We are not at 22 or 23 anymore. We have worked very hard to maintain an 18% profitability over the last 2 years.
And as we indicated from our guidance and we have seen reaction today, this will be seen as some from some investors is in their disappointment. However, we would like to focus here. We are not managing this business for an exit end of 2018. We want to be here for the long term and we want to have a superior business model that outperforms our industries. We have clear indication that we are outperforming many of our peers now and taking market shares from the top line.
We have already a very strong operational if you look at our gross margin level, if you look at our cost efficiencies, that this is a business model that has nothing where you can point from the outside where you're excessive in Fashion A or B and C. But we need to maintain those momentum. We need to normalize, you are right, in our investment levels. So we have a strong focus to implement certain measures in 2018. And clearly, we are also depending on a normalization on the exchange rate.
I'm not saying that we expect this to if I'm better forecasting exchange rates, I should change my assignment. I just have to deal with that. But clearly, if this is back to a neutral level, we will see already progression in the structural profitability. It's something first we have to report back on the level of progress. We have a strong commitment from the full management team that it will be back to absolute structural growth as of 2019, but it will be not a revolution like with the 2 of us experience between 2011, 2013, where we've seen 200 bps improvement in such profitability.
These times are gone because it's a different market environment. There is no buy a super cheap franchise business to acquire from us like it was in China. There was not a huge gap of 30% or 40% sales densities. When we started our retail journey, we were at €6,000 and less per square meter. We almost doubled this value right now.
So take it now to a 13,000, which is a very high number compared to most of our peers, will require the best business system in the world. How this will ultimately translate and which EBIT or EBITDA margin we can't project at this point in time.
I think there was one remaining question in terms of the drivers of wholesale growth in 2018.
Yes. Well, I think Andreas also asked a question already on the U. S. Business. We see that in some accounts, it's not that the winner takes it all, but there are still strong and successful wholesale partners out there, not only online pure plays, but also the ones who are very good in combining these formats.
And we are highly committed to grow our business with these wholesale partners. We have been back more into the listening mode, I would say, than we were a couple of years back. So in terms of our collection offering, be it to the specific needs of the U. S. Market, Bernd, Hake and Ingo Bilts are now in a very close collaboration to ensure that our offering is the right to retake market share at important wholesale accounts, be it specific market requirements, be it specific price points.
So in these where we expect accounts to be successfully in business for the next 5 to 10 years, online pure play is leading platforms, of course, but also these partners, we are weathering the storm that's still raging in the U. S, we expect to be with these partners. So we are, for example, rebuilding strong year relationship with Nordstrom in the U. S. As a leading department store, but similar efforts are underway with leading partners in the Western Hemisphere as well.
At the end, my target and objective to Bernd is you have to take market share. You have to be stronger than Caddy Growth and all of our wholesale departments. And we have the collection that provides you facilities
this target.
Thank you. Mark Josenson at Equinet. I'd like to dig a bit deeper in terms of these investments in 2018 that will hold back profitability. As I see it, you've highlighted a number of areas. There is the investment in the gross profit.
There are P and L costs in IT. There are costs in extra service and elsewhere. Can you give us some feel for the relative importance of those different areas that are impacting this year? And which of those might fall away in 2019? And the second question I have relates to the balance sheet structure or you're practically at 0 debt now.
What is the current thinking on an optimal debt structure going forward, please?
Yes. I would take the first and then would ask Yves to take the second. So it's not this one silver bullet that you might look for. Okay, this specific project, maybe question was also okay, tell me when this project is completed and then okay, we're after it and then okay, please be so kind and give me the actual effect amount because and then plug it into my model and I know okay, at least x percent margin improvement will come from that. But there are some I think we highlighted them, but let me just quickly summarize them.
On the negative or the dilutive, I wouldn't say if you should avoid the term negative, but on the dilutive impact on the gross margin, I would highlight the quality investments that we have done across the board. And of course, our as I said earlier, we are committed to perhaps a superior business model and product to the customer. And honestly, what I see now in Q1 trading where the first casualwear collection is being received, A lot of wholesale customers have even called us and say, we said, well, I was so surprised what superior quality you offer at these prices. You will give a very hard time to competition XYZ. I said, well, that's a nice call.
Unfortunately, your order numbers is not as high as I initially hoped for. And you would say, well, my overall business is unfortunately flat. But I just wanted to call you to tell you, okay, this is a significant step up. And now you told us to expect that these 3 was green, was orange, was black should be 1. Now we see it in real time, in real that this is really a significant investment to it.
To a smaller scale, it's the HUGO European price alignment. Well, it's not beneficial to the German consumer, but for a French consumer, HUGO, as of springsummer 2018 has reflected 15% to 20% price reduction. So we are now very aggressively pursuing the contemporary market. I mean, we highlighted that to you as part of the new strategy that HUGO, all brands within the Eurozone are now in one price. We increased prices in Germany to bring the BOSS prices closer to the French level, but we decided deliberately to lower the sugar prices outside of Germany.
Now it's still not the most known brand in Paris yet because our network is not the same. But I can tell you with new focus on casual wear in HUGO, which was in France very much perceived as a suit brand, cheaper version of BOSS in a way, this is now creating a lot of buzz and excitement around it. So this investment into the gross margin, I think, will be embedded in the base as of 2019 and beyond. And this is probably in terms of size, in terms of impact, something that basically feeds itself because it then would grow on a superior value proposition. On the OpEx side, I think the most important one, as Jas mentioned, is not one specific IT project that we highlight, but the upgrade in the e commerce and the omni channel services is something that we expect to further normalize.
But it's not to the same degree that we say, okay, it's a one time and that's why we didn't quantify this next million investment in the OpEx that will be part of the base, what we expect to achieve what we call OpEx leverage as of 2019 and beyond. And clearly, that's part we do not know. It's not necessarily the U. S. Dollar.
As Yves explained to you, it's rather the fluctuation in the R and P and the U. K. Pound. At some time, we have to decide, okay, do we now have to increase prices again? That's what I would call the operational hedging again or to what degree are we still digesting these in our profitability.
But I would expect the negative impact that we have now we will experience for 2 years, 2017 2018 from exchange rate fluctuation will diminish in 2019 beyond. On average, it will be Don't give us credit when it's in help. I mean, that's also something that's why we are considering to guide you of what we already do to some degree on our earning development also ex currency, which is a bit more difficult to do than on the top line, but we think it's also fair not to basically pocket this improvement once fluctuation will work in our favor. On balance sheet?
On balance sheet, at the moment, we feel comfortable with our balance sheet structure. This is one big reason because the IFRS reporting will change with the beginning of January 2019, where we have to put onto the balance sheet all our lease obligations. So they will be on the passive side and the assets will be on the active side. So all the balance sheet will grow tremendously as a retailer, as you might know. If you look at the notes and if you see the lease obligations that we are having, we're talking about amount of $1,400,000,000 that we have in terms of lease obligations.
So we will have them in our books in the future due to the change big changes in IFRS statement and we call this actually adjusted leverage and the adjusted leverage at the moment is 1.3 if you consider this and we feel comfortable with this.
May I follow-up on the answer in terms of have you got an idea at this stage in terms of what the impact from IFRS 16 will have on your EBITDA for next year once it kicks in?
I won't give at the moment the exact figures because as you can see, we have to translate every Chinese rental contract. We have this finished in the middle of the year and then we will disclose once we have those figures. We have, of course, estimates, but I think every estimate I give now is wrong at the end. I just want to be more reliable at the end. Philipp
Frey, you had a question?
Yes. Philipp Frey, Bauburg. Just wanted to get a bit how far or how much of the impact of the collection changes you have actually already seen in the like for like acceleration we saw actually from Q2 last year. You mentioned, I think, something like 80 stores that already have at leisure in the collection offering. Can you just give us a number of how much this was at year end?
And what how well, would it be every store that will carry the offering in 2018? Just some idea on these changes. And then secondly, also, I think you mentioned something like space to be flattish in terms of sales impact with 30 store openings. So is it more like, well, 0 point something or 1% like we had last year? Or is it more that we at least something like 30 store closures still to come.
And then it looks a bit like maybe your mid single digit guidance for growth in retail that you've basically factored in something like 4% to 5% like for like growth, which is more or less the 9 month average that we had from Q2 to Q4. But it doesn't seem for me to imply any specific very positive reaction from the consumer to the improved quality. Would that be a fair assessment? And then an easy question, last one. If I get you right, you would say that the currencies have done recently the heavy lifting in terms of price adjustment that you currently wouldn't see any need to change your prices or particularly not lower them anywhere?
Yes. Just to start with the last one, we do consider in some markets still some technical price adjustment in the second half of twenty eighteen. So we are monitoring the price the fluctuation exchange rate very closely. But what is important that we do this now within the principles that we highlighted with you. So the maximum between high and low has to be within certain ranges.
It will not go back to price differences within the eurozone. So these principles we would adhere to. So it's more on a tactical level. That's something we do also on a regular basis to adjust for high inflation markets. And of course, if we see that, for example, the U.
S. Dollar to stay at $1.24 or higher, we would, of course, not miss on opportunities in certain product categories where we see a price increase opportunities in the U. S. So it's always a balance between maintaining the top line momentum and maximizing margins, but it's not the same structural fundamental changes that we discussed. On your first question, on the inclusion, we opted for the athleisure in the in particular in the second half of twenty seventeen for two reasons.
One is the there was the strongest underlying demand for these categories in the industry. So it's not Hugo Boss specific, but we were it was such an easy win, I must say, in hindsight, because these were categories we were anyway super strong in tend to use some more tech outerwear jackets, strong polos, chinos, but also the sneaker business for Dan Stilbos Green was extremely successful. In terms of price points, in terms of design and the twist was a technical component to it. So that's why we gave you these numbers and it clearly has helped us to end the performance. However, since it was not yet integrated in the BOSS overall design capsule, we could only do this in stores above a certain size.
Now with the new collection that is coming to our stores in 2018, not only from a labeling because it's now all with a black label in terms of quality, this was Mark's question earlier, with the quality investment that these are now on the same quality. Hours. But even if you know look well, you see the pictures here from our former Boss Black collection, but if we put pictures next to it from our springsummer 2018 casualwear or athleisure collection, it's the same setting, it's the same mood, it's the same color story. So what is happening as we speak and that's something you can now test increasingly also in smaller stores, a store even just with 120, 140 square meters is now capable to introduce or mix this casual wear, this as leisure or former BOSS offering in a much smarter way. In terms of price points, in terms of well, this is just selling better than something else, go for the winner, This is now gives our merchandising teams now far more capabilities to offer these opportunities.
And last but not least, you hinted to that, now that these overlaps, because they are now on the same price point, we are now also clearly looking into efficiencies into it. We say, okay, now that these overlaps as a collection become more visible because they know at the same price point, same messaging, we will also look quite aggressively into where can we take out economies of scale by consolidating these offers. It's not 3 brands anymore. It's 1. We have been cautious not to radically cut complexity.
I mean there were some investors suggesting this to us. That's why we have not Boss Orange and Boss Green. We have intelligently integrated that. It was the right move, if you might pointed out, to accelerate like for like development. Now, with new branding, we will bring it to much more stores, smaller stores.
We will not give you exact numbers because that's something we do rather than a tactical base. But when we report back on the Q1, you can be sure there is positive news from now the full integration of these brands in our retail space. Coming back to the most philosophical question, everything that we do, I repeat myself, has one purpose, drive sales densities. And as we see that in certain stores, a higher share of casual wear will drive sales densities, you know there will be no opposition to do that.
Are there any more questions from those who had not a chance to ask a
question before? Peter Steiner, please.
Peter Steiner, Bankhaus Lampe. Well, one typical question that's not been raised so far is on current trading. Actually, what have you seen in the 1st couple of weeks in the year? Zalando last week was a little bit cautious in their comments with regard to the current trading. What's the state of the fashion consumer at the moment?
What are you observing Maybe also split a little bit between the certain markets you're active in as you're a little bit more global? The second question would be to the new CFO, Mr. Muller. On one of your slides, you also mentioned that efficiency improvements, one puzzle piece for further profitable growth. Are there any certain projects you would have in mind with other listed companies in our sector?
There are some I don't think it's very common to have some kind of efficiency programs like trade services or something like that. Is there anything that would be in your expertise or from your past you see that would be something else for Hugo Boss? I know it's not easy to answer having the CFO sitting quite next to you, the former CFO. But maybe there is something you already see that could be also interesting for you, Gogorbaas to drive profitability going further. Thank you.
Well, you get a candid answer from Ife, I'm sure. But let me just answer on current trading. As always, the quarter is not over until it's finished. So there's still important weeks of trading ahead of us. But we have passed the halftime bell.
So there's just 3 weeks now ahead of us until the end of March. So what we are quite pleased with the momentum we have seen. So we were very confident with what we have seen with the improvement that I think it was Luca's question earlier, pick up which was so important to me in full price business. So that's something which I still see as a brand's health indicator that this momentum continues. And of course, there are sometimes repercussions.
I'm not sure how closely you follow us. We have continued to shorten our sales period again in the Q1. And of course, if you then look at on a weekly trading, you will say, oh, that looks a bit reddish. But then you have to go into it and say, well, last year, we were still on sale. Come on, nothing in life is for free.
If you want to execute, like we described also in our margin progression, that we will continue to shorten. We have a clean inventory situation. I mean, 18.6% is almost we have to maintain that, of course, but this is now a super clean inventory situation that we have. We are not forced to be extensive in our sales. Of course, that has some impact, especially in also in e commerce where people clearly react to sales incentives even stronger than it's in the physical retail.
But nevertheless, we know that the underlying momentum continues to be strong. So today, early March 2018, it's difficult to predict full year like for like guidance. I mean, this was your question. But it's better to have a +7 in Q4 last year and not Q2 where it then has dropped. Whether we can repeat and keep some momentum throughout the year, it's too early to tell.
We need to be realistic. In the end, we have to look at the underlying market. If the underlying market in our category is growing at 2% to 3% and we are the market leader, guys, we need to be realistic to what degree we can outperform that. Where we see winning formulas, we will reapply them. So in short, we are very pleased with the development of 1st weeks, but we are still cautious to read even a full quarter or full year estimation from that.
So we've continued to be very comfortable with the implicit like for like guidance of the top line growth we have seen for the year.
So coming back to your question, first of all, thank you very much. To start answering this, I think first of all, it's crucial to point out that the cost program that has been initiated in 2016 has been very effective and very good and we're on right on track, especially touching the right issues. Secondly, I think I was hired and I'm here and I stand and I'm committed for efficiency improvements. And I will go for this. And I think the retail experience I have, I will, of course, challenge and try to contribute best to have efficiency improvements.
Like to be honest, in the first 100 days, I see a lot of things and I have a lot of ideas, but I think right now it's too early to call and to give you a kind of what we are really doing in specific, but you can rely on me that we will have efficiency improvements in due course. And I think it's because if you look at the year 2018, it will be a year of investment as well. And as the CFO, I think my And I And I think this will be the efficiency driver that I will be seeing.
One last question, Volker, please.
Yes. I would like to have a follow-up, Volker Bossel Baader Bank. On your visibility, looking deeper into fiscal year 2018, so speaking about preorder situation, I know you do not give the exact figures anymore, but to give it to get at least a kind of sense, how does formal wear stands versus casual wear, for example, or HUGO versus HUGO BOSS to get at least a feeling what we talk about? Thanks.
So we have increased our wholesale guidance for the year 2018 relative to 2017. And this is based on the visibility we have in terms of preorders. Not all preorders are done yet, but you're right, the heavy lifting is done for winter is in our books and we were pleased with the feedback. And this reflects also what we mentioned earlier that the changes to our offering quality investments, focus on price points and I would say being customer focused again on specific demands in certain markets without going excessive on complexity is seen and recognized by our wholesale partners. Many of or some of them are still in rough waters.
They say, well, sorry guys, but men's wear is a category that has been flattish or negative. So yes, you have a higher share of mine buy, but this might be still in a single account base be a flat development. That's okay. But I said this is my yardstick to measure the performance of our wholesale team, are you taking market share without doing funny things? So no return agreements, no margin agreements.
We want to win clean in terms of market share. And this is happening. And yes, we are benefiting clearly with Ingo's strong focus now on the smart casualwear element that our commitment, our competencies have been now demonstrated with 3 menswear shows, something we didn't do for almost 3 years, which we could pause on it. Now this is now clearly being recognized by fashion editors, by buyers that they see, well, there's not only a new sheriff in town, but somebody who plays a strong focus in particularly on the fusion, what we call sports tailoring between our tailoring competencies when it comes to casualwear opportunities. This fusion will be the sweet spot from my perspective where we basically can take market share from casualwear pure plays and boring suit only companies.
This is where we will have a strong hold on the menswear market and this is also what I see in the numbers that we see with a lot of innovative products, be it the washable suit, it's the garment dyed suit, it's the capsules that we have done now on the sporting side. So we have World Cup coming up, the outfits that we have provided with the Madrid Bayern Munchen, the German football squad with the World Cup coming up. Of course, these are super strong stories to tell, which resonates and benefits also our wholesale business. So it will be like overall a gradual acceleration in sales momentum in wholesale, but most
mainly by casual wear.
Yes.
The
formal wear, casual wear, formal wear flat, casualwear
up? Relatively better. So as always, we give you just relative data. So the HUGO Casualwear is extremely positive, but it's
HUGO Casualwear
is probably the strongest momentum, which just demonstrates that we see a strong reaction to the in this avant garde sub segment, which is growing stronger than the overall apparel segment. So it was just demonstrated our decision to give stronger focus on HUGO is right. On the other hand, we will clean up some of the HUGO distribution on the former where this is maybe back to Marc's question earlier, this is a temporary impact that will dampen HUGO in the course of 2018 because there will be some discontinuation of certain businesses on the HUGO side. But on the ones that we see as long term growth drivers, HUGO's casualwear offering at far more attractive price points, the sophisticated BOSS sportswear offering coming from all the integration of the wearing occasion are proving themselves to be sustainable growth factors. Now women's wear has to go to the next stage.
Women's wear, as I said, has suffered slightly from the reallocation of spaces, not dramatically, but it's a healthy internal competition. So if we wear misswear with now, the we don't have the but look at the first page of your presentation, It's a joint battle. It's the combination in our strength in wandswear and womenswear that we are committed to. The womenswear on the midterm, I expect also return to growth. It might be a bit more muted in 2018 relative to menswear.
But again, maybe we will be positively surprised here as well. I think final words. I would like to thank you for paying us the honor to visit us here on-site. But I also want to thank those of you who followed us on the webcast or over the phone. Thanks for your interest in HUGO BOSS, and we're looking forward to see you again in our next reporting or one other capital markets activities that we have joined in the future.
Thank you very