Earnings Call: Q1 2016

May 3, 2016

Ladies and gentlemen, and welcome to the HUGO BOSS First Quarter Results 2016 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Marc Langer, CFO. Please go ahead, sir. Thank you very much, and good afternoon, ladies and gentlemen, and welcome to the presentation of our Q1 results 2016. The premium apparel industry had a difficult start into the year, and the same is true for HUGO BOSS. Cautious customer spending globally and some specific challenges, in particular in the U. S. Market, had a significant negative effect on the Group's top and bottom line development. Nonetheless, we made important progress in our initiatives to protect margins and cash flow. At the same time, we started implementing some far reaching changes to brand and price positioning in the U. S. And Chinese market, respectively. But let us start with our largest region, Europe. Here, sales declined by 1% in currency adjusted terms, affected by a notably weak month of March. Tourism played a negative role throughout the quarter, with particular weakness among the Chinese clientele against a very tough prior year comparison base. However, the business was local, which accounts for around 85% of sales in the region, also moderated compared to the 2015 levels. By market, the UK continued to outperform and grew by 4% in currency adjusted terms. In Italy, sales were even up at a double digit rate. Germany recorded a mixed performance with sales declining by 2%. Wholesale outperformed on retail here, underlying the sustained positive reception of our change of distribution strategy implemented last year. The Benelux and France were among the weakest performing markets regionally, clearly affected by the terrorist attacks and the resulting drop in tourism. In the Americas, performance differed significantly by market. Our business in Canada and Central in Latin America grew at double digit rates. The latter, in particular, benefited from a repatriation of local demand, following region wide currency depreciation. Shares in the U. S, however, declined by 16% in currency adjusted terms, so that the overall region was down 8% in the quarter. The double digit sales decline in our U. S. Wholesale business is indicative of the difficult state of the overall market on the one hand, As a result of weak sell throughs over the course of the second half of twenty fifteen in particular, most retailers are buying very cautiously at the moment. On the other hand, we have started scaling back our off price business in the wholesale channel, although the related sales impact has still been process of implementing the category migration concept, so we are reducing the exposure of the BOSS core brand in multi brand spaces in exchange for HUGO and BOSS Green. This substitution will become visible on the floors of partners such as Dillard's and Lotte and Taylor over this summer. At Macy's, this change was implemented in February. Responsibility for the entire BOSS core brand business at Macy's, now limited to 8 shop in shops in key flagship locations as well as an online concession, has been transferred to us, and we are busy upgrading store concepts, the assortment and the quality of staff. Admittedly, however, current weakness in the U. S. Is not limited to the wholesale channel. On retail, we suffer from substantial like for like sales declines, predominantly related to a double digit decrease of visitors. As a result, we are intensifying our efforts to improve the in store experience, including the rollout of more personalized service options and the expansion of Omnichannel Services. In Asia, overall sales were down 5% in currency adjusted terms. Momentum continued to be positive in Japan. Some smaller markets such as South Korea also grew very strongly. In the key Chinese market, there was light and shadow. Overall sales were down 11% in local currencies here. In Hong Kong and Macau, the decline was even much more pronounced. On the Chinese mainland, however, trends improved compared to the end of last year, although we had lowered prices by another 20% with the launch of the springsummer 2016 collection in January. On a comp store basis, sales on the Chinese mainland were still down in the high single digits, purely reflecting the impact of the price adjustment. However, traffic stabilized and volumes were up around 10% compared to the prior year. And in the 1st weeks of in April, this trend even accelerated. We attribute this to the following factors: 1st, the price adjustment and its consistent in store communication helped us activating existing customers more effectively. In addition, we are now addressing an additional group of aspirational customers for whom the brand has been seemingly unaffordable in the past. 2nd, we significantly changed our marketing strategy to prioritize digital over print. Employing Valet Hu, one of the most popular actors in the country, as a spokesman for our Men of Today campaign, we generated unprecedented brand interest and drive to store. As an indication, the number of users following us on WeChat has quadrupled within just a few months. And third, we benefited from some repatriation of local demand. Our offer to Chinese customers visiting our key stores in Europe and other parts of Asia to register with us on WeChat and make alterations free of charge in their local store back in China has been well received and we will exploit cross selling opportunities. By distribution channel, own retail sales were up 1% in local currency terms. The sales contribution from openings and takeovers in 2015 and in the 1st 3 months of this year more than offset a comp store sales decline of 6 lesser was primarily related to weaknesses in the U. S. And Greater China, which caused like for like sales in the Americas, in Asia Pacific to decline at a low double digit rate. The European business was in slightly negative territory on this metric. The group's overall comp store sales decrease was mainly driven by lower traffic. The price adjustment in Asia had a comparatively smaller impact. Unlike in previous quarters, online only performed in line with the rest of own retail. This was due to the overall slowdown in our business, but also the fact that the pace of on-site innovation has temporarily been slowed ahead of the insourcing of online fulfillment and the major site upgrades scheduled for August. Since yesterday, we have taken over sole responsibility for the fulfillment of our European operations from our partner, Avato. The transition progressed very smoothly, helped by extensive testing over the last few months. We now focus our resources on offering omni channel services as quickly as possible. In August, we will launch pilots of click and collect and in store online ordering in the U. K, followed by the full implementation of these services in all European online markets later in 2016 2017. With regard to physical retail expansion, we opened 12 new freestanding stores in the Q1, most of them in Europe. In addition, we took over 4 stores from franchise partners, including 3 in Malaysia. Net of closures, the number of freestanding stores increased by 8 to 4 38 at the end of March. As communicated at the Analyst Conference, the pace of retail expansion is going to slow over the further course of 2016. Following the review of our store opening plans, we will only expect to open another around 15 freestanding stores this year. This includes several cases where we relocate our presence within the same retail area. At the same time, we are also analyzing the performance of those 10 to 20 stores, which had the most dilutive impact on retail margins in 2015. Pending the negotiations with landlords currently ongoing, we will most likely close several locations in order to improve the structure profitability of retail operations. We will update you on our findings latest in August at the time of the half year's results presentation. 1st quarter wholesale sales declined by 9%, in line with our full year outlook. This was predominantly due to the U. S. Where cautious ordering and weak short term replenishment demand dragged down performance in addition to the effect from converting part of the Macy's business into own retail. However, in Europe as well, the negative overall market sentiment weighed on demand. Finally, the license business was up at a double digit rate, also benefiting from a positive delivery shift, which we don't expect to recur. However, also on an underlying basis, the Fragments business, in particular, developed very well. BOSS, the scent, continues to play a major role in this respect. Launched in autumn last year, it has helped us achieving overall market leadership in Germany now, for example. However, good growth in male Fragrances was not enough to lift our overall menswear business in the Q1. While this had to do with many rather cyclical market related factors discussed earlier, we strongly believe in the need to continuously strengthen the brand in what is the DNA of HUGO BOSS. We do so in different ways. 1st, the recent appointment of a Managing Board member exclusively responsible for Brand and Creative Management underscores the importance the company is placing in this area. Ingo Wirth combines creativity with a strong business acumen. And while he knows the company inside out from his previous assignments here, Ingo is also bringing in a fresh perspective from his experience at major U. S. Domicile peers. 2nd, we decided to reallocate a sizable portion of our marketing spend back to menswear. In the wake of this change, the importance of digital is only growing further. And third, based on a review of sales productivities in our own retail network, we will expand the retail floor space allocation to menswear again, in particular in the U. S. Market. To make this very clear, this does not change our commitment to womenswear. BOSS Womenswear has prospered under Jason Wu's artistic direction and gets enormous recognition from the press and our customers. We will continue on this journey, and we remain dedicated to investing in the opportunity that Women's Wear represents. However, we will carefully balance these investments with the goal of maximizing overall commercial performance, acknowledging the paramount importance of our menswear business. In the Q1, overall women's wear sales were down 4%. The BOSS women's wear business continued to perform better than the overall segment. Let me now go through our quarter. Gross margin was down 140 basis points year over year and reached 64.1%, An increase of rebates, mainly in the U. S. Market and inventory write downs were the main reasons for the decline. The latter was due to the scrapping of old inventory taking over from previous franchise partners in the Chinese market. As a result, we now have significantly more flexibility in this market to adjust our merchandising to the new pricing strategy. Whose implementation has just had a smaller negative impact on gross margin development in the quarter. The first result of our cost saving initiatives led to a more moderate operating expense growth compared to the prior year. Supported by the first benefits from the successful renegotiations of store rental contracts, mainly in Asia, as well as by a slight reduction of marketing expenditures, the increase of selling and distribution expenditures was limited to 5%. G and A expenditures were up 6%, reflecting our measures to digitalize our business model. Obviously, though, tighter cost management was not enough to avoid significant operating deleverage related to the weak top line development. As a result, EBITDA before special items declined by 29% to reach €93,000,000 in the quarter. Also considering special items of €7,000,000 mainly associated with the change in management, as well as a 20% increase of D and A, EBIT and net income dropped by almost 50%. By region, profitability in Europe held up relatively well considering that the reported margin decline of 2 70 basis points includes the substantially negative currency impact related to the around 30% share of sourcing denominated in U. S. Dollar terms. In particular, we reduced rebates in our European business in the Q1. In contrast, currency continues to have a favorable impact on American profits. Excluding the supporting effect from the appreciation of the U. S. Dollar, regional profits would have been down more severely. Higher rebates and operating deleverage owing to the weak top line were the primary factors here. The same effects were also at work in Asia Pacific. Coupled with the negative gross margin effect in connection with the price adjustment and the inventory scrapping in China, so regional margin dropped significantly by almost 13 percentage points in the Q1. Turning to the balance sheet. We continue to improve working capital management sequentially. The just 1% increase of inventories in the Q1 represents the lowest growth rate in the last 10 quarters. Tight merchandise management and cautious planning of sourcing and production was instrumental in this respect. With the inventory scrapping in China, we are now clean in this market. And even in the U. S, the pressure from having too much stock has eased considerably. Investment activities also started moderating compared to prior year levels, although the reduction of capital expenditures in the Q1 still smaller than what we expect in the full year. Investments in the 1st 3 months predominantly focused on own retail. However, while store renovation expenditures increased, spending for new openings declined, a pattern we also project for the full year. The improvement of working capital management offset the decline of earnings, so that free cash flow now flow developed even slightly better than in the prior year period. Nonetheless, net debt was still up compared to the levels achieved at the end of March last year. Improving free cash flow remains a key goal in 2016. To this end, we have reviewed all non committed investment plans as outlined at the Analyst Conference in March. In addition to the cancellation of several store openings, we also decided to streamline our IT investments. Here, we will focus our resources on the faster implementation of fewer projects, prioritizing those most critical for the digital transformation of our business. Also factoring in the postponement of some expansion projects the group headquarters, we now expect investments in 2016 to amount to €160,000,000 to €180,000,000 compared to €220,000,000 last year. We also made progress with the cost review announced in March. We have now identified cost savings of around €50,000,000 compared to our original budget for the year. The successful renegotiation of store rental contracts, the tightening of operating overhead cost management and the streamlining of marketing initiatives will contribute the lion's share to these savings. However, unchanged to our previous plans, we will continue to invest in the growth of digital. Our sales and profit outlook remains unchanged. We continue to project group sales to increase at a low single digit rate in currency adjusted terms, driven by growth in Europe and the overall retail channel. This implies an improvement of trends predominantly in the second half of the year. In addition to an easier comparison base, we also expect the various measures we are currently implementing to take effect. Gross margin is projected to remain on prior year's levels in 2016 as a whole. Compared to the Q1, we expect performance to improve in the quarters to come. A reduction of rebates in combination with further optimization of the inventory position, the ongoing quality upgrade of our U. S. Distribution and a positive channel mix should drive this. Nonetheless, EBITDA before special items is forecast to decline at the end of the year. While the cost savings identified will help cushioning the effect from weak top line trends, we still expect considerably operating deleverage in 2016, even factoring in stable on retail like for like trends in the year as a whole. Ladies and gentlemen, the results of the Q1 highlight the challenges we are currently facing. Obviously, we won't be able to change overall market conditions. However, we know where we will have to improve our business in order to bring hugo Boss back on growth track. Our measures in the U. S. And Asia will strengthen the consistency of our global brand and price positioning. And our focus on digital will greatly enhance the brand and shopping experience for the benefit of our customers. There's clearly a lot of work to do, so 2016 will be a difficult year of transition. We are pressing ahead with these changes, but we will also have to accept that returning to profitable growth is not a quick fix in light of the current market backdrop. Nonetheless, I've been impressed by the energy and determination of our people to turn things around. The passion for the brand and the company that I've come across the last few weeks is an important reason for my confidence in the group's long term outlook. I will now be happy to take your questions. Thank Our first question comes from Anton Belge of HSBC. Please go ahead. Hi, good afternoon. It's Sontin Belode, I shall be seen. Three questions. First of all, I understand the logic behind maintaining the EBITDA guidance given the cost saving program. And a bit it's a bit more difficult for me to understand how you can have a flat retail like for like over the full year after a minus 6% in the Q1. So I understand that actually the basis of comparison in Q2 is not that easy. Second question relates to Europe. Europe was the region which was holding quite well. I think when you we last discussed Europe, it was still growing. So obviously, March was very tough. Have you seen a continuation of that in April? And again, given the basis of comparison, what makes you confident about Europe for the remainder of the year? And finally, on the cost savings of €50,000,000 I think you mentioned some rents renegotiation. I mean, how are you going to achieve this? Is it a big part of the cost reduction? And so in the press release, it was mentioned that some marketing costs could be revised down. So how the marketing to sales ratio is expected to evolve this year? Will it be down year on year? Thank you. Thanks, Antoine. Yes, let me start with the first one. We indicated in this call, we have experienced a weak like for like trend in all markets. We have seen some improvement in China despite the price adjustment, which per se would have been a significant drag on like for like performance also in the Chinese market. So we do have indication that some of the measures that we have implemented and we've continued to implement for the remainder of the year will have a positive impact to our business. So as we indicated, reviewing format allocation in our stores between menswear and womenswear between different price points, we are quite confident that some of these measures were not to be used in the 1st 6 months of the year, but we'll still have a positive contribution based on the reviews that we have gone through over the last couple of weeks that we have a better in store execution. Driving customers to our store is an important element. As we explained in the call, we have not lost on conversion rate or basket size necessarily. These have rather the opposite contributed to the success. But we need to intensify and improve our offers to bring customers to our store. That's where your first question also relates to your third one, the new focus that we have brought to our marketing spendings, as we explained in the call, especially from measures that will be effective for the second half of the year, we have prioritized these parts of our marketing plans and given more resources that have demonstrated in the past that they will allow us to drive customers to our stores. Centimeters is a key element to that. The integration of our digital and physical distribution is another part. So we also expect now that we have successfully passed a milestone in sourcing online fulfillment, we have an industry leading infrastructure in place that will allow us to take even more advantage of offering our customers seamless experience. So you see there's many elements that we are implementing, which I would qualify as self help globally. But clearly, this is against a challenging market drop. So just betting on an easier comp as we will have, especially in the second half in U. S. Might be supportive, but we predominantly expect improvement in like for like development for the full year to come from the effect of the measures that we have implemented. Europe has weakened. Strong markets like the U. K. Were still up. Also Italy, we were pleasantly surprised forever in total, in particular due to the weakness that we experienced in the Q1 in France and Benelux slipped into negative territory. I think we mentioned some of the elements that affected our European business, especially those parts, especially in France, where the predominant part of our business was in continues to be in Paris, but also Brussels clearly affected in the aftermath of the tourism effect. We have seen quite a significant decline in tourism, which was also affecting our numbers. Again, from the European trading trends, I expect this region to benefit most from the in sourcing of online fulfillment, which is focused on the EMEA region, where we expect an acceleration to the rather low single digit trends we have seen in the Q1. I already answered part of your third question. I think you touched on 2 parts of our cost saving initiatives. 1 is rent reduction. We already have secured a successful rent reviews globally in some markets. So this has helped us to moderate the increase in operating costs in the Q1. And we are armed and this will not come as a big surprise to you in very tough negotiation, especially on larger store operations, where we have clearly flagged since the analyst conference that we are willing to ultimately take the decision to close stores if we are not successful in renegotiating rental levels. So the analysis on these 10 to 20 most diluted stores is completed. We have all of these stores developed with our regional and country outcome to that expect an outcome to that. So it's rather negotiation on the exit, the sublease construct, return to the current landlord, which is something that has to be done swiftly, but also with diligence. But we expect these measures to be fully implemented and decided and also on the impact it might have in terms of non recurrence in the Q2. Marketing will be significantly reshuffled in composition. As I said, it's an important element of our first objective to drive customers back into our stores, but it will not change significantly in ratio as a percent of sales for the full year. I would rather expect marketing spending as a percentage of sales to be very comparable to the levels we had in the previous fiscal years. Thank you. Maybe just a quick follow-up on the rents negotiation. I mean, are there any particular region which we'll see more renegotiation or maybe more closing? Well, there might be some parts of the world, take for example, one of our star performer in the past like the U. K. Market, which might have thought they're immune to this exercise. I can tell you everybody has something which is dilutive to the store, maybe some more than others. But we have been clear and it is affecting all 3 regions, almost every market that we now take a very rigorous approach to anything that's clearly dilutive to the margin. It will not surprise you that a significant portion of the analysis is in the Chinese market, where we have seen significant declines in sales levels over the last 2 years, but we also have not easy negotiation situations in Europe and North America. Thank you. Thanks, Antoine. Our next question comes from Jurian Kolb of Kepler Cheuvreux. Please go ahead. Thanks very much. On China, you mentioned that you had a 10% volume growth. Could you maybe give us indication in which categories that was predominantly? Secondly, we're seeing in the industry some kind of tendency that there is some brand harmonization going on. Have you already thought about that? Or is the green, black, orange, tailored, what have you, is that put in stone that this will continue to be as it is currently? And then lastly, on Bosswoman, how is the situation there? Obviously, with Jason Wu, how long is the contract still ongoing with him? And should we assume that the importance of Boss Woman will go down materially? Or is it more an adjustment of the current situation? I know you already elaborated on it, but some additional words on that business would be appreciated. Thanks. Yes. Let's start with the volume uplift in China, which as we indicated in the call, have been one of the bright and promising results in otherwise quiet year first quarter performance. We think that we have now found a much better execution not only into finding the right pricing, if there's ever something like the right relative pricing at all, but also especially in terms of execution using social media in a far more advanced and sophisticated way than we did 6 months ago, using the brand ambassador, I guess, less than 10% on the analysts on this call would might have heard about this gentleman before, well as who. But it clearly is an indication of local intelligence to be tapped into to find the right execution to make this price adjustment known to our end consumer, especially those who we might have lost over the last years because they have established different purchase habits. So yes, it's rather the execution on the price adjustment, which has played a role than specific product categories or brand lines. It is driven by our menswear business. We are still predominantly sports in the Chinese market, but we continue to see positive development also in our tailored products, especially Mr. Welles Hu was also important brand ambassador when it comes to tailored products. So if you Google his image now parallel to the call, you will see that he is not dressed in shorts and T shirts, but he is dressed very nicely in a cool Hugo suit, which is also investing into our core equity in the Chinese market. In terms of brand harmonization, it's clear that this is also a story or a journey that will always continue. We have to evaluate the effectiveness of our brand architecture, the breadth of the offer, and we have done this in the past, and we will do this in the future. I would like to highlight, however, that our brand portfolio that we offer in our most important sales channel is far more harmonized and focused on the BOSS core offer than ever before. So if we look at our retail operations today, in particular with the successful category migration that we implemented in Europe last year, we are quite confident and pleased with the results that we have established BOSS now as our core retail and monobrand in our portfolio. HUGO, both green and orange, will continue to play important roles, in particular to an aspirational buyer in certain shopping environments where we think that the brand environment is not appropriate for the BOSS offering. I think I mentioned as part of the call also the efforts we are going through right now in the U. S. Market that BOSS is not any more appropriate at some of these wholesale department stores. However, other brands, which are seen as a substitute for adequate brand mix to the HUGO brand operating at lower price points, also to a younger consumer might be well served from this location. So I think we have very strong sizable successful brands with good customer recognition and we are well advised to work with the potential that these brands offer to us. I'm glad that you mentioned women's wear because this is very important that we are not reverting on our commitment to women's wear. However, we have to acknowledge that we have overexposed ourselves sometimes in space allocation, definitely in marketing budget allocation to women's wear. And we need to be right in our allocation to support our core business representing close to 90%. So we have adjusted for that. We are happy with the first results that this is helping to support our menswear business in overall difficult market environment. But we have no intention to slow down or to walk away from our commitment to womenswear. We have a multiyear contract with Jason Wu. It's a well established relationship. It's received strong feedback from buyers, but also from the fashion press. It has brought BOSS and its fashion competencies to an unprecedented level, and we have no intention to change that. Very good. And a very quick one. The €50,000,000 cost savings, just to double check if I understood that correctly, is that all going through your P and L this year already? Or is that something that builds up, A? And B, how much was already in the initial budget for this year? Well, two questions to that. One is, we have given you fiscal year 2016 impact to that. We have not disclosed the full run rate effect from this cost saving. And clearly, this is not pure play cost cut that we have quantified a reduction versus previous year cost levels because we have to acknowledge that given the strong run rate from cost increases from last year where we have built infrastructures not only on the retail side but also on overhead, the measures we have taken now will cause a significant and increasingly decline in the increase, but will not reduce the overall cost base versus last year. So the reduction is worth our initial plans that we have signed off at the end of 2015. These plans have now been very critically reviewed, not only in terms of OpEx, but also CapEx. We have quantified now the range of reduction at the €60,000,000 to €40,000,000 reduction worth of the last year investment levels. And also the OpEx reduction is due to the fact that we have very critically reviewed spending plans for the current fiscal year. We are now able to quantify the impact in the current fiscal year. Understood. Thanks very much. You're welcome. Our next question comes from Brad Sears of UBS. Please go ahead. Mr. Spears has disconnected. We'll now proceed. The next question comes from Claire Hough of RBC. Please go ahead. Yes. Hi, Mark. Thanks for taking my questions. Could I just follow-up on the question that was just asked around the cost savings? Are you saying that there was an amount of cost savings already implied in your guidance and you've now just quantified it to the market or is that an additional $50,000,000 on top of any that you'd already identified when you first set guidance. So just wondering really if you've kept your EBITDA guidance unchanged, what the offset is from that extra $50,000,000 So that would be the first question. And then second question, just wondering if you could comment on trading in April, whether there's been any improvement to trading in Europe or the U. S. Since the Q1 ended? And then third question, I appreciate it's still early in the year, but just wondering if there's been any change to your thinking around the dividend policy and outlook, given the expected decline in profitability this year, that would be very helpful. Well, let's start with the dividend question first. There's going to be quite sizable dividend payment, which is coming up now on May 19. And as we also explained to the market back at the analyst conference, we do expect a sizable decline in profitability in 2016. As you've seen from today's guidance reiteration, we have seen no change to that. And we were proven right with a very cautious outlook based on Q1 performance. But also as we said at the analyst conference, we will frame the different proposal not only on net income development, but also on progress in terms of cash flow generation. And clearly, it's just 1 quarter completed yet, but I'm quite pleased with the progress we have not only made in reducing and focusing our investment schedule, but also making progress in trade networking capital management, which from my perspective puts us on a pretty good path to hit on our target of improving free cash flow levels for the full year 2016. Let us deliver on these two metrics. We need to deliver also on our earning guidance in a now clearly proven difficult market environment. And we then take these actual data points end of 2016 together with our outlook on 2017 to frame our proposal for the dividend for the fiscal year 2016. I think your second question was on April trends. As you see from our unchanged guidance, we've seen we have no reason to revise our guidance for the full year based on any current trading trends. As we typically do during the quarter, we would try not to comment on current trading to the extent that this goes beyond on the completed quarter. But overall, we have not seen a significant change to the trends that we have experienced not only in the Q1 of 2016, but also at the end of 2015. On the cost savings, we have given to the market our clear commitment back in February to be quite rigorous in our cost review. We have done our homework. As I just explained to Jurgen, we have now not only identified but also quantified and timed the effect of these measures. We are giving you this number now for 2016, the €50,000,000 cost reduction was at the initial plans. This is now the number we feel comfortable with at the analyst conference and the initial guidance. We expected already some savings, but this is now the more quantitative assessment of these. Okay. Thank you. So that €50,000,000 is on top of anything that you'd already identified when you first set guidance? Yes. So I'm just trying to work out what the offset is because you've kept your EBITDA guidance unchanged and appreciate perhaps slightly weaker Q1. But is it that some of those cost savings should be reinvesting back into the business? Or what's the offset that so that you haven't changed guidance? Well, I think to run through this metric, I would also ask you to touch base with Dennis, but we have given you a quite wide range on our EBITDA decline. So please keep in mind that you might have a different interpretation of low double digits than we had initially. It could be part of this discrepancy on having now quantified additional €50,000,000 added to your initial assessment on our full year EBITDA guidance. Okay. All right. Thanks very much. Thanks, Claire. The next question comes from John Guy of MainFirst Bank. Please go ahead. Yes. Good afternoon, Mark. Thanks for taking my questions. First one, just on gross margin. You had 140 basis point decline in the quarter. Could you talk a little bit more about the basis point splits around markdown, rebates, pricing variations? Clearly, there was a significant price drop in China, but prices might have increased a little bit in Europe and with regards to raw materials. So just wanted to get a greater understanding of those moving parts around the gross margin, please. The second question around Europe. And you mentioned that 85% of your European consumption is effectively domestic. Can you talk around how sluggish the local consumption was effectively in Europe relative to travel and tourism related spend? And maybe give us an idea of trends on a demographic basis? And I guess thirdly, with regards to the North American market, you're still pursuing a strategy which is, I guess, quite department store centric when it comes to either taking over previous wholesale areas, conversions into shop in shops, etcetera. Why so much of department stores when ultimately traffic is in structural decline? And can you give us what you expect U. S. Wholesale will be as a percentage of Americas sales by the end of 2017? Thanks. Yes. Thanks, John. On the gross margin, I think you touched on all factors that affected our gross margin development. In the regular quarter, we would have just one explanatory factors on gross margin. This is the impact from channel mix, which in most cases also in the Q1 of 2016 is accretive to gross margin as we have seen a small growth in retail versus a high single digit decline in wholesale. You can factor in and calculate quite easily from the outside what is the positive impact that we also had in the Q1 of 2016 from a channel mix. What has been demoting or decreasing the overall gross margin for the Q1 were 2 factors, which were less than €10,000,000 but they were sizable enough to be mentioned. So what's the impact from rebates that we had in particular in the U. S. Market. And I will come back to the U. S. Market in the third question you asked us. So it's partly driven by margin agreement that we had to honor on the wholesale side of our business, but also continuous pressure that we also experience on the retail side of our business, which increased rebates in particularly in the U. S. Market versus last year. And last but not least, and these were the 2 negative factor which dragged down gross margin in the Q1 was the impact from inventory write downs, which was also sizable in the Chinese markets from previous takeovers. All other factors play into role. You're right that we had also a smaller impact from the price adjustment in China on the group level. However, the impact, because it was only effective on the springsummer deliveries, which is not effective on the full quarter, was compared to the first three I mentioned, channel mix, rebates and inventory write downs relatively small. Also, you're right that in particular Europe, I think that we mentioned it as well, has been negatively affected by currency fluctuation. So this is also a smaller negative impact to that. On the European performance, we think that our overall development, in particular in the German market, which is probably the market where we are even above the average number of domestic customers according to industry data, this market declined by 2% in the Q1. So our performance in Europe, I think, is more or less in most markets, maybe with Italy and U. K. As a positive exemption, in line with the overall apparel industry data that we received so far. Apparel has been less positive affected by an otherwise positive consumer sentiment that has been seen in the European market. And clearly, HUGO BOSS is not immune to that. To answer your question on U. S. Wholesale Distribution, Clearly, and we have learned these lessons already within the 1st 2 years of operation at Saks where we started to do concessions at department stores, it is not as easy as we initially expected. And we are not able to replicate successes that we also had on the Americas and Canada and Mexico and the U. S. Market. Part of that is certainly also due to that our execution was not without fault and we are working on improving our internal execution. But it's also due to the fact that in particular over the last 12 months, these department store partners have lost traffic. This has triggered the question that you also asked us, is it right to have the HUGO BOSS presence at all POS where we had the HUGO BOSS presence 1 or 2 years ago? In some instances, we have clearly decided to discontinue these operations. As I explained in the call, we have discontinued a significant number of POS at Macy's. We will further consolidate our presence at Dillard's and Lawton Tailors. We will discontinue the distribution of the BOSS brand. However, this is a market which still has a very sizable and also in terms of traffic numbers important wholesale business system. And there is a customer who is not as brand loyal, who has a high depreciation for choices who will continue also in the past, be it a male or female consumers to first visit the department stores before he might discover or she might discover the brand he feels most committed or bonded to. So we think it's not eitheror. It has to be a smart combination to that. What we have to make sure and clearly that's now a tough call in overall difficult year 2016, we have to make sure that our exposure on the wholesale side in particular in U. S. Is not jeopardizing our retail operation. So in cases where either brand damage is being tarnished or our ability to sell products at full price is put at risk by the behavior from wholesale partners, we will go into very difficult negotiations or tough negotiations, and we'll be ultimately willing to discontinue the relationship if we think that behavior, brand treatment is not in line what we expect the brand to be treated. There's no target percentage split between wholesale and retail for any specific year. It's a result of our successes on retail where we clearly focus on profitable growth, especially via like for like. But we are also very happy to continue relationship with wholesale partners like we do in Europe, which treats the brand as we expand brands to be treated, where we continue to have also in the future a very mutually beneficial relationship with these accounts. Thanks, Mark. I mean maybe just getting down to a number, if we think that the retail wholesale split in America is, I don't know, just around 50% wholesale, just under 44% of your wholesale is coming out of Nordstrom. That means that there are opportunities to consolidate. You mentioned a few of them. But what should we consider the wholesale as a percentage of sales to be in the North American market because you're still too overweight there? Can you any idea? I mean, even if it's not towards the end of 2017, maybe by FY 'twenty, just to get some idea? Yes. For the group, we have given you an indication that we expect by the year 2020, overall from a global scale, something that's probably between 70 five-twenty 5 split between retail and wholesale. This might clearly vary by region. Asia is far ahead of this percentage split. Europe will not be at this range by 2020. I would assume that the U. S. Market in particular will be clearly north of the 50% retail we have today. Whether it's going to be already above 60%, please understand that we don't want to lock us in into any specific target percentage rate. We want to have a healthy, sustainable wholesale business relationship. Whether this will be achieved with just 1 or 2 accounts in the future really depends on the outcome, also changes of behavior that we currently have found unacceptable from some of our current partners. And what is clearly understood by all of these partners that if this does not change from HUGO BOSS perspective, it will terminate the relationship. Okay. Many thanks, Marc. Thanks, John. Our next question comes from Thomas Chavut from Citi. Please go ahead. Good afternoon, Marc. Thomas from Citi. I have three questions, please. The first one on the rental renegotiation. Can you indicate how many stores in China or perhaps Hong Kong are concerned? And I mean, what have you generally achieved? Is it a lower variable rent, lower fixed rent, additional benefits, etcetera? And with regards to the 20 store closures in China, you had announced earlier this year, are these stores where effectively you're not able to reduce the rents? Or are these part of a more general downsizing of the footprint in China? Secondly, on the management changes, so you've named Ingot Weltz Chief Brand Officer and replacement of Christoph Hagen. If I understand correctly, he's worked at Hugo Boss already twice before. So can you tell us what he will bring to the table this time? And how do you anticipate him to interact with Jason Wu and influence perhaps the women's wear strategy? And thirdly, today you've given us a lot of the moving parts supporting your low double digit earnings decline guidance for 2016 with flat LFL, with flat gross margin, €50,000,000 of additional cost savings. So when you take all these into account, I know it's early in the year, but can you perhaps indicate whether you're comfortable with where consensus sits at the moment, which if I'm not mistaken is a 15%, 1.5% decline in adjusted EBITDA? Thank you. Let me start with the first question. I think there are 2 parts to that. One is the 20 store closures that we already announced in China were, I would almost call them the low hanging fruits because some of them were stores where former franchise stores have now come to the end of the rental contract. We have assessed the situation and have come to the conclusion that we have better alternative operations now in these city areas that we're not dependent on the continuous operation in these malls. And you have seen this also in terms of non recurring charges that we booked in the Q1 that what we have already executed in terms of these Chinese closures were not material in its impact in terms of top line profitability nonrecurrence. That's not true for the ones we are right now reviewing and some of we are in negotiation basically with every landlord because the environment right now in the Chinese environment is not easy. And as you probably are familiar with, it's not 120 landlords we are dealing with that are groups where we have a portfolio of stores that we operate with, some of them very on a very decent or good performance and others that we would like to close. So let's add additional complexity to it like every other branded competitor in this market. However, the relative performance of HUGO BOSS that we have seen not only in the Q1, we discussed earlier in the question, I think, from Antoine, the drivers for the positive impact from volume improvement, is giving us quite a good position to negotiate relative to other apparel players. Hugo Boss is now enjoying probably one of the strongest volume trends in the market. We have clearly improved brand images by all the activities that we have. So we have received quite open reception in terms of adjustment to our rental costs. This has found and will find some creative solution. Maybe it's not just a lowering of the percentage rent. It could be a removal of the minimum, but it could be also something that's just called differently, but effectively it's also rent reduction. It's a marketing contribution that's being giving over extended period of time. So we have multiple ways to achieve this target. But what we have also made clear to all of our landlords, we are willing to walk the ultimate mile. In these cases, where we are not happy with the outcome, we have not locked us in by maintaining a certain store presence or size of the business. If we come to the conclusion that this store with this cost base is continuously dilutive to our retail operation in China and same is true to any other part of the world where we have looked into our most dilutive stores, we are willing to close these stores and we'll be more precise on the exact amount latest by our half year results discussion. I think I've given you all the information that we have prior to Ingo's start, why we are very happy to have him join Hugo Boss. You're right, he had a very long and successful leadership leading the creative BOSS brand, especially from the menswear part for many, many years. And during this period, especially until 2,009, we have seen a continuous very positive success to that. He has worked in multiple other brands, male, female, this side of the Atlantic, the other side. So he has built a very strong also outside expertise at some of the leading companies in this industry. So we think it's not only somebody who knows Hugo Boss very well, has a very deep understanding to what the brand stands for, but he will also bring what I think is very important, a good industry knowledge, also best practice that he has picked up at other companies where I'm really looking forward to his now renewed and fresh perspective what we can do to strengthen all of our brand lineups. The focus will be on BOSS as our core brand. He has built a strong relation expertise also in the women's wear. And we are quite confident that especially in the combination between Ingo and Jason, we will also bring our BOSS women's wear business to new height. On the EBITDA guidance, you're right. We have a significant part of moving parts in the equation. That's probably one of the most difficult years to forecast also for myself in 6 years. And you know that last year, my track record wasn't the greatest to be not only precise but also right in my guidance. So I please ask for your understanding that this is a year which makes earnings projection quite difficult, and we continue to feel very comfortable with our low double digit guidance at this point of the year. There will be certainly in the later part of this year the opportunity for us to be more precise in our guidance and also to refer it back to the consensus. Consensus, as you know, has changed quite significantly over the last couple of weeks. So we would prefer to rather reference to our guidance than to any external reference at this point in time. Thank you, Marc. Thanks, Thomas. Our next question comes from Luca Silke from Exane BNP Paribas. Please go ahead. Yes, hello. This is Luca from Exane BNP Paribas. A couple of questions to better understand how Uroboros is doing against the broader market backdrop. Well, first of all, what is your assessment? How much of the problem is coming from a weaker market? And how much of the problem is coming from the U Go Boss brand execution? But more precisely, how do you see your market share evolution in the most recent quarters? And what is the breakdown of like for like growth? Do you have stronger like for like growth in the full price or in the off price retail activities that you maintain? I want to Okay. Sorry. Just go ahead. Yes. No, just a follow-up on this. Whether you see now the challenges at hand more about fine tuning the execution of the strategy you have or whether there's space to change parts of the strategy that you had detailed in the most recent Capital Market Day at the end of last year? Thank you very much. Okay. Let's start with the first two questions, then I will come to the strategy question at the end. There's limited market data available, especially now on the Q1. I mentioned some industry data for the German market, which according to this source was down about at the same percentage rate as our business declined in Germany. So my assessment for Europe would be that Hugo Boss is performing more or less in line with the overall market, maybe with a weaker performance in the online. So clearly, a growth of just 2% is, from my perspective, disappointing. But I think it's in the light of resources being in particular focused on a faultless execution of this insourcing. So during this phase, we have clearly put more resources in ensuring this transition and bringing more and additional features to our online side and integrating our online business further into our physical network. And we also have not continued to open up new markets where the online business is not available. So it was purely driven by like for like performance. Nevertheless, I would say within Europe, we now have to accelerate further later in the year, as I explained, with bringing more services to it. So Europe overall relatively in line with the overall market segment with a slight weakness in the online business. In Asia, I think this was also the earlier question from John and to Ma. I think we did a pretty good execution on the price adjustment in Asia in general, in particular in China. So volume growth of 10% and a further acceleration as we go into the Q2 gives us confidence that we are in this part of the world continue to take market share from our competition. This has always been our stated objective that in this part of the world where HUGO BOSS enjoys relative to its menswear peers the lowest market share, we see a significant opportunity now that we have bought back these operations from former franchise partners. We will over time build similar market share position like we enjoy in Europe and North America, which brings me to the 3rd region, smaller parts of the Americas, Mexico, Canada. I'm very pleased with the execution, very solid results. However, it's overshadowed by a very disappointing performance in the U. S. Market. And here, there's no easy solution. It's not a price adjustment or a neglected sales channel. There's no easy fix. It's something that will lead to a reset of our wholesale business like we have started to do and it will in some areas painful discontinuing business relationship that we might in some cases might have or should have discontinued already 12 or 24 months ago. In the current market environment, we are clearly committed to go for the changes, but this is at the expenses of our relative market share relative to our peers. But I would argue that what we are losing now was anyway not sustainable and healthy for the brand equity going forward. You asked us about like for like development by channels. The most variances in performance are rather by regions than by channels. So the minus 6 that we reported globally didn't vary much between our physical distribution channel, be it shop in shop, be it freestanding or factory outlets. The only one which was slightly better was our online business. Even so here, we also seen a significant decline. Your question on strategy, it has multiple facets. I think we want to make be very clear that elements that we also highlighted at our Capital Markets Day in Paris and what we did last time here in Metzing where we focused on especially the opportunity in the digital part of our business continues and remains a key focus area of our business. So also in this difficult quarter where we have reduced investments and also OpEx growth in almost every part of our business system, we have not done this when it comes to further building digital competencies within the group. So you can clearly see this as one part of our strategy going forward where we have seen no change to our strategy. However, in other parts of our strategy that we presented, you will have noticed that we are fine tuning or adjusting our strategic execution. Of resources allocated to women's wear relative to men's wear, of resources allocated to womenswear relative to menswear to ensure that both parts of our business are growing in a healthy path. Same is true for further expansion, be it growth into emerging markets or further retail growth via takeovers and white space expansion. Also here, we clearly have moderated our plans going forward, which from my perspective is not a change. But clearly, new execution, a different quality of execution to a strategic element that continues to be part of our strategy going forward. And you said indeed that you would be open to considering changing your product line architecture if that was appropriate? That's correct. Thank you very much indeed. Thanks, Luca. The next question comes from Warrick Aronkins of Deutsche Bank. Please go ahead. Thanks very much. Hi, Mark. Two questions, please. Just coming back again to the €50,000,000 of costs that you've talked about. You said quite a lot already, but there's quite a distinction between cost cutting and canceling of projects. Could you quantify the sort of 2 buckets, please? And secondly, you also said quite a lot about the different brand colors. But actually Oren actually Hugo and Greenwork were extremely strong in the quarter. Presume some of that is just the natural change in the wholesale business, but just wondering if there's anything else that was going on in those relatively small categories. Thanks. Yes, you're completely right. Both brands, HUGO and GREEN, have benefited in the Q1 predominantly in Europe, but we also highlighted that we expect now with the category migration in the U. S. That both brands will benefit from the substitution, we call it category migration, in certain brand environments and certain price points where we have discontinued to offer the BOSS core offer and have either discontinued the relation of both together or have given these departments or partners now the opportunity to substitute these products via our BOSS Green and HUGO offer. So it's rather the shift between BOSS and BOSS Green and HUGO rather than self sustained growth pattern. Nevertheless, if you take a more multiyear view to that, BOSS Green has benefited clearly from the strong heritage and functional sportswear. So we have seen beyond the category migration strong demand by our active golfing and other activities inspired collection. So it is also a multiyear strong momentum that we are enjoying with Ostrin. On the cost savings, this is admittedly more difficult from the outside than from the inside. From the inside, it was clear that we have worked with all markets, with all functional cost centers on a point of departure, which was their budget for the year 2016. Of course, these initial budget plans were already in the context of a more cautious outlook for the year 20 16. However, in the light of the business trends we have seen at the end of the Q4 and the beginning of the year 2016, we have tied significantly the budgets allocated. And it was not a cut across all functions. It was rather a call for priorities that we have reviewed anything that was in terms of projects, be it expansion, be it additional functionalities on the initial plan for 2016 and have to the extent that these investments or OpEx were not committed yet have reduced them and especially refocused them on this part of our business on which we believe are needed in a difficult year 2016 coming back to Luca's question earlier on commitment to online growth in Europe. This is clearly one of the investments area where we are not reducing our focus. But the other elements, I would try to avoid the term nice to have, but with a more longer term benefit to it, which we have postponed or reduced in size in light of the current environment. So we have to make sure that the run rate, which from our perspective is not yet in line with our underlying business growth, but we have to be sure that the OpEx reduction, which is currently especially in the 1st months of 2016, is still suffering from the significant buildup of resources that we did in 2015. So even though the addition has now basically come to a stop, we are still feeling the impact from cost increases that we had from last year, but further increases have been significantly capped with the amount I just mentioned during the call. Okay. Okay. Thanks very much indeed. Thanks, Warwick. The next question comes from Melanie Flukert from JPMorgan. Please go ahead. Yes. Good afternoon. Thank you. It's Melanie at JPMorgan. My first question is on the timing of your 2 big initiatives, the price decrease in Asia and the U. S. Wholesale resetting. I'm a little bit confused by the timing because on the gross margin, you're saying the impact was actually pretty small of the China price decrease. But on the sales, it seems to have been most of the impact. So can you clarify what the impact was on sales in Mainland China, please, on the minus 11%, what was the actual price decrease impact? And when you refer to a 10% volume increase, does that actually refer more to the springsummer collection? When you did the minus 20%, you had a plus 10% volume increase. Same question goes with U. S. Wholesale. You're mentioning, I thought I understood on the presentation that the impact of the of basically resetting the U. S. Wholesale was not really a big impact in Q1 yet. So I suspect this means the rest of the quarters will be more impacted, and you will compensate with other regions sort of doing better. Is that right? Or did I misunderstand and you had the full impact in Q1 already? Could you help us understand what the growth rate or decline was for the mainland Chinese consumer base in total since you've had an element of transfer out of Europe back into Mainland China. And I'm sure this is going to be a tough one, but it would be very helpful for us to understand what are the losses of the stores that you are currently looking at and reviewing. Thank you. Yes. Let's start with the first one. And you're right, the 10% volume uplift that we gave you as an indication of the impact from the price reduction is the total number. So it's including also the sales period that we still had in January February on the fallwinter merchandise, taken together with the impact from the springsummer deliveries. For the winter merchandise, we did basically the same execution like we did last year. Please keep in mind that we have a smaller price reduction still carrying over from the price adjustment we did in with the delivery for winter, which was relatively small, which had only a marginal impact on our second half twenty fifteen performance. What we have noticed, however, in the weeks starting basically end of February into March that with the spring summer merchandise, consumers recognized the far more attractive offering by HUGO BOSS on its new full price offering, which helped us to bring customers to stores. So we have seen an improvement in traffic numbers, but we have also seen a significant uplift in units per transaction, which helped us to drive a 10% volume growth. So you're right, we didn't disclose this number. We'll be more visible when we talk about volume uplift in the Q2 because the Q2 will be the first clean quarter where we have a full quarter of a quarter where only price adjusted merchandise will be sold in our full price channels to the end consumer. So the volume uplift on the springsummer stand alone was clearly above the 10%. However, I think we are still well advised to be a bit cautious on extrapolating the effect. It's a bit early to tell. Beyond these very few data points, we think that the execution, the communication was much better orchestrated than we did in the fall. So we have learned from what fell short back in August, September in our execution in the first half year. And we will try to build on these winning elements, be it investment on WeChat, be it investment with brand ambassadors and other elements that we are currently collecting performance data on to have an even better or more effective execution in the second half of twenty sixteen. A similar more difficult part comes to the U. S. Wholesale impact. It's not that we have started to cut back on off price channels in the Q1 2016, but we have continued and accelerated this trend. We are not through with that. But we have seen an even stronger decline in the wholesale part of our business that I quantified earlier is non sustainable and not healthy for the brand. So what we will discontinue to a large degree, but we're not through yet, that we will not provide both the robust merchandise to third parties, which are not related to any of our department store partners. But going forward, we clearly have the intention to limit off price distribution of BOSS merchandise in the U. S. To our own factory outlets that are operated by HUGO BOSS and limited to the degree that this is feasible in the U. S. Market of price distribution at 3rd parties, be it independent operators or factory outlets operated by our department stores. Especially the latter, it's a difficult journey. It's an integral important part of their business. And as we indicated, this is an ongoing negotiation with these partners. HUGO BOSS is an important and respected brand for them, but we need to find a new balance, which is allowing both of us to prosper in this difficult market environment. But first and foremost, and that's our paramount interest to protect the brand years. Some part where the brand has been tarnished by our action over the last 2 years. Sorry, you have to help me on your 3rd part on the question. I think these were the 2. Melanie, did I answer your question? Yes. The mainland Chinese consumer base in total, if I include the tourist, how did that fare in Q1 versus Q4? That's a very difficult question because I would love to be more precise on that one. If I had a much higher capture rate on consumers that do purchase a TUHUBOS, which are captured in our system. As you know, there's one part not only in China, but globally where we need to become much better that we do more transactional capture consumers. But this is based on the data we have available. It's too difficult to give you quantified answers to that for the Q1 performance. And then on the losses of the stores you are currently reviewing? Well, I think there was the earlier question from Thomas. There's a certain number of stores that we already knew that are going to be closed. The other ones, and these are especially larger, bigger operations, where the outcome might be a reset on the operating costs, where we would continue to be operating these stores, but we prepare the market to expect also some high profile closures in the Q2 or the announcement of closures to that. So the financial impact will be visible in Q2. But here, I would ask for your understanding, Melanie, that we need to complete this integration first before we can pinpoint specific ones. It's not going to be the full set of reviewed stores of up to 20, the biggest dilutive stores, But I do expect a sizable number of stores where we'll have an exit plan announced probably by the mid of this year. And then I have a follow-up, sorry, on online. Could you share with us, in your view, is this a quick fix? Like you seem to believe that you are behind, but that you are fast investing to try and catch up. In your view, 2 years down the line, can you what percentage of sales can online be for you? And what you base that on? Thank you. It will be higher, definitely. And as I explained, we had a temporary discontinuation of certain revenue driving activities during the phase where we in sourced the EMEA business. And to my knowledge, we are one of the very few players in the premium to luxury field. We have now a full control on the full value chain to the end consumers. So everything is operated by IT systems and the logistical platform operated by us, completely integrated also in the platform, which is serving our physical retail operations. And we clearly see this now as a point of departure to quickly move into new omnichannel services, adding new markets, but in particular now to strengthen the offering by combining or bring to the market so called omnichannel services, which not only should help us to drive our online sales, but also allow us to give even more incentive to the end consumer to use also our physical outlets, be it via click and collect, return processes, ordering from stores and other services, which will make the consumer experience not only seamless, but also far more pleasant experience than we were able to do that with the previously disaggregated services. We need to deliver on that. Already as of the Q2, we need to not preparing for the implementation of these measures. Most of them will be started to be implemented in the second half. I think we mentioned our core market, the U. K. Online market, where we will already start some of these services over the summer. But this is part of the earlier question of the acceleration of retail growth in the later part of this year should come from an improvement, especially also in the online business. Whether this will result in a 3rd percentage rate, it's not necessarily our primary focus. The primary focus for the group is to have a more sizable, better performing retail business going forward. Thank you very much, Melanie. And I think this is also the time for me to conclude today's call. I think there were many questions and maybe not all questions have been answered during this call. So if you feel there is something you would like to follow-up on with us, please feel free to contact Dennis and the team. Otherwise, we are looking forward to seeing or talking to you and meeting you during the Q2, and we will back to you later with our second half results beginning of August. Until then, have a good