Good day, welcome to the HUGO BOSS full year results 2016 conference call. Today's conference is being recorded, ladies and gentlemen. 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 our 2016 financial results presentation. Ingo Wilts, our Chief Brand Officer, and Bernd Hake, our Chief Sales Officer, are with me on today's call. Together, we will update you on our progress in returning to profitable growth. We will also outline our financial forecast for 2017. To understand where we're headed, let's start with where we are coming from. 2016 has been a year of profound change for the industry, even more so for HUGO BOSS. Where we had previously seen smooth sailing over calm seas for a long time, the going has gotten rough in the past 12 months. On the one hand, this was due to a recessionary market environment.
According to Bain, the global luxury apparel market shrunk by 4% in 2016, making apparel one of the weakest segments in the overall luxury goods sector. In many markets, our industry did not benefit from a positive climate of consumption on the whole. Many consumers diverted their spendings to high-ticket items such as cars and real estate or experiences. In contrast, apparel lost share of wallet, which triggered enormous promotional activity that left many brands and retailers struggling. This was also due to mistakes we made in the past. Our brand portfolio has clearly become too complex for many consumers to understand. Some of our brands have strayed too far away from the core. Others are not sufficiently distinct, creating overlaps in terms of our product lines and pricing architecture. This was exacerbated by a challenging underlying market.
In our attempt to capture a greater share of the luxury goods market, we alienated a part of our core clientele. We acknowledge the global nature of our brands and our business. We are therefore placing even greater emphasis on maintaining a globally consistent brand image, whereas we had accepted regional imbalances in the past. The growing importance of digital channels, in particular, has made these imbalances unsustainable. Not only has the Internet become a means of comparing products and prices among different markets, it has become an integral part of many consumers' life, which we need to turn to our advantage going forward. This will require speed and agility rather than the complex organizational structures and processes that slowed down our decision-making in the past. In the last 12 months, we took immediate actions to weather the storm and to recalibrate our course for the future.
We slashed more than €100 million in costs and investments of our initial budget. We have tightened inventory management. We have initiated a program to close 20 unprofitable stores worldwide. Another 20 locations in China we had inherited from former franchise partners. We started restructuring our U.S. wholesale business and discontinued distribution formats that do not fit our brand positioning. We aligned global price levels more closely, an important reason for why China returned to growth. Finally, we built a foundation for future growth in digital commerce by insourcing the fulfillment of our online business in Europe, redesigning our online store, and launching a mobile app. As part of the action plan, we consciously accepted sales losses. Coupled with further top-line pressure owed to weak consumer demand, currency-adjusted group sales declined 2% in 2016.
EBITDA before special items were down 17%, reflecting significant operating deleverage due to declining comp store sales in our own retail business. The decline would have been even greater had we not taken effective measures to curb the rate of cost expansion. Free cash flow, however, was up year-over-year, underlining a greater focus in the group's investment activity in particular. Let me give you some more details on our financial results in 2016. Starting with the top line, full-year sales were up 1% in Europe. The U.K. continued to grow solidly and was up 8% for the year. Sales in Germany and France were down 4% and 3% respectively. In the Americas, full-year sales in local currencies were 12% lower than in the prior year. This was mainly due to the U.S., where sales were down 17%.
Registering a decline of almost 30%, the wholesale business exerted a disproportionate impact here. Approximately half of the decline in this distribution channel was due to the aforementioned distribution restructuring aimed at improving presentation quality and brand desirability. Above all, we stopped selling to the off-price retailers we had been using to clear excess inventories in the past. Asia recorded a 2% decline after adjusting for currencies. Momentum in China improved considerably over the course of the year, resulting in sales on the Chinese mainland remaining closely to stable. In Greater China, however, sales were 6% lower than the prior year due to primary market-induced declines in Macau and Hong Kong. By distribution channel, own retail sales were 2% higher than last year, ex currency effects. On a comp store basis, channel sales declined by 6%.
While the European region recorded a smaller decline than the average for the group, the negative impact of a decline in the low double digits in the Americas was significant. The performance in Asia was in line with that of the group overall, despite slight growth on the Chinese mainland. Currency-adjusted sales in the wholesale business decreased 9% in 2016, primarily reflecting the tough market environment in the U.S. just mentioned. In Europe, channel sales were slightly down from the prior year, reflecting declining sales in many key markets in the sector. Finally, the licensing business generated a robust 12% in sales growth for the reporting period, driven by double-digit growth in the biggest licensing category, fragrances. Moving below the top line, the group's profit margin held up well despite significant promotional pressures in the U.S. and many key European markets. At 66.0%, it remained on the prior year level.
Disproportionate growth of our own retail business impacted the margin positively. Negative factors included price reduction in Asia, though partly compensated by increases elsewhere, and higher inventory write-downs than in 2015. On the cost side, we managed to strike a fine balance between exploiting efficiency potential on the one hand, and investing in the future growth on the other. Selling and distribution expenses were up 3%. In the own retail business, expansion and renovation-related increases were partially offset by lower costs due to store closures and the successful renegotiations of rental contracts. Marketing expenses remained almost unchanged in relation to sales and translated to a 6% decline year-over-year in absolute terms. The increase in G&A expenses was focused on digital commerce and communication, where we invested in both talent and system infrastructure.
Across the entire cost base, we have been able to take EUR 65 million out of our original budgets, mostly through lower rents and tighter management of administrative expenses. The latter benefited from the efforts of streamlining the group's project portfolio with a view to identifying which initiatives would exert the greatest positive commercial impact, and implementing them as quickly as possible. These savings helped us to curb the EBITDA decline, but EBITDA before special items nevertheless decreased to EUR 493 million, a 17% drop with respect to the prior year. Special items of EUR 67 million primarily concerned termination payments and write-downs in connection with planned store closures. The remainder was owed to organizational changes at both our headquarters and at regional levels. Including these expenses, net income declined sharply to EUR 194 million. Let me also discuss some key balance sheet and cash flow trends.
2016, we kept trade network capital under tight control. Despite the disappointing top-line performance, working capital remained broadly stable relative to sales and also delivered a positive contribution to free cash flow generation in the period. This was primarily due to the improved inventory management. In the U.S., we successfully completed the inventory clearance started at the end of 2015. In China, we cleared excess stock still related to our franchise legacy in this market. As a result, inventories are down by a double-digit percentage in these two markets. For the group as a whole, we are able to record a currency-adjusted increase of just 1% at year-end. Investments decreased significantly compared to 2015, owing to fewer store openings and takeovers, as well as the non-recurrence of one-time projects as in the previous year.
The latter concern expanding our production plant in Turkey, upgrading our U.S. distribution center, and relocating our New York showroom, all done in 2015. 2016, the group's own retail business continued to be the focal point of investment activity. Around a third of the total budget was spent on the build-out of new stores. Another third went into the renovation of existing stores. As a rule of thumb, HUGO BOSS refurbishes existing stores approximately every five years. The remaining third was invested in other areas. Investment in IT of over EUR 30 million underscores the importance the group places on the digitization of its business model. In this context, major projects in 2016 included the insourcing of online fulfillment in Europe, the rollout of omni-channel services, as well as system enhancements in Customer Relationship Management and digital communication.
Lower CapEx more than offset the earnings shortfall, so that free cash flow increased by 6% to EUR 220 million. Net debt nonetheless came in higher than in the prior year, since we stuck to a stable dividend payout in 2016. To put things into perspective, we continue to be in a rock-solid position financially with an equity ratio of almost 50%. We need to be careful in preserving the strength in order to maintain financial flexibility regardless of the prevailing economic backdrop and the group's short-term outlook. As a result of the aforementioned, we remain committed to offering attractive shareholder returns, but we will never compromise our ability to invest into the business. With this in mind, we propose a dividend of EUR 2.60 for the 2016 financial year.
While the proposal still reflects one of the highest yields in the industry, it also highlights our belief that the dividend should first and foremost be based on the group's performance in terms of profits. In light of the sharp decline of consolidated net income, it's only logical and in the long-term interest of our shareholders to adjust the dividend accordingly. With a payout of 93% of net income attributable to shareholders, we nonetheless decided to exceed the 60%-80% corridor stipulated by our dividend policy. We are convinced that this continues to be the right policy. By 2016, however, we also took the healthy free cash flow generation, the group's strong financial position, and the expected non-recurrence of significant expenses in connection with store closures in 2016 into consideration.
Looking ahead, I'm confident that future profit growth will allow maintaining or even raising the dividend again within the framework of the policy I just reconfirmed. In the past year, we have worked hard on defining the course back to sustainable and profitable growth. Our vision to be the most desirable premium fashion and lifestyle brand guides our actions. In our industry, it is brand desirability that makes or breaks long-term commercial success. Obviously, brand desirability is not defined by us, but by customers who must take center stage in everything that we do. What might sound to you like a truism requires a great deal of change. Change we initiated in 2016. We adjusted our strategic direction to make sure we maintain and grow our relevance in the eyes of today's fashion consumers. The demands and attitudes of these consumers have changed in multiple ways.
A shopping trip for a new suit now starts online, whereas they once went window shopping in the past. Brands unable to demonstrate a unique proposition will quickly get lost in the masses. Where customers used to accept limited selection available in stores, they now expect immediate access to the full range on offer whenever and wherever. Yet whereas before they were willing to browse through aisles of product, they now expect brands to identify the right product for them based on a relationship on equal footing. With these changes in mind, we redefined our strategic direction in 2016. We are building on what has been the core of our success over the past 30 years, but we are neither shying away from correcting past mistakes, nor from exploring new grounds. Specifically, we are simplifying our brand portfolio and clarifying the positioning of our brands.
We are refining our distribution strategy. We are focusing on the digital transformation of our business model, and closely related to this transformation, we are actively transforming our corporate culture to improve speed and agility throughout the organization. Let me now hand over to my fellow board members to update you on the progress in these areas of action.
Thanks, Mark. Progress is indeed what 2017 will be all about. We are working hard on defining the group's future creative direction at the moment, and I'm confident that all the tremendous work we are investigating right now will yield great results. Let me briefly recap what we announced in November. We will focus on two brands, BOSS and HUGO, going forward. Why are we doing that? Let me give you three main reasons. First and foremost, because we talked to a lot of customers and learned that many simply did not understand what our different brands stand for and how they differ from each other. Second, because we have punched below our weight in casual wear, despite the fact that casual wear accounts for around half of our current business. Third, because we want to strengthen our relevance again for a younger, more fashion-savvy audience.
With BOSS, we will continue to address the status-oriented, rationally-minded customer. The customer wants to dress in a classic, yet modern and high-quality style, often driven by the desire to belong. The BOSS customer has high expectation when it comes to quality and fit, and attaches great importance to a favorable value-for-money proposition. Of course, the shopping experience must also meet the highest standards, particularly with regard to personal service. We strive to dress this customer 24/7 in the office, in their leisure time, and when they are active. I believe that most of you will agree that this is a no-brainer when it comes to business. The business suit is our iconic product, and consumers continue to associate the brand with formal wear first.
Of course, the formal wear outfit can be much more nowadays than just a black suit with a white dress shirt and a nice tie. Strict dress codes are increasingly becoming a thing of the past and are being replaced by smart casual outfits, such as the one we have including in our presentation. When meeting with your friends on a Saturday, a BOSS casual outfit will make you look as refined and sophisticated as the one you wore to the office. BOSS Casual will build on what you currently find under BOSS Orange. However, the range will be upgraded significantly in terms of quality, craftsmanship, and design to bring it back in line with the BOSS standards. Finally, when the same consumer works out, goes for a round of golf, or simply wants to dress in a cultivated, yet relaxed and sporty way, BOSS Athleisure comes into play.
Here, the core of the current BOSS Green line will give you a good idea of what you can continue to expect from BOSS going forward. The changes I just outlined will become fully effective with the spring-summer collection, which will be in stores from January 2018 onwards. Collection development is in full swing already right now. What is just a product sketch or a prototype today will be a complete collection by the end of June. By then, we will be presenting the collection to our wholesale partners and our own retail teams. The BOSS menswear presentation at the New York Fashion Week in February was an important first step towards the full implementation of our new brand strategy. The collection we presented was focused on the fundamental elements of the brand: precise cuts and construction, and a love to detail.
Tailored sits in the heart of the collection, this is interpreted in different, sometimes surprising ways. For me, it was very important to show people that there is a lot happening at BOSS. I wanted the audience to feel the emotion and the passion that is in every product we design. BOSS has always been very commercially minded, and rightfully so, we also need to make sure that we surprise the consumer with certain high-fashion items with stories they aren't expecting. Going forward, we will place these stories bigger and more consistently. Let's take the fashion show again as an example. For the event, we partnered with fashion influencer, Marcel Floruss. His coverage turned the event into much more than just a collection presentation by spanning the entire period from the first preparation up to the after-party.
The event itself was streamed live on Instagram, we built it on a holistic campaign across key social media platforms such as Facebook, Twitter, and Pinterest. The fashion show in New York exemplified three key developments in our marketing strategy. First, we will be concentrating on our marketing efforts on fewer campaigns, which we'll be executing strictly 360 degrees. That is, consistently across all consumer touchpoints. As a result, second, we are making our brand communication even more digital, so we can extend our reach and relevance. Third, we are focusing much more on our menswear business again. Nevertheless, the share of marketing dedicated to womenswear will still be significantly higher than its business share. You may read this as a sign of confidence in what remains an important part of the group. BOSS strikes a balance between ease and elegance.
With our collections, we strive to dress the modern woman for whatever the day may bring, knowing that her outfit needs to be just as right for a presentation in the office as for a day of business traveling. Driven by Jason Wu as the brand's Artistic Director, the refinement and craftsmanship that BOSS stands for is evident in every piece of the collection. While it's the tailored look that defines BOSS womenswear, we are confident in the brand's growth potential in casual wear. With the upcoming integration of BOSS Orange into BOSS, we will create easy-to-wear looks that complement her wardrobe for the weekend. The BOSS brand will be our key focus, we are equally committed to HUGO. I'm excited by the opportunity that presents itself to HUGO today. Namely to target more fashion-conscious, younger consumers who seek to express their personalities through what they wear.
In the past few years, we lost sight of the customer to some extent by diluting the fashion-forward, trend-focused heritage of the HUGO brand. Firmly anchored in the premium segment, at the same time attractively priced, I'm very confident in HUGO's ability to play an important role in the growing contemporary fashion market. All the more so once we have expanded the brand's casual wear line in 2018. HUGO will get the resources necessary to grow into a much bigger business over time. We're placing high importance on digital communication to engage with the young fashion-forward audience targeted by HUGO. We are investing into a new store concept which will live and breathe the DNA of HUGO, and we will introduce the new HUGO with a big bang in June.
We will present the brand's future creative direction with a fashion show at Pitti Uomo, the world's most important platform for men's fashion in Florence. Now over to you, Bernd.
Thank you, Ingo. Let me tie in with your comments and outline the implications of these changes for our distribution strategy. Starting on the wholesale end of our business, the feedback from our partners to the changes in brand strategy is clearly positive. The vast majority of them welcome the clarity and consistency the changes Ingo just outlined will add to the positioning of BOSS and HUGO. Many partners stressed their interest in a more refined and sophisticated casual wear line from BOSS, with which they can more effectively exploit the strong growth momentum in this category. While it will still be another few months before we can present the new collections to the trade, order intake for fall/winter 2017 collection, which still only incorporates a few of the elements that define our new brand positioning, was in line with our expectations.
The casual wear line under the BOSS brand performed much better than in prior seasons, reflecting the first discernible improvements in the collection, while demand for BOSS Green and BOSS Orange remained solid despite the upcoming changes. Nevertheless, the market environment continues to be tough, a fact that we continue to take into consideration when defining our future pricing strategy. We acknowledge the importance of accessible price points, especially in difficult market conditions, we also remain firmly committed to the principle of one product, one price. We will be continuing our efforts to align global prices even more closely with the launch of the spring/summer 2018 collection. We do not plan any significant adjustments before this date. In 2017, improving sales momentum in own retail will stand at the forefront of our activities.
In the year ahead, we aim to lay the foundations for the 20% increase in sales productivity we are targeting over the next five years. Let me recap the five key drivers and their expected impact. First, we are confident that the brand strategy changes will result in a much clearer brand message consumers will immediately grasp. Based on the BOSS positioning in the upper premium segment, we will be expanding and upgrading our product lines at certain entry price points to stimulate traffic and conversion. Second, we will be correcting a mistake we made in the past by prominently promoting our casual wear line in our own stores. Until only recently, we had been predominantly focused on menswear clothing and womenswear, while neglecting to consider general trends in the market towards more relaxed, casual, and even athletic-inspired dress codes.
In response, we have started reintroducing BOSS Green in many stores, and our new casual assortment will be provided with ample space when we launch it in early 2018. Third, we will continue to expand our omni-channel services, knowing that convenience is a key factor in customers' purchasing considerations, especially where the core customer of BOSS are concerned. The rollout of click and collect, order in store, and return in store in both Europe as well as in the U.S., will be completed by the end of the year. Fourth, we are systematically investing in retail staff training and development to improve service quality and retention. This includes changes in the structure of retail staff remuneration, as well as a new approach to retail training. Finally, we complete the optimization of our retail network announced last summer.
By the end of the year, we will have closed around 15 stores remaining under the program, thereby eliminating what were by far the most dilutive locations from our retail portfolio. These stores diluted the group's adjusted EBITDA margin by 60 basis points in 2016, so closing them will support retail profits in 2017, and even more so in 2018. We will also be closing some stores in locations where we have decided not to renew the rental contract. The other way around, we will continue to seize opportunities to expand our network where they arise. In 2017, for example, we will be taking over three key locations in Dubai from a franchise partner, thereby expanding our business in the Middle East. In total, however, we will just be adding something like 10 new freestanding stores. Please note that these will all be BOSS stores.
At least initially, our focus in the case of HUGO will be on expanding the brand's presence in relevant wholesale accounts via shop-in-shops before opening a few selected freestanding stores in key cities in 2018. Because the new stores will be slightly larger than the average sizes found in our current portfolio, and because we also expect the number of shop-in-shops to continue to grow, we project that the network size as measured in square feet, will remain more or less stable in 2017. Yet, stable does not mean unchanged. The network is constantly evolving thanks to renovations, which will account for the lion's share of our retail investment budget. The network will evolve even more once we start rolling out a new store concept for BOSS towards the end of the year.
While it is still too early to go into details, one key element of the new store concept will be the expansion of digital elements, which we will not only use to tell the stories behind the product, but also to create an omni-channel distribution process. Regardless of the rise of digital and mobile, physical stores will not lose their relevance anytime soon. Their function as key consumer touch points is only going to become more important. We need to make those stores more connected to the digital world. The introduction of omni-channel services, as well as the further development of our store concepts, are important steps in this regard. As the lines between online and offline become blurred, overall retail sales are what counts. However, this should not detract from the disappointing performance of our e-commerce business.
In 2016, our own online business, that is the business generated through 11 hugoboss.com stores worldwide, declined by 6%. The fact that many partners saw much better performances with BOSS products in their online business is not much of a consolation. Quite the contrary. It clearly points to the need to improve execution. Our online business builds on a solid foundation. Thanks to the insourcing of key elements of the value chain in previous years, we directly control the online front end as well as the back end. We are convinced that owning the interface with consumers will be an important competitive advantage over peers. This advantage will only become magnified as we build up more and more online retailing expertise in-house. In the short term, however, we are going through a learning curve, which puts the commercial performance of our online business under pressure.
It is very important to understand that the challenges we face have nothing to do with a lack of resources. We have built good infrastructure, but we are not making enough out of it at the moment. Let me outline the key starting points to bring our online business back to growth over the course of 2017. Mobile. Half of the hugoboss.com site traffic is coming from mobile devices now. As a result, we need to think mobile first. That is why mobile will be given absolute priority in all aspects of online management going forward, from content strategy to navigation, to shortening of loading times. Content. Attractive content makes customers spend time on our site. We will create interesting content to engage with our customers and drive them to store. Service. Customers expect premium service from a premium brand.
We will invest ensure shorter delivery times and an increasingly curated shopping experience to make the hugoboss.com website the destination of choice for the demanding customer. Finally, merchandising. From the second half of 2017 onwards, a more commercial and less complex offering will ensure that value-conscious customers find what they are looking for. For us as a management team, digital clearly is a top, if not the top priority in 2017. Our goal is not just to ensure that the online business contributes to retail growth again. At the same time, we are working on digitizing our business model wherever it makes sense to do so along the entire value chains. Expect more news on this over the course of the new year. With that, I'll turn over to Mark again. Thanks.
Thanks, Bernd. Let me talk about our business development by region. The online business that Bernd was just describing is particularly relevant for our European business, given that Germany and the U.K. are actually our largest and second-largest online markets, respectively worldwide. We expect our European business to remain more or less stable overall. Performance in Germany and its neighboring markets will be somewhat more subdued, primarily due to the challenging market environment. Market data speaks a clear language here. In the first two months of the year, market sales in Germany were once again under even more pressure than they were at the end of 2016. In the U.K., solid local demand as well as continued strength in our business with tourists should contribute to growth in local currencies. That said, the devaluations of the British pound will depress sales in EUR.
Note that we have decided against raising prices in the U.K., at least in the short term, given that most competitors haven't raised their prices either, and the apparel segment is under a lot of pressure market-wide. In France, the third-largest market in the region, performance picked up towards the end of the year, a trend we forecast will also continue into 2017. In the Americas, our key focus will be on turning around our U.S. business. Without a doubt, 2017 will be still a difficult year. The market environment continues to be tough and marked by significant footfall declines, particularly in full price distribution. Against this backdrop, we expect sales in the U.S. to still be down year-over-year. Over the next 12 months, however, we will be laying the foundations of our return to growth in 2018. We'll complete the right sizing of our wholesale business.
By the end of the year, less than 10% of sales will be in off-price formats. Our brand will have fully disappeared from the racks of value retailers. We have also some initial positive developments in our business with department stores, where some first steps we took towards broadening our assortment at more accessible price points in the fall-winter collection were very well-received. In our own operations, we expect that changes in space and merchandise allocation will help improve performance, particularly in the second half of the year. In addition, we just reshuffled our management team by transferring some of store operations know-how accumulated in Europe to the U.S. Good growth in Canada and Brazil, and to a lesser extent, in Mexico as well, should offset some of the pressure in the U.S. market. As a consequence, total sales for the Americas region should only decline slightly overall.
Finally, we expect solid growth in China to drive sales increases in Asia. China, we will continue to benefit from an innovative marketing initiative with a strong digital focus. Compared to just 12 months ago, we have seen a change in the rate of digital followership on the most important platforms. This provides us with the reach to demonstrate our strength in terms of quality and value to a much bigger audience. As a result, I'm confident in our ability to deliver solid growth in China in 2017, even assuming the declines in Hong Kong and Macau to continue. In sum, we expect group sales to remain largely stable in 2017. In wholesale, the order book provides us with good visibility.
Mainly due to the U.S., where we expect channel sales to be down in the low teens, our wholesale business worldwide should see a percentage decline below to mid-single digits. Performance in own retail is somewhat more difficult to forecast. The contribution of openings and takeovers to sales growth will be in the low single digits. On a comparable store basis, excluding the effects from retail expansion in the previous year and the current period, we expect sales will perform within a range of -3% to +3%. Sales should improve over the course of the year as a result of the various collection and the distribution-related measures I outlined. Considering expansion effects as well as like-for-like sales performance, growth in the mid-single digits marks the upper end of our guidance range for the total owned retail sales. Finally, the licensed business should yield solid increases also in 2017.
The group gross margin should improve due to positive channel mix effects and the non-reoccurrence of prior year's inventory write-downs. However, negative currency effects, mainly associated with the devaluation of the British pound, will curb the margin's rise. Largely depending on the sales performance in own retail, EBITDA before special items is also expected to perform within the range of -3% to +3%. This forecast assumes continued increases in operating expenses in connection with our transition to a stricter, strictly customer-oriented business model, including a slight increase in marketing expenses compared to sales. Carryover effects from the savings initiated last year, as well as store closures, will limit the cost growth. Net income is expected to increase at a double-digit percentage rate, supported by the non-recurrence of costs incurred in connection with the aforementioned store closures.
Depreciation and amortization charges, as well as financial expenses, should largely remain stable. 2017 will once again underscore the group's ability to generate strong cash flows, even in more challenging times. Investment will remain at similar levels to those seen in 2016, amounting to between EUR 150 million and EUR 170 million. Around two-thirds of the budget will go towards store refurbishments and new openings. The remainder will be largely focused on IT, where we will continue to build the infrastructure we need to drive our digital activities. With regard to free cash flow, 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. Overall, we forecast free cash flow generation in line with the prior year level.
Ladies and gentlemen, many observers have called 2017 a transition year for HUGO BOSS, because the change in our strategic direction announced in November will take some time to complete. Our presentation today should have demonstrated that 2017 will be much more than that. The term transitions has a very passive connotation, which is the exact opposite to what's actually happening at HUGO BOSS right now. From a financial perspective, 2017 will be a year of stabilization. From a strategic and operational point of view, 2017 will be a year of implementation. In the next 12 months, we will lay the foundation for bringing BOSS back to profitable growth. That's why I'm confident that we will be able to call 2017 a year of progress when we discuss our annual results in one year's time. Now we are very happy to answer your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question today, please press star one on your telephone keypad. If you 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. Our first question comes from Zuzanna Pusz from Berenberg. Please go ahead. Your line is open.
Hello. Good afternoon, everyone. Just a couple of questions from my side. First of all, on the like-for-like range, which is relatively wide at -3% to +3%, and given that you expect a similar development for the adjusted EBITDA, it looks like you have some additional cost control you could implement should the like-for-like be at the lower end of the expectations. Would you mind commenting a bit more on that? Where do you see more scope for cost cuts? Secondly, on the U.S. business, I understand that you expect another year of low double-digit decline in the wholesale channel. Would you mind just quickly clarifying how much of this is expected to be driven by the ongoing restructuring of the business? What is your expectation for the overall market?
Maybe very quickly on the CapEx, you have guided to EUR 150 million-EUR 170 million this year. I was just wondering if you could share with us the expectations you have going forward for the coming years, whether that could be in the similar range or perhaps a bit lower or higher. Thank you very much.
Thanks, Zuzanna, and let me start with the CapEx question first. I think it's a good practice for us to give a specific guidance for the current fiscal year, and we gave this today with the EUR 150 million-EUR 170 million. We also, on a more qualitative level, outlined that we also expect for the outer years, 2018 and 2019, despite the fact that we will start to have the first rollout of first HUGO freestanding stores, not a major change or return to the number of takeovers and white space expansion that we have seen in previous periods. Also for the outer years, even so we can't quantify it as precisely as we will have done this now for 2017, we expect that investment levels will be at comparatively lower levels than what we have seen in the period between 2013 and 2015.
On your question on like-for-like, well, I think a corridor between -3% and +3% is also something we have seen as likely outcomes in difficult-to-forecast market environments. We feel comfortable to guide the market in this range when it comes to our like-for-like performance on retail, where we have much more limited visibility, clearly, compared to the wholesale business. I will answer your question there as well. You're right. If a like-for-like would fall to the lower end of our development, this might require additional measures that we have also prepared of our budget plans in terms of OpEx and CapEx control to deliver our earning guidance for the full year.
Right now we expect with these measures, contingency measures in place, that we would deploy if we see continuous slump of like-for-like to the lower end of our development, that the group will be able to deliver also on the earning guidance for the full year. On the wholesale outlook in the U.S., you were right on your assumption that part of the decline is due to the full year effect from discontinuing off-price third-party distribution, which was only completed during the course of 2016 and will have a full year impact in 2017. That's one of the elements, as I described in the speech, of a negative wholesale trend for the next year. Also many of our wholesale partners operating in physical retail, full-price operations, have experienced very difficult market environments with being similarly affected by decline in footfall.
Also pre-order in the full-price business is below previous year, adding to a negative or the decline in our wholesale business in the U.S. for 2017.
Sorry, just one point to clarify, because I understand that in 2016, half of the decline in the U.S. was due to your own actions. Can you give us more or less the idea whether this year it will be also more or less of the decline you expect, or you can't quantify it to that extent?
I wouldn't be as precise. It's always easier to calculate these numbers with actual data than with forecast. It also depends on some elements. We have not taken full orders yet for the second half of 2017. We know we can calculate the impact of the discontinued operation. That's clear. Let's use the term it's sizable, but it's probably less than 50% of the declines due to the further cleanup. It's still sizable enough to be mentioned as a key factors of the decline on the U.S. wholesale business in 2017.
Okay, that's perfect. Thank you very much.
Thanks, Zuzanna, for your time.
Thank you. Our next question comes from Thomas Chauvet from Citi. Please go ahead. Your line is open.
Good afternoon, Mark. I have three question. Coming back firstly to the retail like-for-like guidance of -3% to +3%, can you tell us what the trend was in January and February? Which regions improved versus Q4? What do you mean when you said at this morning's media conference that you were not sure that the strong double-digit growth in China would continue? Secondly, with regards to your gross margin guidance, slightly up for the year due to channel mix and lower inventory write-downs. Can you recap what the EUR million amount of those write-downs were in 2016? Do you expect write-downs towards the end of 2017 or in early 2018 after the integration of Orange and Green into Black and the relaunch of HUGO? Finally, on womenswear.
At the fashion show in New York Fashion Week in February, you presented a men's only show and no longer womenswear, as Ingo Wilts reminded. You're also relocating a lot of NP from men's to womenswear. When you look at, if you can think of a standalone P&L of the womenswear business for the year ahead, do you feel that you've now downsized it enough, you've reduced the cost base enough, or reduced the break-even points enough? Can you confirm that Jason Wu, without a fashion show dedicated to his collection anymore, will still be in charge of womenswear this year? Thank you.
Thanks, Thomas. I will answer part of the economic question and then I hand it over also to Ingo Wilts, because please stay tuned. We have exciting and relevant news to tell also on the womenswear part of our collections, where we are working very closely with Jason to have exciting not only collection, but also events. Let me start with the like-for-like trend. Yes, we are now, I think, in week nine or 10 in 2017, so we have some trading trends. As in the past, we will not comment on current quarter's trading before this is completed. You're right.
This morning on Bloomberg, I alluded to that we have seen a strong momentum in the Chinese market, which you might recall that we stated already in our prelim data beginning of February, that we have been positively surprised by the resilience and strong momentum that kept until the end of the year. Here we have seen continuation on the mainland China, strong trend in the double-digit area. This will annualize in the second half of 2017. This is what I meant with my comment earlier this morning, that we would be shy not to predict the complete continuation at this trend. We will make sure that we have all resources in place to ensure that the growing middle class is fully aware of this highly attractive offer that we have developed to the Chinese market.
Be assured that we will do whatever we can do from our side in terms of retail execution, marketing, brand communication, to maintain the strong momentum that we have now started to enjoy. In other parts of the world, we already touched on the U.S. market from a wholesale perspective. We see also our full-price business to be under pressure. Some of the improvements that we outlined in Bernd's part of the presentation in terms of merchandising, omni-channel services also for the U.S. market will only be fully implemented during the course of the year 2017. The big bang, and I think that this is the right term to use, in terms of collection will come with the Spring/Summer 2018 collection, which will only become available on the second half of the year.
In terms from our merchandising, in terms of our pricing decision, yes, we expect financial performance to stabilize, but as our range of like-for-like performance indicate, it is not yet in the current market environment a guarantee to return to positive like-for-likes in the current fiscal year, which is also following the trends we have seen coming out of the fourth quarter. You're aware that we are still in negative territory in like-for-like in the fourth quarter. In terms of gross margin-
Sorry, just to clarify. If you elaborate the -3% to +3% like-for-like guidance, it's reasonable to assume that the trends in January, February, despite China, despite the good performance in the U.K., have not probably improved versus the fourth quarter, which was -3% and improving from the nine-month 2016.
As I said, the first quarter is not over. Clearly, we have taken the year-to-date performance into consideration when we create our full-year guidance. We just want to highlight, and some market data also underscore that the retail environment in many core markets, especially in the Western Hemisphere, has not improved in the first two months of 2017.
Thank you.
To answer the gross margin question before I hand it over in terms of activities on womenswear to Ingo. The write-downs on inventories, in particular in the Chinese market and the U.S. market that we booked as part of the inventory clearance, were in the mid-single digits EUR million amount that we expect not to reoccur in 2017. That's an element which will help us to grow gross margin in 2017 beyond channel mix. Having said that, Ingo, please.
Hi, Thomas. As we said, the focus on the menswear is still on our strategy, is aligned with our strategy. Womenswear is still a very important part of our business. Even though if we don't do a show, for now, we still work and we appreciate the work of Jason Wu and work with him also here and in our New York studio. Part of the collection we build in the New York studio, especially if we don't do the show, we do editorial pieces. This is also a kind of icing of the cake, which we show to our wholesale partners and retail partners and have this especially in our own stores. Besides this, we work also in womenswear in some capsule collections, on some capsule collections where we partner up, for example, with our license partner or even with some magazines.
There's also a lot of momentum also for the next season on the womenswear.
In terms of financial performance, I think that was the other part to womenswear. We always highlighted that womenswear has a sufficiently size and a very healthy gross margin when it comes to the COGS of our business due to the fact that this has an industrial scale to it. We never really allocated our marketing spendings in terms of a P&L specificity to that. We think that both fashion show activities have benefited both genders in our collection. However, as Ingo explained in his presentation, we think the explicit and strong focus on menswear only was also needed to confirm to the market, to our stakeholders, that we will refocus more resources explicitly on the menswear side of our business.
You will see hardly any changes in terms of space allocation when it comes to womenswear apparel in our retail network. This is purely due to the fact that womenswear continues to be an important and profitable part of our retail business going forward.
Okay. Thank you, Mark. Just quick follow-up on the gross margin. Do you expect any write-downs of inventories of the old BOSS Black, BOSS Green, BOSS Orange collection, the old HUGO collection, once you roll out the new products at the end of the year?
No. We have looked into that, and we take these steps now very carefully. We will use the investor day in particular, where we already send the sales day to you later this year to update you what are the implications in terms of overall brand complexity, pricing decision, but also phase in and phase out on these collections. From today's perspective, we don't expect any write-down in the context of the phase in and phase out of the new and the phase out of the old collection that we will continue in the current setup.
Thank you, Mark.
Thanks, Thomas.
Thank you very much. Our next question comes from John Guy from MainFirst. Please go ahead. Your line is now open.
Good afternoon, Mark, Ingo, and Bernd. Thanks very much for taking my questions. If I could just stay with the free cash flow and CapEx. Mark, you just mentioned that CapEx would be running below the average of 2013 to 2015. I think that was around EUR 166 million. Are you talking about that on an absolute basis or the average percentage of sales, which is around 6.4%? Maybe you could just give us some clarification on that. With regards to the free cash flow balancing act in 2017, you talked around, I think, roughly a mid-single-digit cash outflow on some of the store closures impact for the free cash flow in 2016, so maybe EUR 25 million or so coming into 2017, but partially being offset by retail or channel mix.
When we move forward into the 2018 year, assuming that the CapEx is going to maybe come down a little bit, how far away from the EUR 300 million free cash flow level do you think that you can get to? I appreciate that there's an element of like-for-like factored into that, but I'd be curious. Maybe just an additional question around the marketing side. Could you just maybe talk a bit about how much you're going to spend on digital going forward? Marketing fell 6% year-on-year in 2016. What can we expect as you obviously roll out these changes within the portfolio that you've just described again for us? Thank you.
Let's start with the impact on free cash flow on investment. You're right that we have talked about absolute numbers. This has not a major impact on percentage numbers if we are in a phase of flattish top-line development. We expect the current fiscal year 2017, similar to what we have seen last year, that investment as a percentage of sales, but also in absolute terms, will be below the levels we have recorded in the three previous years through the period. One factor that we do not expect to recur, because there are no major franchise operations left to be bought back, which was a source of above this rate investment. We also have taken, as we outlined in London, a far more cautious view to the need to capture further white spaces.
There are still opportunities that Bernd mentioned, but they are in a much smaller number that the share that goes into white space expansion will be also in the foreseeable future below. There will be an investment need for renovation, and as we all three described to you, we see exciting opportunities to bring new technology, new store design, not only to BOSS, but also HUGO going forward. The group will be highly committed to bring the latest functionality and services to our own retail network, and this will remain a key element. To answer your question more precisely, compared to the peaks that we have seen in 2015 and 2014, I expect investment for the group to be as a percentage of sales at a slightly lower level.
Return to a cash flow level of EUR 300 million above is clearly depending not only investment, but first and foremost on a return on sustainable growth, which we guided the market to expect to start with the fiscal year 2018. We have not given any specific target on sales and profit targets for the year, I would ask for your understanding that this is also the reason why we can't give a specific date on when we will be able to reach a EUR 300 million free cash flow number as well. Clearly, a growing top-line and net profit development as of 2018 should also result actively in an increase in free cash flow, which can be used to growing also the dividend to our shareholders again. I think we have given just two points in time on the share of digital.
It will be already 70% on our marketing spending. It will go into digital. We have believed that physical retail will never completely go away. To a lesser degree, we think this also applies to magazines. The classical print advertising, but also out-of-home advertising, be it at airports, city lights, will be here. It's a bit difficult to predict, is there a target value on how much we will spend online? It will grow, and it will particularly grow, not so much from banner advertising and search engine optimization. With a much better CRM system, hopefully in place in the course of 2017, we think that we'll use these digital resources rather to target customers very individually in their needs and interest when it comes to the brand, which accounts for digital marketing.
I would see it as a new generation, far more intelligent marketing means than we were able to display in former times. In the result, we do expect over the next years a slight increase in digital marketing spendings as a composition of total marketing spendings.
Thanks, Mark. Maybe just one follow-up there on the retail business expense line. You mentioned that there's fewer white space that you're going to identify and you're taking a more cautious approach there. Can we assume that that's going to be relatively stable over the course of the next few years, or will there be a certain allocation or spike in 2017 and 2018 as you look at the HUGO pilots and you think about that reconfiguration?
The HUGO rollout will be driven by just one factor, that we have found an expandable and profitable business system. We are very confident from where we stand today with HUGO and the feedback we get from many wholesale partners. It's predominantly a shop-in-shop brand in core European markets. With the new collection that we're in progress working on, and also with the new global price position on HUGO, we will see how high is the limit in terms of growing this business. We can assure you we will not be limited by resources if we see that this is a highly profitable business to expand it. We are cautious already to give you today an amount of number of POS or annual investments behind the HUGO.
We want to see a proof of concept by the end of this year in terms of collection, in terms of concept. We'll have the first result from freestanding stores. Please keep in mind, we do have some HUGO stores already in place, which will allow us an immediate feedback from consumers how much more successful these formats are. Clearly, we need to, and all three of us are aware of that, we need a step change in performance of retail performance compared to the current HUGO retail performance before we will decide to go into an expansion. It could, and that's why we're cautious not to give a 2019 and 2020 investment or total space expansion number yet.
It could be a major driver of a retail expansion going forward if, and that's important if, we see that this is a highly successful retail format for global rollout.
That's very clear. Thanks very much, Mark.
Thank you. As a reminder, ladies and gentlemen, please press star one to ask a question. Our next question today comes from Antoine Belge from HSBC. Please go ahead. Your line is open.
Yeah. Hi, it's Antoine Belge at HSBC. Three questions. First of all, in terms of investment in general, so not only marketing but product stores, et cetera. My understanding from the Capital Markets Day was that you were in a big phase of changes. I'm a little bit surprised to see that there is no more impact on the margin from those investments. Isn't it a risk that by trying to protect the margin at all costs, you're in a way postponing the timing of the recovery at the brand level? My second question relates to your order intake for the fall and winter collection. I think one of the reason why you didn't want to provide precise guidance back in November is that you wanted to have a bit of more visibility on those order intakes, especially for the Germans wholesale partners.
I'm quite keen to understand the reaction, especially they've already done a bit of a price increase with the entry level of the suits going from EUR 449 to EUR 499, but they still have to implement another sort of bigger step to EUR 599. Any feedback would be appreciated. I have a very boring question, but which is actually impacting the consensus figure is the depreciation and amortization number. In 2016, the increase was almost 20%, which means that the depreciation to sales ratio has increased from 5.1% to 6.3%. I think that consensus is factoring a big decline in 2017. Were there any exceptional in those depreciation? Even the Q4 numbers was quite high.
Any sort of guidance in terms of EUR number or as a percentage of sales for 2017 will be welcome as well, because it seems to be a wide array of expectation on that metric.
Well, thanks, Antoine. I don't think that any of these questions were boring, also the last one. Let's go in with the first one. I think we highlighted the things on gross margin development that we do know will have a positive impact. It's easy to calculate with the momentum by sales channel that we will have a beneficial impact from a mix gross differential. We expect retail to grow stronger than wholesale, which will benefit our gross margin. I think Thomas asked earlier the question on the inventory write-downs in the previous year and the current fiscal year, which as we highlighted, will have a positive impact. Let's leave currency effects to the side.
One element that we highlighted in London, where we have now a bit more visibility is our impact on our COGS related to where we also said, I think Ingo repeated that today, that we are willing to invest into the quality of our product, especially in the casual wear, not in terms of design, but also quality, value for money. We have done that already with the fall/winter collection. We are in full swing developing our spring/summer 2018 collection. We are relatively sure that we can balance efficiencies, be it from other sourcing options, be it from complexity reduction where we see them, to take advantages of economies of scale with the investment that we take into product. Where needed and where we are convinced that consumers rightfully ask for higher product quality.
As we said today, we see this in particular for our BOSS casual wear offer. We are willing to invest that, we do not expect an impact on our gross margin, at least on the forecast for 2017. On the order intake, I think we're giving you the numbers by region. We will not provide order numbers by market. Yes, the German market has seen some declines in the third quarter, but it's recovered very nicely in the fourth quarter. From our perspective, the price adjustment we have done from EUR 449 to EUR 499 in summer 2016 has been well digested and accepted, not only by the end consumer, but many of our trading partners.
Bernd already alluded to that also the now announced price harmonization measures that we plan with spring/summer 2018, that we will charge in the Eurozone for the same product, the same price, has been overall overwhelmingly accepted as an overdue decision by the group. We will take into consideration also tactical elements like we do that with our U.S. partners and European partners to see where pricing pressures are extremely severe. We assure you that the price adjustment with the French market as the lead market for our European Euro price level will be the new norm as of spring/summer 2018. On depreciation amortization charges, we expect, based on our current forecast, this to be on a similar level to the fiscal year 2016. It's a bit due to the composition in our depreciation, our asset base.
There has been uplift due to the closures to some of our stores, we expect SG&A expenses to be on a slightly higher level than in 2015, we guided this to be flat in 2017 relative to 2016. That's correct.
Okay. Just when you mean flat, you mean flat in Euro terms?
Flat in percentage. No, sorry, in Euro terms.
Okay.
Absolutely. Sorry.
All right. Actually, my question about investment, where also I think linked to maybe just not at the gross margin level, but also in terms of SG&A, and there doesn't seem to be a lot of SG&A pressure on your EBITDA margin guidance. Here again, are you sure that all your strategic initiative will not require more SG&A investments? My understanding also from your presentation last year was that 2017 would be, whatever you want to call it, but then 2018, the return to profitable growth will be actually not happening already. That's why I understood that you would require some kind of SG&A investment as well.
Well, you're right. We have new teams on the campus that we didn't have two years ago. I'm now also getting my Snapchat and Instagram one-on-one. We have now content teams that we haven't seen before that are fueling these very hungry channels with interesting content. If you think about the change in professions, we are desperately looking for people who can be editors on our Snapchat and Instagram accounts. Clearly in these areas, we recognize the need to build more teams. Keep in mind, we're talking about a 2,500 people headquarter army, and this is now shifting in composition. Certain elements to our business in the more general G&A part have to take, and this message has been well accepted by the organization now, to accept to the new norm of a flattish top line.
We have to keep our costs in this area and space, be it our wholesale distribution team, be it our finance teams, be it our HR and backbone IT system. This discipline allows us to invest into certain parts of our business system which are needed in a more digital world. I'll just give you one example to that, but there are other elements in driving the digital transformation where we are willing and capable to do the investment, but it's rather a shift in composition than overall increase in the cost structure. Please keep in mind that this industry has been for many years, almost in a state of denial, that where we have grown our cost base quite excessively, and only as of 2016, we had our sobering moment to come back to a new normal.
That is not starving an organization, but it's more resizing and refocusing our resources where they're most needed to grow our business again.
Thanks. That's very clear. Thank you.
Thanks, Antoine.
Thank you very much. Our next question comes from Volker Bosse from Baader Bank. Please go ahead. Your line is open.
Yeah. Hello, gentlemen. Volker Bosse, Baader Bank. Thanks for taking my question. I have two question on the online segment. Good to hear that digitalization is a top priority for 2017. Second question is also, what is your idea about potential partnerships or marketplaces which you might be going to enter? Any news to expect from that side? Thank you.
Yeah. I think Bernd also touched on this point. We were clearly disappointed with our e-commerce performance overall in 2016. To some degree, we expected a slight setback with the relaunch of the site, which merged our formerly separate content and commercial sides. I don't want to repeat what we said as part of the call. We underestimated the importance of the mobile side. Our focus was very much on the desktop solution. There were other elements, starting with trivial elements, you would think, of just loading time of the page, having the right depth and amount of merchandising at the relevant price point, so that we have to be on a much steeper learning curve to be best practice as a former branded retail space. I think we said it very loud and clear. It's not one, it's the priority for the management.
We will not cut corners. We will not be excessively pouring market, driving traffic to the page if it's not yet performing on the level that we expect. We will not turn our e-commerce side in a digital off-price channel where you find discounts that you will never find on any other pages. We know there could be easy solutions to drive e-commerce sales. It has to be healthy. As we said, we want to return to a safe, sustainable, and profitable growth going forward. We are fully convinced that there are these opportunities, but there are no quick solutions. We do expect that the difficult situation our e-commerce business might also be part of our reporting also still in the first half year of 2017.
We will not guide on a specific number yet. We have not found a quick solution to the difficulties in the fourth quarter. Overall, for the full year, we remain committed that the relative share of e-commerce will increase for the full year. Bernd, you want to comment a bit on partners that we are already with and we are planning to have?
At the moment, there are two partners we are actually looking into. One is our department store partners who actually drive their own website. Some of them, we already manage the merchandise. At the moment, we are with two partners in discussions about a marketplace. The online players, which is, for example, Zalando, Mr Porter, ASOS, the pure online players, where we also discuss on marketplace side. For us, the highest priority at the moment is to really to manage our own website first, and thereafter, we are putting resources into marketplace opportunities.
Thanks for the details. Thank you very much.
Thanks, Volker.
Excellent. Our next question today comes from Warwick Okines from Deutsche Bank. Please go ahead. Your line is now open.
Yeah. Good afternoon, everybody. Two questions, please. Firstly, on the license segment and your guidance for the year ahead. You talked about it increasing solidly. Could you just frame what that means? Because you described +12 in Q4 as robust, and it seemed a bit more robust than that. Do you mean single digit or double digit, please? Secondly, Mark, you began the presentation talking about the operational deleverage that you experienced in 2016. Why are you not expecting any operational leverage or deleverage in 2017?
Well, on the license business, we haven't given any more specific guidance. I think also in the past. As you know, a business that is even more remote to our direct control than even wholesale, because here we are benefiting from the work that we clearly have an important role into, but the execution lies with our partners, be it Coty now on the fragrance or Movado, when it comes to and Safilo to the other two major categories. We have to be a bit realistic in our ability to forecast the development also on these three major license business. We see a good momentum. We know, on all three of them, that we have good initiatives in place. We have been very happy how the relationship has started with our new and biggest partner, Coty. We have seen a strong commitment in terms of regional expansion.
There are attractive opportunities for both of us to capture to a larger degree the U.S. market, where we were not as strong as we were in other regions in the world with our fragrance business. We also see for glasses and watches, good development. Whether it is going to be as strong, and this is why we use a stronger term for 2016, as it will be in 2017, this is just too early to tell, but we do, as you rightfully quoted, expect a solid development also in 2017. In terms of OpEx leverage or deleverage, it depends a bit on your top-line development, I would say. Right now, we are guiding the market for a flat top line. We have to make sure that we maintain the cost discipline while investing into areas that we already discussed as part of the call.
At the same time, I think that was the first question asked, also have contingency plans in place if the market environment turns more against us than we now see as a base plan. The cost discipline is there. We have some areas like rent negotiations that will have a full year effect, other cost measures that we took. We also recognize the fact that we will have areas of investment also in SG&A, that was Antoine's question earlier. That we will pursue to ensure that we have the capabilities in place also for recovery of the market, and especially with the collection in place with spring/ summer 2018, that will resonate even stronger with the consumers and have a higher level of desirability than where we are today. Operational leverage will be in a period of flat top line, a difficult task for us.
That is why we guided more or less in sync, top and bottom line. Clearly we do not want to lose this discipline once we get back to a more stable top-line growth momentum that will not only grow in absolute but also in relative terms, structural profitability going forward.
Thanks very much, Mark.
Thanks, Warwick.
Thank you. Our final question today comes from Mélanie Flouquet from JP Morgan. Please go ahead. Your line is open.
Yes, good afternoon. I'm sorry, I actually have a few questions. The first one is regarding your expectation for like the guidance for this year and the current trend. I understand you don't want to tell us exactly for the current trend, but it sounds like it's not improved markedly on Q4, which is understandable given the Germany [takes time ], I suspect. My question to you is, if it's not improved, what are you expecting to actually turn it more favorable to get to your more positive outlook for the rest of the year? Because the comparables don't actually turn much more positive or much easier after that. There are quite a lot of initiatives that seem to be hitting in January 2018. I was wondering whether you can recap what actually can turn this more favorably later in the year in terms of your initiatives.
That's my first question. My second question is a bit more strategic. It's on the outlets. The outlets were at 19% of sales and 31% of retail sales, if I'm not mistaken. Where do you see this evolving? You've done a lot of work on cutting the off-price channel and the promotion activity in wholesale, but what about your own retail side of it? Can you help us maybe, if we look at Q3 and Q4, understand maybe a bit more for China and Germany, where the most price action took place. What was the actual price decrease in China and price increase in Germany that took place in Q3 and in Q4? Or rather, what was the average impact over these quarters, and what were the growth and declines of each market in these quarters? Thank you.
Thanks, Mélanie. I think the line was a bit difficult. I hope I got all your questions right around like-for-like sensitivity, order perspective, and the price changes that we did in 2016. In terms of like-for-like sensitivity, we have a range of ±3%. Of course, if the group sees a prolonged trend at the lower end to this like-for-like development, we have contingency plans already developed as part of our budget plans to ensure that we follow the prioritization on things that we will first reduce, postpone, or do differently to ensure that our OpEx development reflects also the like-for-like development. I think that's a practice we have now learned in 2016 to ensure the discipline that we can only spend the money that we earn in our retail and wholesale business to begin with. We have to take decisions on which amount of merchandise to buy.
That's something that Bernd and his teams are working on very carefully. There is a certain revenue projection we have to work with, and then we need to be smart and agile in how to shift merchandise to these stores, POS, where we see the biggest return for these investments. Same applies to our projects and investment in OpEx, that we have plans in place also to protect the bottom line when like-for-like falls. However, as you can see from the range that we provided in the earning guidance, if like-for-like will fall to the lower end of the guidance, there are also limited means also to avoid a decline in operating profit.
That's clearly not our objective, there will be, in a difficult market environment like we experienced in last year, at some point also an end to the measures that are available to us to counter an overall negative market environment. We can ensure you that we have worked very carefully to ensure that contingency plans are in place to protect also the earning guidance for 2017.
Can I come in? Sorry.
Yeah, sorry. Go ahead.
The line was indeed not very good. My question was more, if the like-for-like is trending around minus 3% in January and February, what will make it turn to positive within your range in the rest of the year? The base of comparison is not a lot easier, a lot of initiatives seems to be hitting the stores in beginning of 2018.
Yes. Well, first and foremost, we didn't make any comment on the January, February like-for-like or retail trends, just to be sure that you don't read too much on my qualitative comments. What we said is that we have seen in general market trends that we have seen in the fourth quarter to be prevailing also in the first quarter. With the stronger demand in China, especially a difficult market environment that we are faced with in the U.S. Yes, none of our like-for-like guidance is based on an easier or more difficult comp base. It's rather based on the measures we have taken in terms of improving one important element of our retail business, which is our e-commerce business, where we expect a more difficult first half year to be followed by a phase where the measures that we have described will take a bigger impact for that.
We will see with the changes in our retail network, two major things that will be helping our retail performance already based on first indication that we see. First, you will see much stronger shift into entry price points in our own retail operation that will drive visitor numbers and conversion rates in our stores. Plus, I think Bernd had this part of his presentation as well, we had very limited expansion into casual wear offerings be it on the BOSS Orange and in particular the BOSS Green side yet. Where we introduce it, we have seen very confident and positive reactions to that. We think we have some elements in our portfolio that we would describe as self-help measures independent from the market environment that we work with. Unfortunately, not all of them are immediately available.
On the e-commerce improvement, some of these measures, for example, loading time on the webpage, merchandise changes that we have executed, need to be understood and recognized by the end consumer. Over the course of the year, we do expect that these measures will have a meaningful impact to help us to maintain and improve our like-for-like development within the range that we guided you to expect for the full year.
Thank you.
Let's complete your question with the two parts on terms of pricing increases. The price adjustment we did in the first quarter in China was a price adjustment of around 20% decline relative to the prior year. The price increase that we did in Germany and some other markets, for example, also the Russian markets we increased prices, was roughly in the low teens. It was not one specific percentage rate, but it varied a bit by product category, but it was in the low teens that we increased prices. In Germany, as I described, it was very well received in particular from our wholesale and retail customers going forward. Outlets are the preferred way for us to clear excessive inventory. As we described, we have discontinued to use third-party off-price channels pure plays. We've never used them in Europe.
We have used them extensively in the U.S., and this practice has been discontinued. We continue to strive also to improve the shopping experience in our factory outlets. Factory outlets with premium luxury tenants are here to stay, in particular in the apparel world. If there's a high-class set of competitors in that, we have no issues to operate also BOSS outlets there. The prime purpose remains, however, to clear unsold inventory that we have to take back from our full-price businesses. Over the longer term, over the next year, even so we did not deliver on that one in 2016 yet, our objective remains what we stated also in London to grow stronger in our full-price business and in our off-price business also when it comes to own retail.
There are already very confident signals in some markets, but it will require a return to positive like-for-like in our full-price business that we make more significant progress to that. We do not target a specific share of off-price to full-price in retail, but we would concur to the point that in some markets, in particular the U.S. market, the share of off-price is slightly excessive on the longer term. We will do the necessary steps to correct this split between these two sales channels.
Thank you very much.
Thank you, Mélanie. Ladies and gentlemen, thank you for your interest in today's call, and we look forward to speaking to you again relatively soon with our first quarter results which will be on May 3rd at the latest. Also already today, I would like also to take the opportunity to invite you to our investor day, which we'll be hosting in Metzingen in our headquarter on August 2nd. We will look forward to update you on the future plans. We will be walking you through our showrooms. Especially, Ingo will like to show you that you touch and feel for yourself what we have been talking about because this will be our moment of truth, not only via you as our investor and analyst base, but also to our customers to see what is a bit abstract and difficult to grasp at this time.
Thank you very much for your time, and have a very nice afternoon.
Thank you. That will conclude today's conference call. Thank you very much for your participation. You may now disconnect.