Good day, and welcome to the Hugo Boss first quarter results 2017 conference call. This call is being recorded. At this time, I would like to turn the conference over to Mr. Mark Langer, CEO. Please go ahead, sir.
Thank you very much. Good afternoon, ladies and gentlemen. Welcome to the presentation of our first quarter results 2017. Hugo Boss had a solid start to 2017. In a volatile, in many parts of the world, still declining market environment in premium and luxury apparel, we held up well. I'm particularly pleased with our performance in core markets such as the U.K. and China. Our growth in Germany demonstrates the strength of the brand on its home turf, despite the price increase implemented last year. While we continue to have work to do, we also make good progress in restructuring our U.S. business. Overall, group sales increased by 1% in currency adjusted and in euro terms, reaching EUR 651 million in the first quarter of 2017. By region, sales in Europe increased 3%.
Supported by a slightly different timing of deliveries compared to the prior year, the wholesale business contributed high single-digit growth, while own retail sales in the region remained stable. The U.K. continued to outperform and grew by 7% in currency-adjusted terms. Sales in Germany were up slightly, reflecting positive momentum in wholesale in particular. In own retail, a weaker performance in the outlet channels more than offset good performance in our full price stores, where conversion rate improvements and an increase of average transaction sizes contributed to growth. In the other larger markets, France and the Benelux, sales were down as a result of a weak start into the year, which was not fully offset by an improvement thereafter. Robust demand from tourists, in particular from Chinese and Russian nationals, contributed to growth in the region. Nonetheless, our European business continues to be driven by domestic customers first and foremost.
This group accounts for more than 80% of own retail sales in the region. Sales in the Americas were depressed by ongoing declines in the U.S. In the overall region, as well as the single market, revenues declined 7% in currency-adjusted terms. Nonetheless, performance in the U.S. improved sequentially versus 2016 levels, as we limited the declines in both wholesale and own retail. Sales in the wholesale channel were down in line with our full year guidance of low teens decrease, still affected by the discontinuation of off-price business we initiated in mid-2016. Retail sales were down mid-single digit. While our mainline stores continued to suffer from significant declines in customer traffic, performance has stabilized in the outlet channel. This reflects better execution, as well as the limitation of off-price business in the wholesale channel. The latter has clearly started benefiting customer footfall in our own outlets.
In Asia, overall sales were up 1% in currency-adjusted terms. Disproportionate growth in mainland China was partly diluted by declines in Japan, Australia, and some of the region's smaller markets. Comp store sales in mainland China were up at a double-digit rate also in the first quarter of 2017, although we have now started lapping the significant price reduction introduced with the launch of the spring 2016 collection earlier last year. A better conversion rate and a strong unit growth drove the increase. This reflects the brand's improved value proposition, effective marketing, and better consumer confidence following at least two years of significant declines in the local premium and luxury apparel market. China's overall sales growth of 3% fell short of this comp store performance because of ongoing weakness in Hong Kong and Macau and store closures in the prior year.
By distribution channel, own retail sales remained stable in the local currency terms. On a comparable store basis, business was down 3%. After a slow start to the year, performance improved noticeably towards the end of the period, particularly in Europe. Customer traffic declines dragged down performance over the entire period. All other metrics improved. By region, comp store sales in Europe declined in line with the overall group. The Americas recorded a mid-single digit decline. The Asian business was flat from this perspective. Despite the moderation of store expansion, around a fourth of the group's own retail sales are not like-for-like yet. This has to do with openings and takeovers in 2016 and the first three months of 2017, but also with larger renovations during which stores are taken out of the comp store base.
In sum, the non-like-for-like component of retail sales made a low single-digit contribution to retail sales in the first quarter, completely offsetting the comp store sales decline. We do expect a similarly positive contribution also in the full year, although the size of our retail network will remain largely unchanged. In the first quarter, we opened five new stores, three of them in the Korean market. In Europe, our new store in the GUM Shopping Gallery in Moscow was the highlight opening of the quarter. Following the takeoff of our franchise store in 2016, we now move to a new 400 sq m location. Net of closures, the number of freestanding stores declined by six locations. This means that we have now closed five of the around 20 loss-making stores we intend to shut down by the end of 2017.
An increase in the number of shop-in-shops, predominantly related to a takeover in Canada, more than offset the decline of freestanding stores, the group's overall store count remained virtually unchanged. By retail channel, the outlet business delivered the best performance. As mentioned earlier, this was largely due to the Americas, where channel sales benefited from high price sensitivity among consumers market-wide, as well as the restructuring of our wholesale distribution. In the two other regions, retail performance was very consistent across the different formats, with just one exception: online. Our e-commerce business was down 27% in the first quarter, suffering from a double-digit decline of site visitors, as well as from a deterioration of conversion rates, in particular in the all-important season end sales period in January.
This performance underlines very clearly that the focus we placed on insourcing key digital activities in 2016 has come at the expense of short-term operational performance. While it was right, and for the group's long-term benefit, to take full control of online fulfillment in Europe and to rebuild customer relationship management in-house, we are challenged to improve e-commerce sales performance as quickly as possible. For this purpose, we formed a cross-functional task force in January. Since then, we have made good progress in addressing some of the key issues across the sales funnel. First, we have started optimizing the hugoboss.com website to improve its ranking in relevant keyword searches, reacting to some significant changes implemented last year in the way search engines determine the order of results.
Second, given our progress in rebuilding customer relationship management in-house, we are increasingly better positioned to capture more customer data online as well as in our stores, so that we can reach out to consumers in a more personalized way. A campaign to reactivate existing customers in February and March yielded some very positive results already. Third, all development work now adheres to the principle of mobile first, replacing our former focus on desktop and tablet, whose share of traffic has declined. Fourth, we have significantly shortened load times so that site performance is in line with peers again since the end of March. Fifth, we have started working on design, content, and usability to improve user experience and the site's commercial performance, leading to a stabilization of conversion rates towards the end of the period.
Finally, a clear focus on best-selling items will mean that the offering will lean much more towards commercially important entry and medium price points again, leading to a leaner but deeper assortment with the launch of the Fall 2017 collection in August. As a result of these measures, performance has started to improve towards the end of the first quarter. We are hence confident to return to growth in our online business in the remainder of the year. In the second quarter already, we expect performance to be visibly better compared to the first quarter levels. Returning to my analysis of first quarter sales performance, wholesale sales were up 2% in currency adjusted terms. This performance was better than what we expected for the full year due to some delivery shifts in our European wholesale business.
This shift supported first quarter sales at the expense of the fourth quarter last year, as well as the second quarter this year. However, also excluding this effect, the European business continues to trend clearly better than our wholesale operation in the U.S., where weak underlying demand is expected to weigh on sales throughout 2017, although the pressure from the restructuring of distribution in 2016 will fade gradually. Finally, the license business was up solidly as a result of good growth in the fragrance business, which continues to benefit from the takeover by Coty in 2016. Performance was driven by BOSS The Scent and the successful launch of BOSS Bottled Tonic, another extension to the BOSS Bottled family of brands introduced in early 2017. The total BOSS business, of which fragrances are obviously just a small part, declined 1%.
This includes the BOSS Green and BOSS Orange lines, which will be integrated into the BOSS brand going forward. The former recorded strong double-digit growth across all major product groups, reflecting healthy consumer demand in athleisure. Sales of the BOSS core brand, however, suffered from a more restrictive distribution in the wholesale channel. Sales of the HUGO brand were up 16%, driven by space gains in wholesale as well as increases in own retail. This performance is a further sign of the growth potential the brand has in the contemporary fashion segment. This is true for menswear and womenswear alike. In the first quarter, a double-digit increase of HUGO sales drove 2% growth in our overall womenswear business. Hence developed slightly better than menswear. The latter was up 1%. Let me now go through our quarterly results in more detail.
Gross margin was up 30 basis points year-over-year and reached 64.4%. Margin benefited from a significant decline of rebates in Asia, where the adjustment of selling prices last year led to a strong improvement of full price sales through rates. In the other regions, rebate levels remained virtually unchanged. Currency effects in relation to the devaluation of the British pound, and to a lesser extent, the negative channel mix effect in the quarter, offset some of the gains. Pricing had a neutral impact on gross margin. Note that we did not implement any further price adjustments in the last three months and do not anticipate any major changes also in the remainder of 2017. Operating expenses were almost stable. This still reflects the cost savings we generated in the later stages of 2016, in particular, with regard to the renegotiation of store rental contracts.
In addition, store closures had a first positive effect. As a result, we were able to at least limit the deleverage effect from the negative comp store sales performance in the period. In addition, this year's different phasing of marketing expenditures limited cost growth. While marketing expenses remained virtually unchanged in the first quarter, we will intensify brand communication around the launch of the new BOSS and HUGO collection later in the year. As a result, EBITDA before special items increased 4% to reach EUR 97 million in the quarter. In the absence of special items, and supported by lower financial expenses, net income was up almost 25%. By region, profitability in Europe improved due to the positive sales trend and tight cost management. The Americas suffered from a significant drop in margin owing to the operating deleverage from the negative sales trend, as well as some negative inventory valuation effects.
In contrast, the AS margin recovered well from prior years declines, improving by almost 700 basis points in the quarter. This was due to sales growth, the aforementioned reduction of rebate levels, as well as the non-recurrence of inventory impairment charges in the prior year. Turning to the balance sheet. Trade network and capital was down 1% in currency adjusted terms. A 4% inventory decline was the main driver behind the improvement. Inventories decreased in all three regions, with the most pronounced reduction in the Americas and Asia. Relative to sales in the last 12 months, trade network and capital continues to be up slightly. Investments were below prior year's level, solely due to a different phasing of retail openings and renovations compared to the prior year. Coupled with higher profits and a lower working capital cash outflow, this had free cash flow turn positive again in the first quarter.
Nonetheless, net debt was up slightly at quarter end. Ladies and gentlemen, our results in the first quarter, our performance since the end of the period, as well as the measures we will implement in the further course of the year, make us confident that 2017 will indeed be a year of stabilization, in line with the plan to return to profitable growth we outlined at the end of last year. We are reconfirming our financial outlook today. We expect group sales to remain largely stable in 2017, with a growth in own retail compensating for a low to mid single digit sales decline in the wholesale business. On a comparable store basis, we forecast retail sales will perform within a range of -3% to +3%. By region, Asia should perform somewhat better, the Americas somewhat weaker than the overall group.
Overall sales in Europe are expected to remain more or less flat on the prior year. The group gross margin should improve due to positive channel mix effects and the non-recurrence of prior year inventory write-downs. However, negative currency effects, mainly associated with the devaluation of the British pound, will curb the margin's rise. Lastly, depending on the sales performance on retail, EBITDA before special items is also expected to perform within the range of -3% to +3%. As we highlighted in March already, this forecast factors in contingency plans for further cost savings should retail sales remain under pressure for longer than we are currently expecting. Excluded even from these contingency plans, however, is our commitment to drive the transformation to a strictly customer-centric business model and the repositioning of our brands, which we will support with a slight increase in marketing expenses compared to sales.
Net income is expected to increase at a double-digit percentage rate, supported by the non-recurrence of cost incurred in the connection with the aforementioned store closures. Finally, we forecast investments and free cash flow in line with the prior year level. With regard to the latter, the expected profit increase will be offset by cash outflows related to the remaining store closures, the cost of which we booked in 2016 already. In the next few months, we will reach important milestones in the implementation of the strategic changes presented a few months ago. In just a few weeks from now, we will present the new HUGO Spring Summer 2018 collection at Pitti Uomo. With the combined men's and women's wear fashion show, we will showcase the future creative direction of HUGO to the global fashion community gathering in Florence.
A few weeks later, BOSS will be back to New York with a men's wear fashion show, introducing the new brand strategy to relevant buyers and the press. The Spring/Summer 2018 collection on stage will be the first reflecting the integration of BOSS Green and BOSS Orange in the BOSS core brand. We will present this collection to the trade over summer. Keep in mind, though, that it will only hit the stores at the beginning of 2018. The collection before, Fall/Winter 2017, will still be based on the old brand logic. Nonetheless, it already features some elements of the new strategy. In particular, we have strengthened the casual wear offering. In addition, we've aligned the different brand lines more closely so that the overall collection statement is far more consistent across business, casual, and athleisure than in previous seasons.
The launch of the fall collection will also mark some changes in the merchandising of our stores. Specifically, we will be expanding the in-store offering at entry price points to stipulate traffic and conversions. This goes hand in hand with the reintroduction of BOSS Green in more stores, considering the brand's strong performance as well as general trends in the markets towards more relaxed, casual, and even athletic-inspired dress codes. Ladies and gentlemen, we have exciting months ahead of us. 2017 will be a year of implementation. We will lay the foundation for bringing Hugo Boss back to profitable and sustainable growth. The feedback from retail partners and customers makes me confident that we are on the right track. I look forward to meeting you here in Metzingen at our Investor Day in August, so you can touch and feel for yourself what today may still be difficult to grasp.
In the meantime, let me answer your question on today's set of results. Thank you very much.
Thank you, Mr. Langer. Ladies and gentlemen, if you'd like to ask a question today, please press star one on your telephone keypad. If you do find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. And our first question today comes from Susanna Putz from Berenberg. Please go ahead. Your line is open now.
Good afternoon. I have just three questions. First of all, on the wholesale business. So I understand that the different timing of the deliveries supported your performance in Europe in Q1. I was just wondering, would you be able to quantify that? What was the impact? Was it low double-digit million EUR? Just any estimate around that would be very helpful. Secondly, on the gross margin. So the 30 basis point gross margin improvement year-on-year, it seemed a bit light given the non-recurrence of the inventory write-down from Q1 2016. So I was just wondering, would you be able to walk us through the actual gross margin drivers, including any negative effects, the channel mix, and any underlying improvement you may have seen from a reduced discounting? And just also, a follow-up question on gross margin.
It seems like you also recorded another inventory write-down in the U.S., which I guess wasn't really expected. Can you explain that? What was the decision? Why the decision right now? Could it mean that also for the full year, you will see less of an improvement in the gross margin than initially expected? Thank you.
Thanks, Susanna. I think we highlighted in the report and also in the call that we benefited on a quarterly base from delivery shifts. Which by the way, was not managed by us in a way, but it was the consequence of the buying behavior of our wholesale customers, who just put a larger preference on the theme 2 and theme 3 in our deliveries, at the expense of the theme 1. Overall, what we did is a calculation. Without these effects, wholesale sales would have declined to low to mid-single-digit, in the first quarter. Also in line what I mentioned earlier with our full year guidance.
Please keep in mind that at the time when we guided you on our wholesale development in 2017, we had full visibility on the order book. It shouldn't come as a surprise that we factored this in. We expect, as I said earlier, still our wholesale business for the full year to perform at these rates. Coming back to your question on gross margin impact. Of course, there's a bundle of effects. I think you mentioned them all correctly. Typically, we benefit from channel mix in our business development over the last year. Given the momentum we just discussed, channel mix even was a slight drag on gross margin development, given that we just book higher gross margin in the retail business relative to the wholesale business. Exchange rates have played a role.
I think I mentioned also the British pound, which had a negative impact on gross margin. Which was positive was clearly rebates, even stronger than we expected. I think I mentioned Asia as part of this speech. Also in other parts of our business, we have seen expected positive development from managing rebates tighter than the previous year. Inventory was. I think this relates also to your third question. We expected a smaller reoccurrence of inventory write-downs in 2017 compared to 2016. There was a non-reoccurrence of inventory in Asia, helping also to improve our Asian profitability significantly. But we also had almost to the same level inventory write-downs in the U.S., which offsets the positive impact from Asia. Overall, what I think a 40 basis improvement in the quarter. We still expect, as I said, an improvement for the gross margin.
From today's perspective, we see no reason to revise our gross margin guidance for the full year.
Okay, perfect. Thank you very much.
Thanks, Susanna, for calling in.
Thank you. Our next question comes from Fred Speirs from UBS. Please go ahead, sir.
Hi, Mark. I've got three questions, please. The first one was on like-for-like. I saw some Reuters headlines this morning quoting you saying that Q2 so far has seen a significant improvement in the in-stores trend. I just wondered if you could share which regions are the main drivers behind that sequential improvement, and does that mean you're positive like-for-like in Q2 to date? Also, just on the thinking about the Q1 print, does that change how you're thinking about the likelihood of reaching the high end of your full-year like-for-like guidance range? Second question was on online. We've seen marketing broadly stable overall in Q1, but there's a shift back towards menswear within this. Could you give us a sense of how much online marketing spend behind menswear is up year-on-year? Is this going to be a bigger sequential support as we move through the year?
Lastly, on wholesale, you mentioned what the underlying piece was in Q1. I just wondered if we think about Q2, should we be thinking Q2 down maybe a high single digit? Is there anything else we should be taking into account for Q2? Thank you.
Okay. Just to put everybody on the same page, we have not given a guidance on like-for-like on the second quarter, which it's too early to tell, and we would be not commenting on or giving any guidance on a quarterly basis. We come back to this principle also when to answer your question on the wholesale development in the second quarter. However, it's true that what I think I mentioned that we see the measures that the task force has identified and implemented in the first quarter is first and foremost benefiting also our e-commerce business, which was clearly very disappointing in our sales period in January. During our regular sales, so spring/summer, which we are still selling, of course, at full price. We've seen that the merchandising is improving, that loading times are better, and that conversion rates improved sequentially during the period.
Also this CRM, which has been many parts a drag to our business in the past, we have seen now, admittedly on a relatively short period yet, February, March, but that our CRM measures are really now activating customers to bring to our side and improving our conversion rate. We have seen a sequential improvement. It's too early to give any commitment or guidance on our e-commerce business for the second quarter. What we feel very comfortable with, but I think this is almost a must, that the second quarter will improve significantly better than what we recorded in the first quarter. Overall, as we said, we do expect a return to positive like-for-like in the e-commerce business for the full-year.
Marketing spendings have been reallocated according to what we outlined and explained to you at the last Investor Day and what we reiterated at the analyst conference. We are now, in the majority, more focused on menswear than we were 12 months ago. That's correct. But keep in mind that still in our specific, especially print and online advertising, womenswear continues to benefit in the order of magnitude around 30%, so significantly to a larger degree than the underlying size of the business. This is true across all marketing means, be it our print or digital advertising.
On the wholesale, as you have seen, due to order intakes, we caution you always not to get too excited on above-trend development like we have now in the first quarter, and not to announce the end of to the Hugo Boss wholesale world if there's a quarter which is below what the company guides on a 12-month forecast. You're right to assume that in the remainder of the year, we see a moderation in the wholesale development to bring the development in sync with our overall expectations for the full year. We outperformed in the first quarter due to the factors that also Susanna asked about, we expect, of course, that the remaining nine months will rather be dilutive, that we expect to deliver at the full year guidance in our wholesale business, as I just explained.
Okay, thanks, Mark.
Thanks, Fred.
Thank you. Our next question comes from John Guy from MainFirst. Please go ahead. Your line is open, sir.
Thanks very much. Good afternoon, Mark. Thanks for taking my questions. Maybe just following on with staying with online, could you comment a little bit more around the exit rate? I understand that January was significantly worse than the 27% decline you had for the quarter. Appreciate that the task force has come in and made some changes. What was the exit rate basically in March? Could you also comment around the store closures? You mentioned that for the underperforming stores, you have now closed around five out of the roughly 20 stores that you are going to close. Is that going to be an even closure process over the course of the year? If you could also just touch upon France and Benelux. I think the comp bases were reasonably soft for both of those two regions, so I am trying to understand why they were pretty weak in Europe.
You did mention that there was a better exit rate, maybe you could just give us a little bit more flesh on that. Finally, on pricing initiatives, you mentioned that there were no pricing adjustments due for 2017. Although I think for January 2018, you are potentially looking at 10%-15% price rises in Germany and a 15% price cut in China. Appreciate it is a slightly longer way off, how should we think about your budgets for Europe and Asia and growth expectations on the back of those price amendments? Thanks very much.
Thanks, John. Let me go through the list. As I said, we have seen a measurable sequential improvement, keep in mind the online business in the course of the first quarter. We finished the single month March in positive territory, which I have seen as a very promising sign. That is that March and April are the two months where we have virtually no rebates offered. These are the cleanest months. February still has the impact from the later stages of our clearance sale. This gives me some confidence that the measures that we have implemented are effective. As we said, this is due to better conversion rates and also better activation. Clearly this is not yet enough to compensate. You have seen the year-to-date numbers to the very weak start we had, in particular in January.
I would also caution ourselves and also you from the market side, to take already one month of trading and also the positive, I think there was a question asked from Fred earlier that I tried to avoid, that we have seen a positive start into the second quarter of the year 2017. Decisive will be again the period June, July, in particular in the online, where we know that consumers are particularly receptive to an intelligent but wide enough offer, during the sales period. Take it as a sign of confidence that there are two things in place at Hugo Boss. We know where we fell short and what are the areas to improve, and that we have taken decisive measures, which at least on a quarterly basis, have seen a quite significant improvement.
I would wait for the second of our half-year results to see how sustainable and sufficient these measures are. Clearly, not all of them are implemented. There are still a list of autumn items where we need to get better. I am pleased giving against the backdrop of the difficult start, that we are heading the right direction. Loss-making stores, it is not significant, but yes, these five, which were part of the base the last year and which we did not have in operation in the first quarter, had a small but measurable positive impact on retail profitability. Remember that we guided you on a full-year basis at all 20 stores at about a 70 basis points dilutive impact on group profitability. This is at least partially benefiting. We have not negotiated the exit on all of them.
Still on some we are in the negotiation on the exact exit terms and timing. We are confident, as we said, that the vast majority of these stores will be excluded from our store base by the end of 2017. The full year effect of the benefits of closing these loss makers will be visible in the 2018 numbers. France and Benelux, we are not at the level as we said. Rather, flat to slightly declining compared to these powerhouse, which is the U.K. and to a lesser degree, the German market. In particular the Benelux market, we also have the impact from some distribution cleanups where we discontinued a set of concession operations, and a factor that we mentioned in previous calls already.
All others, it was just a weaker market environment, probably affected also by macroeconomic factors, which have made these markets not dramatically, but comparable weaker than the two core markets, Germany and the British market. Pricing. Yes, that is correct. With the spring-summer 2018 collection, we will implement the principle, same product, same price within the eurozone, which has the effect of price increases or discontinuation of certain price points in Germany. Be it a suit, be it jeans, be it outerwear jacket, same product, same price across all the eurozone. Keep in mind that this implies also price reduction, for example, in the Swiss market, relative to the other European markets. We have not committed on spring-summer as the implementation date for further price harmonization in Asia. As we mentioned already at the analyst conference, we are very pleased with the strong like-for-like improvement in mainland China.
We think that the weakness which is coming from Hong Kong and Macau is to a lesser degree, driven by price discrepancy within the regions or Europe, but has more to do with domestic effects, in particular in Hong Kong. We'll probably use the Investor Day in August to give you more details in light on the amount and timing on the price adjustment in Asia. It has not been announced that we have a X% price adjustment in Asia Pacific with the spring-summer deliveries. This is only true for the price adjustments in Europe.
Many thanks, Mark.
Thanks, John, for dialing in.
Thank you. Again, ladies and gentlemen, please press star one to ask a question. Our next question comes from Thomas Chauvet from Citi. Please go ahead. Your line is open.
Good afternoon, Mark. I have three questions, please. The first one on the slides about the Americas, you're saying that the discontinuation of the off-price business in wholesale has started supporting sales in your own retail network. What do you mean by that? Do you mean LFL in the U.S. are less negative as a result of that? On the off-price business, are you still on track to reduce the exposure to that business from 20% of wholesale sales to single-digit %, in 2017, as you highlighted at the Investor Day? I'm talking about the U.S. business. Secondly, on HUGO, what was the growth of HUGO in retail, in the period and in wholesale excluding, obviously it looks like a big timing shift.
Given you haven't got the new HUGO collection yet, would you say that the performance is a reflection of the good momentum of the broader contemporary segment or, the results of some of your specific action you've done on assortment on communication? Do you feel more broadly that the organization is ready and very clear on how to succeed with the Spring/Summer 2018 relaunch of HUGO, in that segment? Finally, as we are all seeing the luxury demand recovering strongly in most markets, particularly Europe and Greater China, are you seeing the share of luxury, versus entry-level price points perhaps increasing in the period? Have you still the same view that Hugo Boss should be staying away from that segment? Thank you.
Well, thank you, Thomas. Let me go through the question in the order you asked us. What we do see is that the discontinuation of there were no volumes available anymore since summer of Hugo Boss merchandise in this multi-brand off-price format. These price-sensitive bargain hunter consumers have turned to a significantly larger degree to our factory outlets. Of course, I wished they would come to our full-price stores, but at least on an incremental base, we think it's a positive sign already to our business that where we are in control, where we tend to have also better merchandising execution, ultimately also better brand experience and strengthening our brand equity, that these price-sensitive customers will have now shifted to our own controlled mono-brand off-price formats.
We are well on track to achieve the target that you reiterated, that we will reduce our share of off-price wholesale to less than 10% coming from peaks clearly above 20. As we explained, just to make this clear to everybody, our relationship with Nordstrom and other majors which are also operating off-price formats on their own will limit our ability to bring this down to zero. It's a clearly and strong improvement which has started to benefit our factory outlet operation in the U.S. The HUGO development in the first quarter, you're completely right, also benefited from the delivery shifts. There's one element to it. Keep in mind that the share between wholesale and retail between these two brands is actually slightly higher, with HUGO compared to BOSS. It was also driven by a better performance in our HUGO business and on retail.
Ask for your understanding that we don't break it down by brand line, what are the like-for-like development. It was also due to the fact that the HUGO collection in the HUGO only or if you know in Champs-Élysées and others where we or Sloane Square, where we offer HUGO and BOSS in our larger stores, have performed also very positively, underlying that there are two important market segments which are benefiting right now from changing consumer preference. One is the athleisure segment, the other one is the contemporary avant-garde segment in the HUGO, with both brand lines and genders, menswear and womenswear has benefited from that. It's an interesting point in the light also the very strong results we are seeing from Kering other more luxury pure plays that, in some markets there is a reoccurring demand, at least for some brands, also on luxury price points.
We haven't seen a major discrepancy across our price points. Keep in mind that our new strategy does not include that we discontinue our BOSS Tailored, so the upper end of our collection. However, what gives us some confidence that, and we will strengthen this push even in the second half of the year, there's a huge untapped opportunity that we walked away for the last two years on the entry price point that we want to recapture more on the entry price side of our pyramid, independent whether there's a pickup also on the luxury end to it. Our core is premium. It's not luxury, as we confirmed to that. So at the upper end of our offering, we will still be present, but this will not be decisive for return to profitable growth.
This will be decisive more on the harmonized premium entry price points of our offering.
Thank you, Mark.
Thanks, Thomas.
Thank you. Our next question today comes from Antoine Belge from HSBC. Please go ahead.
Hi, it's Antoine Belge at HSBC. Three question if I may. Regarding the German market, can you maybe give your own feeling about how things are developing, but also compared to maybe five months ago at Investor Day, especially discussing with your partners, et cetera, how you feel the German market for this year and also as we move towards that season where the price will be aligned. Second question relates to cost savings. Q1 was still impacted by some of the measures which really started to kick in more in Q2 last year. I think in the previous conference call, you highlighted that you could find more cost savings. How should we think about the rate of growth for OpEx for the three remaining quarters? And finally, in terms of management, have there been any sort of new hirings and how could things evolve on that front?
Thank you.
Yeah. Let me start with the German market. I think that's now the second quarter where we had a positive, if not surprised, development in Germany. You remember there was a lot of, I wouldn't call it criticism or nervousness on the capital market and after our Q3 numbers 2016, which were down 10%, that the price adjustment was not accepted by the end consumer, maybe our wholesale customers. Since then we have now delivered two quarters where we were slightly ahead of the overall market segment, which also gives me and, but as a whole Hugo Boss team, a lot of confidence that we have a superior, good value for money product offering to our German consumers.
We treat this ground very carefully and, as I answered to John's question earlier, we have now used the last five months also to clearly look at all elements of our collection in terms of value for money. That with the offering or the presentation of our spring/summer collection 2018, we first and foremost have a convincing story through our partners on the German wholesale side and our own merchandising function that with the improved value for money, width, and quality on the enterprise point, that the overall composition, which is then a EUR-priced collection, is sufficiently attractive in design language, but also in value for money for the consumer. Feedback has been very positive. Admittedly, this is still more conceptually being presented in terms of fabrics, concept stories, because this collection is still in the making.
What we have in our showrooms right now is the so-called pre-spring collection, which is already much closer to the new harmonized collection that we present in July. Overall, I would say, in a nutshell, to answer your question, I've seen increased confidence from our wholesale partners and within the Hugo Boss organization that this is something that will be received positively, ultimately from the end consumer. Clearly we are in for a moment of truth, but you can be sure that in terms of willingness to invest into the product, listen to demand from the market, in terms of which price point to start, we'll do whatever we can to defend our market-leading position. One principle will be adhered to without any alternative, and that is as of spring/summer 2018, same product, same price in the Eurozone.
If we see in any category that due to competitive moves, demand from the end consumer, that entry price point has to be EUR 5, EUR 10 lower or higher, we will consider this very carefully, but if we implement such a step, it is one European price adjustment that we do. The historical differentiation between France and Germany or the Benelux and Austria will be a thing of the past. By the way, also benefiting our capabilities in our e-commerce world, where our consumers anyway expect to be treated equally across all geographies. Cost savings, I think there was a point, especially in outlook and performance so far. I think our performance year to date is a very telling proof to the fact that the company continues to be able to control OpEx in a way to mitigate also the impact from negative like-for-likes.
We expect that the first quarter will mark the low point of our overall like-for-like development for the full year. Remember that we guided from -3% to +3% as base of our assumptions. If market would be more depressed than we have seen for the last seven to eight weeks, we will implement contingency measures that we have defined with all cost center owners, which will be then a priority call on which project, which expenses to be postponed or to be reduced in size to achieve our EBITDA guide for the full year. These plans are in place. These plans are aligned. We are flexible enough to adjust our spending pattern, be it hiring, be it discretionary spending on project scopes, to adjust to the level we can afford giving the top-line development by market. Does it answer your question, Antoine?
Yeah. Regarding maybe the management team and maybe also the CFO position.
Yeah. I know you guys are looking for a new speaker. You are getting bored by me. We are in very late phases of the announcement. Let me put it that way. I am quite confident that we will have an announcement around the AGM. I think we would all agree that this would be perfect timing and a good stage to announce a well-reputated new CFO for Hugo Boss. I can only confirm that once we have mutual signatures to that. From my statement, you can see that we are on a very advanced stage to fill this position.
Thank you. I am sure you will still be present from time to time.
I will. Don't worry.
Thank you. Our next question comes from Piral Dadhania from Royal Bank of Canada. Please go ahead. Your line is open.
Hi. Good afternoon, everyone. Thanks for taking my questions. If I could just start on your gross margin guidance. As you begin to widen the entry price offer in the second half of the year with your autumn winter 2017 deliveries and the potential impact of negative price mix we can expect there, should we expect the first half, second half gross margin development to look slightly uneven, i.e. the second half gross margin will be lower than the first half as you get some negative price mix effects coming through? If I move on to your North American retail business. Obviously, you've said that there were significant footfall declines in your full price retail network, but the outlet business has done much better, stabilizing in the first quarter.
Could you just confirm for us what the share of outlet is in North America as a proportion of your total retail sales, and whether you see that development as structural versus cyclical? If it's structural, what actions you can take to prevent further deleverage as we progress through 2017 and into 2018. Just finally on CapEx. Your full year guidance, I think, is for EUR 150 million to EUR 170 million, but your one Q spend is significantly lower than that on a run rate basis. Could you just explain to us perhaps the phasing of CapEx and whether there is potential that the full year number could be lower than that and free up some further free cash flow generation? Thank you very much.
Well, thank you. Let's start with the gross margin impact from the bigger focus the company will place with the fall winter deliveries on entry price points. I think we explained it also back when we gave the gross margin drivers for the full year at the end of this conference. Actually, the mix by product categories, whether we sell more clothing versus casual wear or athleisure or even within groups. The Hugo Boss product range has a very comparable gross margin across multiple product categories. The only category, and that's something you can test on yourself. Now we can't see you, but we always recommend you to wear more ties as the most margin creative product category. We will not have a push on ties, but we will have a push on the important entry price points.
These will hopefully increase footfall, ultimately, because some of these customers who are more looking for price points did not find this offer in our full price stores in the last three to four seasons as we elevated the brand at price points which did not find the reaction or the acceptance from these consumers. We would like to reactivate these customers. By the way, one of the elements I think that has helped us now to improve our e-commerce business also in the later stage of the first quarter that we brought to the attention to the end consumer that entry price suits are far more visibly placed on the e-commerce side at Hugo Boss than ever before. Something you can test this afternoon for yourself.
We have to bring it also to the consumer awareness that Hugo Boss has a very competitive and wide offer to this product. A higher expected sales share of entry price points relative to higher price points will not affect gross margin. What we need to make sure that it could be that cash margin would decline. Clearly makes a difference whether we sell two suits at EUR 600 worth EUR 800. This is why it's important that we compensate this cash margin impact by better conversion rates and, as I said, higher traffic rates. This applies, by the way, for all price adjustments, be it lowering prices like we did in Asia. You've seen that we were able to overcompensate price adjustments or shift some more to entry price points if the market mix is right. In terms of the U.S. retail footfall.
I think this question was earlier asked also from-- Let me see. Thomas, I think, asked this question. Is a beneficial footfall development of factory outlets in U.S. at least partially attributable to the discontinuation of the off-price business in the multi-brand environment? We would confirm to this view. This has led also to a situation that our factory outlet business has grown stronger than full price in the U.S. It is a business that is already above group average. Factory outlet account for more than 30% on retail sales in the U.S. We don't give the specific split between full price and off price by markets or region.
Nevertheless, we still consider this a positive development, considering the point of departure, keeping in mind that 20% of our wholesale sales were within multi-brand off-price formats, which we consider far more brand equity diluted than our own factory outlet operations. On CapEx, we can assure you that we will not cut corners in terms of renovating our store network or postponing openings on store projects that we believe in. We have pretty good visibility also historically on our pipeline on renovation and openings. It is purely timing.
Due to the fact that we are in the late stages, it's already conceptually done or ready to be implemented on the BOSS side on the new store format that we will also present to you at the investor day, which we think also in terms of in-store execution, will have a much stronger impact on consumer perception, but also functionality than our current BOSS store concept, which has led to the fact that we have postponed some of our openings later. The one store we would recommend you to visit, I think opening date is in September or October, is our flagship store in Geneva. This will be our first European store that follows the B7 Plus Evolution Concept, which will be a showcase to the new in-store execution, not only in terms of merchandising, but also then in terms of store design.
We will share with you on-site in August more details to the new store concept, this also has where it's feasible also to the shift of the execution of this project to do it already in sync with the new retail format. Does it answer your question, Piral?
Yeah. You expect to spend the full EUR 150-
Yes
for the full year?
No change are done .
Okay, great. Could I just follow up quickly on your price-volume mix equation? Just talking about the gross margin. I guess that your response suggests that you're expecting a full volume response, I guess, to the change in the prices. Does that tend to come through immediately or is there tend to be a lag?
Well, this falls in the category of question better to be answered in hindsight. We had examples, and we will build on that, where price adjustment has been very well received by our wholesale partners and end consumers. We know what are key elements to that. Marketing or communication is an important part of that. Ultimately, and this was a question, I think, also asked by Antoine earlier, the product just has to be delivered in terms of a fashion statement, in terms of quality, in terms of fit. That's why we said there's a lot of focus on the development and the preparation with our wholesale partners, but also our own buying teams to ensure that in particular with the harmonized entry price points for the BOSS brand for spring/summer 2018, that these prerequisites are met.
There will be an important data point to be shared with you at the investor day of the first initial buying reaction from our wholesale partners, and we will provide you with more details at the investor day. Ultimately, with the first sell-out performance, which we will not have before we report again 12 months from now on the first quarter 2018 performance. In terms of lessons learned from previous successes, but also cases where we have fallen short, I feel confident that we have incorporated that. As we said earlier at the capital markets day and analyst conference with the delivery of these collection and bringing all pieces into play of the new strategy. Overall, we expect the year 2018 to be the year of a return to growth, and this requires a convincing offer also with the new collections.
Great. Thank you.
Thank you very much.
Thank you very much. Our next question comes from Warwick Okines from Deutsche Bank. Please go ahead.
I've got one question on each of your three regional retail businesses. Listening to what you said about Europe, I'm surprised or I get the impression you're a bit more confident than maybe the numbers look to me. What reassurance can you give us that the European performance hasn't just been boosted by very soft comp in March, which you referred to last year? How worried are you that Germany is being driven more by wholesale than retail, which has been the pattern for some time, I think. On the U.S., specifically the mainline retail stores. Again, that's a negative against a very negative comp from the prior year. Are you seeing any positive signs in your mainline retail business? Thirdly, looking at the Chinese retail business.
This time last year, you cut prices 20% at the end of February or the beginning of March, so during the Q1 period. Could you just talk about the performance of the Chinese business this Q1 before and after that price cut? Thank you.
Thanks, Warwick. I think it was clear from my opening statement that we are still operating in a market environment that in almost every part of the world is not supportive. We would be surprised if there's a significant improvement in the underlying market. Menswear premium apparel is our core business beyond the level which was, as you know, negative in 2016, to see in any part of the world a strong growth. Compared to this background on what is the support we get from the market, I'm pleased, in particular, with the performance in most European markets. Also with the mainland Chinese development. Let's go through it by region.
As I said, I've seen now for the first time, our fourth quarter was similar, but the impact in the first quarter was much bigger, that an overall already quite resilient and robust physical retail business was dragged down by the performance of our online business. With all the fair criticism that this needs to be addressed, I think we have taken measures and we are pleased with the results. Overall, the e-commerce was down for the group 27%. You know that this is predominantly EMEA business, which has dragged down our European retail performance overall. With now remedy measures in place for the European e-commerce business and a healthy above-market average development, we see both in the full price and outlet in most European markets.
I'm confident that there is a sales help with the better assortment, the better buying as we move later into the year. I think we try to outline that what we have done in terms of collection, in terms of our buying decision to strengthen athleisure and casual offering in our stores. I'm confident that we see quarter after quarter, in particular in the European business, an improvement compared to where we started. That Q1 was overall, in particular, driven by the e-commerce business at the lower range of our e-commerce is also here, I would describe to you, was the expected difficult start to the year, where we expect a continuous improvement to it.
I try to caution you that March and April are just two, not the most crucial months in the annual performance, but at least it gives us a trend development over the last eight to nine weeks, which indicates a sequential improvement in line to achieve and meet our full year targets. The U.S., we always position that as another quick fix. It will take at least 12 months to annualize on the wholesale distribution on the off price and even on the full price. You know that many of our wholesale partners are experiencing still a difficult market environment, again, in the premium environment and also commentary from the industry, other players in the U.S. I can't see any sign of a quick return to growth, in particular in the full price business.
Whether we like it or not, we need to service customers across these sales channels they prefer, be it e-commerce, be it factory outlets. As I said, our factory outlets started to benefit from our decision, harsh decision we have taken on the wholesale side. Overall, I expect the U.S. market, and this is the lighthouse for the Americas development, to be from all three markets, the one which will remain continuously more challenged than the other two, despite sequential improvements. Asia-Pacific, you ask about the impact on pricing. I would say it's not sufficient data to tell yet to what degree the annualization of the price adjustment in China will now, as we start to compete against stronger comps from last year, will dampen the effect in 2017.
Please keep in mind that in our numbers, the full impact from the price adjustment only started to kick in at the later stage of second quarter, in particular, then in the third and the fourth quarter. I think it's still too early to comment to the fact how strong will be the annualization impact. Are we able, with a better merchandising decision, better in-store execution, try to supplement that? I would agree to the view that the improvement, in particular in structural profitability in Asia-Pacific, it's off to a very good start as we demonstrate in the first quarter, and that this will be accretive also for the remainder of the year.
It will be a year of transition and stabilization where we implement important measures, but it will not be a year where we, based on Q1, can already forecast, announce for the year 2017 a return to growth. That was not our intention, and I think our numbers for the first quarter, if you adjust for the wholesale delivery fact, will just confirm the view that the company has always given for the full year 2017.
Thanks a lot. It's very helpful.
Thank you.
Thank you. As this is our last question, I will hand back over to you, Mr. Langer, for any closing remarks. Thank you.
Well, thank you for your time, for dialing in, participating in our discussion. As I assume, there will always be some question not being answered as part of the Q&A. The team from Dennis is standing by also to follow up on any points that we might have not discussed to the level of detail if you wish. Again, I would iterate my invitation. You probably will not join us for our AGM, even so that's always a nice reason to travel to Stuttgart. If you come to Stuttgart once this year, this would be the one visit will be in August for our Investor Day. I'm really looking forward to welcoming as many of you to this event as possible. Thank you for your time. Have a nice day.
Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.