Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to the Samsonite International 2019 interim results earnings call. Please note that this event is being recorded. I would now like to hand the conference over to Mr. William Yue, Director of Investor Relations. Thank you. Please go ahead, sir.
Thank you, operator. Good morning, afternoon, and evening, everyone. Thank you for joining the earnings call for our first half earnings. Today, we have our Chairman, Tim Parker, CEO Kyle Gendreau, and CFO Reza Taleghani with us. Tim will begin the presentation with a few opening remarks. Thank you very much. Over to you, Tim.
Thank you very much, William, and welcome, everyone. I must say, in the eight or nine years that I've been associated with the company, we have faced some of the most difficult macro conditions. I do feel that Kyle and the team have really grasped the nettle, and when this sort of thing comes along, it makes you examine every component of the business. In terms of products, in terms of brands, in terms of our market position, I'm very happy with where we are. It's also made us look very carefully at our cost structure, and it's also made us examine the management structure, the team we have, and we've made one or two changes there. All in all, I feel we have actually strengthened the business. We certainly have, I think, strong foundations to move forward.
If we look at the first half, I think we're probably moving to a point where things are unlikely to get any worse, and we can actually detect signs of improvement. Alongside the focus, as we've always had, on growth in turnover in our business, we've also re-examined and really focused on the quality of our earnings. The teams have very much prioritized improving the cost structure, improving the gross margin, and are very focused on making sure that in the future, and it may take a couple of quarters to get there, we really do see the operating leverage in the business coming to the fore.
It's not yet the moment I think to be cheering, but it is a moment where I feel we've got a much stronger business and are looking forward to a third and fourth quarter to moving in the right direction. When you get these sorts of much tougher conditions, I think it really is a good opportunity for brands like ours with strong market position to really consolidate where we are in the marketplace. I think the team have taken every opportunity to do that. I must say that this is, as I said, probably the toughest conditions we've seen, but I'm very confident that we have a management team here which is focused on all the right things. With that, Kyle, I'd like to hand over to you, and you can tell the story of the first half.
Okay, great. Thank you, Tim. Thanks, everyone, for joining. I'm on slide five, and the way I might position, and backing up what Tim says, is despite some continued headwinds in a few markets, our business is stable and positioned well for improving sales and profitability as we move forward. The company's net sales are stabilizing in Q2. We were down just 0.7% in Q2. This is compared to down 2.4% in Q1. Again, this is against a very large growth of last year. I'll cover that in another slide. We were significantly up last year in the first half, close to 10%. If I exclude U.S., China B2B, South Korea, and Chile, which are really the four markets that we've been seeing unusual kind of pressures in the market, our underlying business is up 3.6%. I might give you some trending.
In the month of June, we were up around just under a point, July is looking like it's up in the kind of 3% range from a sales growth perspective. Really positive kind of movements on the sales side, not back to levels that we're used to managing, but definitely stabilizing from what we saw in Q1. Another positive on the China sales side, our China net sales are up 5.1% in Q2, despite the continued softness, both designed and just in the market of our China B2B business. If I adjust out our B2B business in China sales in Q2 are up 11.2%, and for the full half, it's up 8.7% adjusting for that. Really excited about the China team and what they're doing. Our Latin America business is back to teens growth.
In Q1, we saw a slight de-growth in Latin America. Q2 is just under 13%, that's carrying into Q3 and Q4. Our Latin America business is back to the level that we'd expect. We started talking about cost savings initiatives at the end of last year and into Q1. I would say we've accelerated those as we moved into Q2, it's really positioning the business to improve profitability in the second half. You'll see we get some benefit of that in Q2, more to come in the second half of the year. There's been some non-recurring costs, non-operating costs associated with that that Reza will cover in a bit. We're seeing the benefits of those initiatives on the profit side. We continue to make very good progress with working capital.
This was an area where we identified and started to fix at the end of last year. For the month of June, or for period end June, we're just 80 basis points unfavorable to prior year. If you remember, at Q1, we were 220 basis points unfavorable to the prior year. From a percentage of sales, net working capital efficiency, we're at 14.8 at the half. We were 16.7 at Q1. This is moving in the right direction. Our view is we get to below our target levels, which is 14%, by the end of the year, and that's very positive. That's translating into this continued strong cash generation. In the half, we more than doubled our operating cash flow, so we were $113 million against last year, which was $56.2 million. In addition to that, our CapEx is a little lower than last year, around $15 million.
Really strong cash generation carrying in for the full half of 2019. On the pressure point, the U.S.-China trade tensions continue, and continued into Q2 and actually stepped up, where we did get a second round of tariffs that went in that impacted the luggage sector. If you recall, we had a 10% tariff go in in September of last year. In the second quarter of this year, that was increased by another 15%. We are dealing with a 25% tariff increase. That has had the effect of really impacting our U.S. business in two ways. One, it's impacting the way wholesale customers are buying as they manage and anticipate the impact of tariffs. We're clearly seeing some traffic impacts with the trade tensions between U.S. and China, and it's the first year where we've seen inbound Chinese traffic down.
By my data, I would say down 6% versus in prior years, very close to double-digit growth in inbound traffic from China. That impacts our gateway cities. In our U.S. business, we're seeing impacts to gateway traffic up as high as 15%, 16% reductions. All of that equates to a U.S. business which is down around 5%. It's around 5.7% for the half. A little better in Q2 than Q1, down 5%, versus in Q1, we were down 6%. That continues. As we all know, there's a further tariff pending that won't impact our product costing, but it'll impact the U.S. consumer on a go-forward basis. That's been pushed out. All that feeds into trade tension and impacts both as far as how wholesale customers are acting and how inbound traffic is to the U.S., which impacts us. South Korea continues to be under strain.
It's down 8.7% for the half. It's really around weak sentiment in South Korea, political tensions, and fewer Chinese tourists impacting South Korea as well. We've had a leadership change in South Korea. We did that in the last two months. I think that will help the team as we navigate through some of the pressure points in Korea. Currency continues to be a challenge. The strength of the dollar in our reporting impacts us. For the first half, currency had, on the sales side, an impact of around $65 million. I expect to have currency pressure in the second half, though currency started to pick up in the second half of 2018 as well. Maybe not to the same extent, but you should assume that there'll continue to be translation effects on our business from a reported revenue and earnings perspective.
Just concluding, stable and well-positioned for future story. I go to page six. I think the takeaway from this slide is all of our regions are positive except for North America, in varying degrees. Our North American business, as I said, down 5.7 for the reasons we discussed. Our Asia business was slightly positive, 0.2. If I adjust for B2B China and South Korea, it's up 4.6%. Underlying strength in the Asian business. Our Europe business is up 1.9% for the first half against an extremely strong first half last year, where they were up 11% as they were launching the American Tourister strategy with huge success. That's a good result for our Europe business. There are pockets of tension in Europe that the team is navigating and managing very well.
As I said, in Latin America, we had a positive first half, 3.4%, with a meaningful shift from Q1 to Q2. We had some leadership change in Latin America. We had a change in our Mexico leader. We just added a Brazil leader in the last few weeks. Our second quarter low teens growth is the way to describe it, and it looks like Q3 will be something similar and puts Latin America back where we typically see it running. If I move to slide seven, this is really to show some trends here, and I think this is important to really point out what Q1 and Q2 of 2018 were, where they were extremely high, really off the back of American Tourister. We had an 11% Q1 and 9% blended, roughly 10% growth in the first half of 2018.
We're copying against that this year in the first half. If you go to the right of the page, you can see in Q1, we were down 2.4. We're down 0.7 in Q2. Our view is this trend is improving. When we think about a forward view for this business, we're anticipating a positive second half. We're anticipating a slightly positive Q3 and a slightly better positive Q4, really against the trends that we were seeing last year. All of that is playing out. We've seen a good July, as I said earlier. That feels positive to us. If I look at the next page, another cut of sales. I think one of the things I take away when I look at the first half versus last year, last year's first half sales were up $205 million in constant currency.
A huge step up last year equating to this 10% growth. This year, our first half is down around $28 million, with an improving trend from Q1 to Q2. If I take out the U.S. business, which is really hung in at just -5% or -6%, the rest of our business, both the markets that are challenged or the few pockets that are challenged, and the rest of the business actually was up in Q2 $11 million, versus in Q1, it was slightly down when I combined all those together, slightly down around $2 million. We see improving trends in many of our markets. The U.S. is really the market that continues to manage some of the real headwinds of the impacts of trade tensions and tariffs from the sales side of the business. We'll get to page two.
As you'd expect, the teams are very focused on actions to position ourselves to manage the sales pressures, but also to improve the profitability in the business. We've been very focused on managing and reducing SG&A expenses. We've had tight controls over expenses. We've had headcount reductions, as I mentioned, and that's resulted in annual savings of around $14 million. We'll cover that a little bit later in the presentation. Much of that will come in the second half of the year. We had a very small amount in the first half, around $2 million benefit. We expect around $9 million benefit in the second half coming from purely these SG&A initiatives. We've done a very extensive review of our retail strategy.
As I talked the last time I was out and the time before, we had some rapid expansion of retail in Europe at the end of 2017 and beginning of 2018. We've throttled that back. In the first half of this year, we've opened 13 new stores in Europe. That's versus 28 last year and 32 in 2017. We've definitely throttled that back. We think retail is still targeted. Retail expansion is still relevant in all of our markets, but at a pace that's appropriate for the business so we make good decisions, and that's exactly what you see happening with our Europe business.
We're targeting to close some unprofitable stores. You'll see in our numbers in this year, we've taken an impairment charge against right-of-use assets and fixed assets for a handful of our stores where we describe it across Europe and North America that are feeling some pressures from both trade tensions and traffic. For Europe, stores that have now been open for a little more than a year that we don't see the ability for them to ramp. Some of these are new stores that we've opened. We're very focused on exiting some of these stores. We've taken impairment charge on that, non-cash impairment charge for right-of-use asset and the fixed asset. We will attempt to exit some of these stores. We're talking around 40 stores against a fleet of around 1,280 stores.
A small amount, but meaningful impact to the business going forward if we can exit some of these. We've also reorganized the retail management team in Europe, and I think this is important as well. I think in the last round, I talked about getting the balance right within Europe. What we've done in Europe is two big steps. One, we changed the leadership in Europe. I brought back a guy who had been running Europe before with Tim and I in the last 10 years, Fabio Rugarli. I have a ton of confidence in him. He understands and gets the balance of both retail and wholesale. One of the first things he's done since getting in there is reorg that retail business, so it's integrated into our business in a better way. I'm very excited about that change.
The other thing that we're working on is obviously sourcing initiatives, particularly as it relates to the U.S. We have this ongoing program to diversify our supplier base and renegotiating pricing with our vendors, really in response to U.S. tariffs, while we're maintaining the high quality standards of the business. We are in the process of shifting sourcing from China, outside of China for U.S. business. Because we're a global company, we have some ability to shift volume from other regions, and trade volumes inside and outside of China. My view on where we are, if I looked at 2018, we were sourcing around 90% from China. In 2019, that'll be somewhere around 75%. As we move into 2020, I think we'll be somewhere in the 60%-65% range of goods sourced in the U.S. that are coming from China. That's a pretty dramatic change.
I think it's important. It's also important to note, in doing this, we have to be careful to maintain the quality of our products. The teams are very diligent on shifting where we can shift while maintaining the quality standards that we'd expect in this business. We're dealing with the overall 25% tariff increase in the U.S. Part came in last year, part came this year. That's equated to us increasing pricing generally in the U.S. of around 12%. On the first round of tariffs, we were feeling fairly confident we could maintain the margin impact. Around the second round of tariffs, the increase has been a little less. We've had a little more time to work on product re-engineering and sourcing. We do see some margin pressure in our U.S. business, gross margin pressure with these double rounds of tariffs.
Our teams are working very closely with our customers to manage this as best we can. You'll see that when we talk about the North America business. I'm really happy with where we are on both the customer relationships and what we're doing here against what is a meaningful increase from a tariff perspective, really for our U.S. business only. I covered the U.S. side and the leadership change. Very excited about the leadership change in Europe. The energy and the vibe is exactly right for Europe, and I have a lot of confidence in Fabio. Again, we also made a change in South Korea, which I think will have some benefits going forward. We are planning a temporary reduction in advertising in the second half. I started to signal this as we were watching what would happen with the tariffs.
On the drop of the second round of tariffs, we've decided to cull the advertising back slightly in the second half. I think our full-year advertising spend will be somewhere around 5.1%, 5.2% against last year, which we were at 5.8%. It's not a big change, but it's a meaningful number. It's around $20 million-$25 million in savings in the second half of the year that we'll get from advertising, really to help offset some of the pressures around currency translation and what we're seeing in some of the trading, particularly in the U.S. If I go to EBITDA, I'm on page 10, and we look at our adjusted EBITDA. The shortfall in Q1 versus Q2 is dramatically improved, okay. When we look at Q1 versus Q2, Q1 we're down on EBITDA around $28 million. In Q2, we're down around $15 million.
That's an improving trend that we'll see continuing into Q3 and Q4, where I expect the second half to be positive year-over-year on EBITDA as we move forward. If you look at the components of our reduction in EBITDA, a piece of it's just the sales volume with translation, obviously, which was $8 million in the first half. There's the margin effect of reduced sales, which is around $15 million. We've seen a little bit of gross margin pressure in the half. In Q1, we were slightly positive on margin. In Q2, some of that pressure is whipped in. That's had a small impact, around $8 million in EBITDA. Advertising decreased, though slight, in Q1, we saw some benefit there.
Then we had some SG&A costs, we talked about this in Q1, that were up, that's a really dramatic improvement, Ken, where it was a $20 million, $19 million impact in the first half. It's $7 million, I mean, the first quarter, $7 million in the second quarter. This really is around this retail expansion in Europe, some expansion in Asia, particularly Tumi in Asia, which was the bulk of this $27 million increase in SG&A, effectively, that was impacting EBITDA. We're making really good progress there. A pretty dramatic change from Q2 to Q1. Again, that will continue with benefit in the second half for sure. If we look at actions from an EBITDA perspective, in Q1, our EBITDA margins were down $300 million just from these initiatives, particularly on SG&A.
It's down 150 basis points in Q2 versus 300 basis points in Q1. The chart on the bottom, you can see other SG&A, which was 3.1% of the EBITDA, is now only 1% in Q2. That trend will continue as we move in a positive way in the second half. In Q1, we had no gross margin effect. In Q2, you can see a little bit of gross margin effect really coming off of the U.S. business and the tariff pressures that that's caused, particularly in the U.S. on gross margins. You'll see a little bit of pressure as we step into Q2 for that. On adjusted net income, come on slide 12. Adjusted net income, really driven by the EBITDA shortfall, but we have some positives on the income side. Our net interest cost continues to be lower. That's $3 million benefit.
We have a slightly lower effective tax rate. Wes will cover that later, but that has to do with just our general tax position, but also was tied to our share comp and what that's done from tax rate. Then other reductions really around how we're managing other costs within the business, including outside advisory costs. We have a big improving trend. Our adjusted net income in Q1 was down $18 million. Adjusted net income in Q2 is a positive $4 million in Q2. Really off the back of what we're doing to manage through the business. Just a few other points for me, just some things that are exciting, and Wes will walk through in more details the half. Our D2C e-commerce, our direct-to-consumer e-commerce continues to grow very nicely.
If I adjust for eBags, where we are strategically reducing sales of third-party brands, our total e-commerce business is up close to 24%. You can look across regions, we're having great success. North America, up just under 21%, Asia 28%, Europe 19%, and Latin America 100%-plus growth, as we really executed a terrific D2C e-commerce strategy. We see inbound traffic high, we see conversion high. A good story here that will carry, obviously, for the rest of the year as well for us. We continue to be focused on non-travel. That's an integral part of our strategy that continues to do well. That's up 1% if I adjust for eBags, which is important to adjust because eBags is a lot of non-travel stuff, the third-party brands.
We see that as a percent of sales moving to 40% of sales from 39.5% in the first half, despite the pressures we've seen in a few markets. A lot of focus here, a lot of great success on our non-travel side. ESG, for us and like many companies, is becoming an important part of our story. I'm really excited about the ESG report we just put out in July. It really sets some framework and some long-term targets for us on what we want to do. I think this business should target being the most sustainable travel luggage company in the world, and we have the ability to do that. We set forward goals around carbon reduction to improve sustainability of products, and we've seen some terrific product launches that are 100% recycled materials.
As a company, we're really focused on how do we incorporate more recycled materials into everything we do. You'll start to hear us talking more and more about that as we move forward. Just our impacts on the environment, the community, and our teams and people are really important to us as we move forward with ESG. If you haven't read the report, I recommend you do, and it really is part of the culture of who we are at Samsonite as we integrate this into the broader strategy of our business going forward. We're excited there. Lastly for me is, as you'd expect from us, we've had plenty of exciting new products. The way I describe it is exciting products and much more to come. We've been integrating technology into much of our bags across brands.
From charging to scales to power, to much more here coming as well. We're excited about what's coming in the back half of the year and what we'll roll into next year. We continue to be very focused on lightweight products, particularly on the hard side. We've launched this Magnum product in Europe, which is the lightest polypropylene 3-point locking case with huge early success. This was just launched, really, as we stepped into Q3 and being very well received. Tumi has launched a V4 polycarbonate case, which is being very well received across the globe, a lightweight polycarbonate case, which is part of Tumi's strategy as we move the brand to have more lightweight products, including hardside lightweight products. That's been very well received. Eco-friendly products that we're very focused on.
We've launched a whole series of products made from recycled water bottles, recycled plastic, post-consumer, post-industrial, and it's really incorporated into a lot of lines that we've launched. You'll hear much more from us as we move into next year on how do we incorporate more of that into all of the products that we do, which will have a bigger impact on our environmental footprint. We're quite excited on the product side. A good pipeline for the back half and more to come for next year as well. As you'd expect from us. With that, I will turn it over to Reza, and I'll come back at the end. Thank you.
Thanks, Kyle. We're on page 18 now, just reviewing the numbers in greater detail. The overall first half results, and Kyle's covered some of this, but just to refresh. On slide 18, we have net sales came in at $1,755.7 for the half. That is a constant currency reduction of 1.5%. It has been improved Q2 versus Q1, but obviously, the negative drag of Q1 working its way into the numbers. Gross margin, we're 50 basis points down first half 2019 versus first half 2018. That is one that if you're looking at the Q1 versus Q2 split, there was a reversal. Q1 was in positive territory, in Q2, we started to see some additional pressures.
Largely in the U.S., as a result of tariffs, as we talked about a little bit earlier, we'll delve into that a little bit as we get into impairments as well. From an adjusted EBITDA perspective, this has been a very large focus for us, we'll go through some of the specific actions we're taking to reduce SG&A. As we look at the margins on adjusted EBITDA, we're looking at a decrease of 210 basis points period-over-period, if we're looking at first half 2018 on an IFRS 16 adjusted basis versus where we are right now at 12.2%. We have taken significant actions here. I think you'll continue to see some improvement on adjusted EBITDA, both from the SG&A improvements that we've done, as well as some of the advertising spend that we're looking at as well.
This, as we look into Q3 and Q4, should continue to improve. Finally, on adjusted net income, we're reporting $97 million of adjusted net income for the half versus $111 million for the adjusted period in 2018. The story on adjusted net income, I think on a constant currency basis, and we'll see this in a subsequent slide, I think it is important to note that Q1 was negative $18.2 million on a constant currency basis versus Q2 was positive $5.5 million. If you're looking at since the last quarter, we are pleased that we have a positive quarter on adjusted net income as we try to take some actions around that. Going to the next slide. This, I do think it's important just to refresh because this is the second earnings call that we've had where we're discussing adjusted EBITDA in kind of the post-IFRS 16 world.
As a reminder to everybody, I wanted to make sure that we covered that in this presentation, when we talk about adjusted EBITDA, we're looking at the right-hand column here, which is basically adding back. Adjusted EBITDA, including lease amortization and interest expense. What that means is that we basically take the IFRS lease amortization expense, which in the half this year was $99.5 million, and the lease interest expense, which is $15.4 million. Roughly, $114 million-$115 million. That is basically taken out of that calculation. The reason we're doing that, just as a refresher, is because it more accurately reflects the way that we've reported adjusted EBITDA historically. We think it's a more transparent and comparable way to do it, but we just wanted to make sure that everyone was aware of that. Again, as a reminder.
We covered this in the first quarter as well. We're on slide 20 now. Wanted to get into a little bit greater detail in terms of what we're doing around SG&A, as well as revisiting the store fleet. Kyle touched on reorganizing the retail management team in Europe. We have also taken significant actions around headcount. We've also looked at renegotiations of our commission structure, especially in Asia, as well as some freight agreements. We have new leadership, which Kyle has covered in Europe, South Korea, Mexico was another one of note as well. The result of all of these actions from a financial perspective is that on an annualized basis, there is $14 million of SG&A savings that come from these actions. $9 million of which we will see in the results in 2019.
However, as a result of severance and other non-operating expenses, there is a charge of $9.8 million that you'll see in our financial statements for the half that reflect that. Again, they're important actions. We have to take severance for it, and the run rate benefit exceeds that, but it is a charge that you will see in our financial results for the half. On page 29, we wanted to spend a little bit of time going through and explaining some of the non-cash impairment charges that you're going to see in our financial statement. Just by way of background, at January 1st this year, due to IFRS 16, we have to put a right-of-use asset on the books at the beginning of the year.
Part of our evaluation on a quarterly basis is we have to evaluate the store fleet and look at whether or not we need to impair any of the assets that have been put on the books. We've done a very thorough fleet review as it relates to our overall operations. That's something that we will do on an ongoing basis as well. The one thing that has changed from first quarter to second quarter that does make a difference in terms of our evaluation of these assets is the second round of tariffs came in in April of this year. Normally when we're doing our impairment testing, what we will look at is the future cash generation and the cash flow stream that comes from these leases.
You should also note that in the U.S. specifically, the leases are typically longer term as compared to the other regions, especially Asia, where you have very short-term leases. When we did the evaluation under the new framework of tariffs, there are 14 stores in North America which we are impairing. That is the majority of the $29.7 million charge that you're going to be seeing. Just to give you a breakdown of it, we have impairment of the lease right-of-use asset of $21 million. Approximately $15 million of that is due to North America. We also have an impairment of PP&E, which is basically the fixed asset fixtures that are also in those locations. In aggregate, that adds up to $8.7 million, of which $6.2 million of that is in North America as well.
We have some smaller impairments that we're looking at in Asia and Europe. Asia is $1 million in total. That's as a result of the fleet review that we've done also in Europe as some of these stores ramp. That in aggregate adds up to 44 stores that are causing impairment of an aggregate $29.7 million. Looking on slide 22. We just wanted to touch on the impact of these actions and what it's going to do to our non-advertising SG&A over time. I think the important point to note is, if you can see, we have the $27.1 million, which is the addition of all of the regions plus corporate.
As we look at kind of the composition of that $27.1 million of SG&A increase, you should know that in Q1, $19.1 million of that was in Q1, and $8 million of it is really in Q2. I do think it's important to note that you're looking at the SG&A, it is definitely starting to come down as you look at basically the ramp. It has to do with the fact of what Kyle noted earlier, that you have this retail expansion that was basically front-loaded in 2017, early half of 2018 in Europe. Now that we've taken these SG&A actions, you're going to start to see that roll in the future periods as well.
We wanted to make sure that we gave you the breakdown between Q1 and Q2 on the top end of the page, so that you can see that there has been improvement and actions being taken and how that's flowing through. As we roll into Q3 and Q4, you'll be able to see those actions make it look better for our financial results as well. On page 23, we're looking at excluding the non-operating expenses, the impairments that we just talked about, the bridge that basically takes us to profit attributable to equity holders. Obviously, the impairments are noted here. We did have kind of the one-time impact of last year of the non-cash write-off of the deferred financing asset that was due to the refinancing of our capital structure.
This year, we have the impairment that you're seeing in this half, up to $29.7 million that you see. Those are the non-operational charges that are kind of the chunkier ones that are flowing through. Again, as you work your way to the right, we wanted to, again, bifurcate Q1 versus Q2 here, because really the net of what's impacting net income. If you're looking at that $13.8 million bar that's all the way to the right-hand side of the page. Q1 was negative $17.4 million of that, and Q2, we have started to see positive again. Q2 was actually $3.6 million positive. I'm going to get into a little bit deeper dive of the regions.
Kyle has talked on the macro level themes, but I thought it would be helpful just to give a little bit of greater color on these. Starting on page 24, we're looking at North America overall. North America, we talk about tariffs, but it's really the overall theme of U.S.-China trade tensions because there is a component of, when we look at gross margin, tariffs working their way into it as we look at North America, which is a largely wholesale-driven business. Really, as we look at the gateway markets, we're seeing anywhere between 15%-20% depending on the store, and it averages out kind of to a mid-16% drop in store traffic. That's due to a lot of Chinese tourists not coming to the U.S. That is something that's meaningful.
That's also a large driver of what we're looking at when we look at that impairment number that we just talked about. eBags is something that we've talked about over several quarters, and I think it's important to just touch on the strategy around eBags. As we're trying to drive profitability at eBags and the turnaround there's been a strategic shift, which we've talked about in the past, in terms of rationalizing the number of SKUs that are available there. Really trying to cull a lot of the third-party brands that aren't profitable for us. Obviously, that purposeful culling means that we had a drop in sales, which had a $10 million impact in the half. If we were to exclude that, North America sales would have been down 4.6%, rather than the 5.7% constant currency number that you see on the page.
We do think that that's an important cut in sales because from a profitability standpoint, those are the right actions to take. eBags continues to be a focus in terms of profitability and shifting to the house of brands that we have in terms of sales that we have there. Gross margin is down by 120 basis points. This is something that's meaningful and again, largely driven by the tariff environment that we have. We have had some price increases to try to offset that to our wholesale customers.
If you're looking at the first wave of tariffs versus the second half, the amount that we've been able to push through is lower coming to the second half because, from a consumer sentiment perspective and everything that you see in the market, we want to make sure that the demand is still there to drive sales and there's only so much. We are starting to see some deterioration in gross margin in this region specifically. As it relates to operating expenses as a percentage of sales, you have to focus on the portion that says as a percentage of sales. Obviously, if you have declining sales, we are taking significant actions on SG&A, especially in North America, but the sales have been dropping at a faster pace.
Overall, we've targeted around $10 million of SG&A reduction specifically in the U.S. to offset this, both at Samsonite as well as Tumi, the bulk being done at Samsonite. We are still seeing 160 basis points of operating increases in the first half. Those SG&A cuts that we have should have an additional benefit going into the remainder of the year to help offset that. Looking at Asia. Really, the negatives on Asia are focused on two specific markets. It's China, not even China overall, but China B2B, which we've talked about, which is an area that we're trying to, as a percentage of the overall China business, try to bring down somewhat. In South Korea where we've had a leadership change as well. Excluding those two, the Asia region grew 4.6% overall.
India has been really positive, 9.2%, so good recovery in India specifically, and Japan up 4.8%. Excluding China B2B, China is up 8.7%, and really good direct-to-consumer e-commerce, up 41.6%, is happening over there as well. South Korea continues to be a focus, but it's challenged because of somewhat the same sort of issues that we're seeing in the U.S. in that the Chinese consumer traveling to Korea. There have been some changes in terms of consumer patterns there, in terms of the total number of traffic that's going there, but also in the availability of buying a lot of the product to take back home as well at the airport there. That's part of the driver as we look at our South Korea business. On the bright side, Tumi sales continue to perform. With Tumi sales in the region, we're up 11.9% overall.
Gross margin in Asia has actually improved by 50 basis points. Whereas we've seen the decrease in the U.S., Asia is a bright spot there. Across the board, we're looking at advertising spend. That also means in Asia, although we did have some major campaigns which we'll touch on in Asia with Chris Pratt at Tumi and some others as well. Moving on to Europe. Europe continues to grow, 1.9% for constant currency growth. Again, this is on the heels of significant growth that Europe had last year as well. Overall, we're focused on the adjusted EBITDA here again, because the story around Europe that we're focused on is really making sure that we get the cost structure right to make it sustainable to improve profitability for the longer term.
That's where we've looked at the way that we go to market on our direct-to-consumer retail business. We've done a restructuring there, as well as looking at the store suite. In Europe, we're continuing to evaluate aggressively the various locations that we're looking to open. There's been much more discipline around the future growth in Europe. It's not to say that we're not opening stores. We're just taking a much more targeted position in terms of making sure that they're at the right location. The other thing that I'll just note in terms of gross margin in Europe is obviously there's significant mix. The American Tourister campaign that was launched last year, American Tourister continues to perform very well in Europe. That obviously has an impact on gross margin as well.
As we look at the 80 basis point decrease in the gross margin, American Tourister, there's greater sales that are happening at American Tourister offset by Tumi as well, because Tumi has continued to perform really well in Europe. There's been lower sales at Samsonite. That mix shift is really what's driving that 80 basis point in gross margin on the page. Latin America, very positive story. If we're sitting here in Q2 versus Q1, in Q1, we had some concerns around Chile that had dipped into negative territory. A very positive rebound in a very short period of time. I think overall, as a management team, we're very pleased with Latin America. Again, 3.4% constant currency growth so far for the half.
I think if you look at the Q1 versus Q2 in that first bullet point, Mexico was negative in Q1, -6.6%. It's rebounded to +15.4% on the heels of improvement and a change in leadership there. Chile went from -12.6 to +4.5 in Q2. Brazil is growing as well. Overall, I think we feel pretty good that Latin America is going to be in that mid-teen number that Kyle alluded to a little bit earlier for the remainder of the year. We feel good about where the region stands. On page 28, D2C continues to be a huge focus for us. D2C e-commerce overall is up 6.8%. If you look at our D2C net sales growth, we have 4.2%, and that obviously includes the stores as well as the e-commerce channel. E-commerce is continuing to outpace that growth.
We have net sales growth of 23.9% in D2C e-commerce, excluding eBags. eBags, we're showing it both ways because obviously we're purposely reducing the sales at eBags as we try to shift them out to brand. Total e-commerce net sales are increased by 13.8%, excluding eBags. Even if you include eBags, it's growing at 5.9%. Overall, the mix is starting to shift more and more towards e-commerce, which is exactly how we're trying to drive the business as well. On page 29, looking at the net sales by brand. Again, we've shown this two ways. Just to look at it overall. Constant currency growth in the first half. Samsonite was down 2.4%. Tumi was up 4.8%. American Tourister was about flat, down 80 basis points. All other were down 7.2%.
What we wanted to do was to exclude some of those challenged markets to give you a sense in terms of how the business is doing if we were to look at that. In the box beneath that, you can see that Samsonite was approximately flat overall, if you were to exclude some of the China B2B, South Korea, and the U.S. Tumi is up 16.3%, so you're really starting to see some of the pressures that are in the U.S. is what's driving Tumi. Tumi is performing very well in Asia and Europe as well. Actually, Europe may actually even outpace Asia this year. Tumi internationally, the international expansion has been very positive overall. American Tourister at 4.7% continues to deliver positive growth as well.
On slide 30, just to highlight again, Tumi brand net sales growth of 4.8%, driven by 14.9%, is outside of North America. That North America number is dragging it down. Overall, I think we're very pleased with the continued expansion of Tumi. It obviously helps in terms of the margin profile of the business as well. One other point of note that I'll just make on Tumi, while we're on slide 30, is in Asia, you'll note that in the bullet point, we're saying that we added one net new store in the first half of 2019. That's simply because we're being very targeted in terms of the negotiations that we have and looking at the location availability to make sure that we're going to be in the right location. We expect by the end of the year to get to a more normalized.
As we add store count in Asia specifically for Tumi, we should probably add about, I don't know, seven, eight net new stores for that region specifically, as compared to the one that you have in the first half. On page 31, Kyle covered advertising spend. For the first half of 2019, we were at 5.9%, which is slightly below last year. If you look at the breakdown by quarter, it's very similar. Q1, we were about 6% of sales. We spent about $52.9 million in Q1 of this year on advertising. I'm sorry, that's Q1 of 2018. Q1 of 2019, we were 5.9%, so roughly in line. This is something that, as we evaluate the latter part of the year, there will be a decrease here.
That 5.9 should probably come in, and Kyle mentioned this a little bit earlier, whether it's 5.2, 5.3, somewhere in that zip code, as we dial back on some advertising to offset some of the cost pressures. Having said that, there have been some really good advertising campaigns. We're trying to be very strategic in how we do our advertising spend. In addition to these campaigns, we have the global Lenny and Zoë Kravitz campaign for Tumi. We had a large Chris Pratt campaign with Tumi in Asia. The Samsonite Born to Go campaign is something that's been in the works, and it's been very well received overall in all regions. We are trying to make sure that we have good brand advertising, but there's also been a shift in terms of where we're doing our advertising spend to drive e-commerce growth as well.
On slide 33 and 34, we're just going to do a quick recap overall on the financial highlights. Net sales stabilizing in Q2, down just 0.7 as compared to 2.4%. Again, these are against very strong comps for the prior year period in 2018. Adjusted net income decreasing by $14.2 million or 12.8% compared to the prior year. Our operational effective tax rate, our ETR was 25.8%, which is in line with what we're looking for largely. We're looking for kind of about that 24%, 25% number as we go into the year end as well. We're continuing to monitor that. There's some actions that we're taking, and there's been some favorable news in terms of tax rate in Luxembourg, et cetera, that may help us on that number a little bit. It's basically in line with what it's been historically.
Operating cash flow of $113 million. This really is a big point for us, that it's more than double what we delivered last year. Year-over-year, half-over-half, we've doubled the operating free cash flow. At the end of the day, the business does continue to generate cash, which we will use judiciously to delever and to pay down debt, as we've said on prior calls. On the next page, on slide 34, net working capital efficiency at 14.8 is definitely trending in the right direction compared to the first quarter. We're getting back into the zip code of our target of 14% that Kyle alluded to. CapEx of $26 million. We've been very disciplined on the CapEx side. This is an improvement compared to first half of 2018. We're going to continue to be disciplined going into the year-end period.
There was a warehouse expansion, which we talked about at the year end. That has been delayed. Depending on how that progresses in Europe, that is something that may work its way into the numbers next year. For the remainder of this year, I think we should be coming in below what we had estimated for CapEx previously. We remain in compliance with all of our debt covenants as of the period. As many of you saw, on July 16th, we had a cash distribution of $125 million dividend, which is up $13.6 million. I should also note that net debt, as we were talking about cash flow, net debt up $155.6 million, is lower than what we had due to the cash flow generation. We continue to work on initiatives to make sure that we bring net debt down over time as well.
On slide 35, again, I thought I would just bridge for ease of reference, Q1 versus Q2 and half versus half. I think the message here is really, it is a tale of we do have the drag of Q1 still working its way into the first half numbers, but we are starting to see some positive momentum as we look at Q2. I've circled on the page, adjusted EBITDA and adjusted net income. Our adjusted EBITDA Q1, negative $28.6 million, we're still down negative 15, but at least the trend is improving as we look at Q2. We are very proud in terms of the adjusted net income number, that although it was negative $18.2 million in Q1, in Q2, we did deliver a positive growth on net income of $5.5 million. Although the half is down 12.6, the trend is improving as well.
Again, I'll just highlight the cash flow generation again on this slide as well. I will quickly go through some of the other points on the next few slides. On slide 36, in terms of the balance sheet, the main point that I would just highlight is if I'm looking at the December 31 period to the June 30 period, just be aware that January 1st is when the right-of-use asset and related liability went onto the books for IFRS 16. If you're all of a sudden looking at assets and liabilities growing and wondering why, it's because of that. You've probably seen that our ratings remain stable from both S&P and Moody's as it relates to our capital structure. We feel pretty good in terms of having a long-term sustainable capital structure. We continue to delever, and we have plenty of liquidity.
As of June 30th, we have $624 million of availability under our revolving credit facility, which is about the same number we had at the end of the year. Again, as we look at our overall net debt position, it continues to come down. In terms of working capital, this has been a very large initiative for us in terms of trying to get our numbers down. Again, if you're looking at Q1 versus Q2, I think we're very pleased with how we've improved. We've had an improvement from 16.7 at the end of Q1 down to 14.8, and our goal is to try to get that to below 14 by the end of the year, which will get us back into line in terms of our long-term targets in terms of working capital.
We touched on CapEx, but I'll just make a note of it again here. This is a significant reduction. Just by way of reference, CapEx for the full year 2018 was about $100 million. It was $100.6 million. The first half of 2018 was $41.1 million, and we're recording $26 million of CapEx, that is a meaningful reduction in the period as well. With that, I'll turn it over to you, Kyle, for strategy.
Just quickly, and then we'll go to questions. I get a lot of questions when I move around strategy. Our strategy remains very strong. No real changes to our strategy. We're executing strategy, which is really driving the business that's well diversified geographically, but also by brand, category, and channel across this industry. We're excited with what we're doing there. We continue to focus on both travel and non-travel. On the non-travel side, which I mentioned, we feel we have the ability to grow that at a faster pace, and we continue to put emphasis there around non-travel products and products that appeal to female consumers. We are still focused on driving our D2C business, as Reza said, and I said.
That is a combination of driving our B2C e-commerce, which is hugely successful, but also continuing to drive retail on a targeted basis, which we think in many markets, there's still real opportunities to do that. As you can see, we've kind of toned the pace down a bit, but you will continue to see us have targeted retail expansion. We continue to support the business with advertising, and so we're going to take a little bit of a slowdown in the second quarter, but you should assume that we'll put this advertising back into the levels that we historically run. That's an important piece to us as we're pushing multiple brands across multiple regions. The regional management structure, I have a ton of confidence in, and it really does allow us to be close to the business within each region and within each country.
We will continue to foster and grow and support that, we continue to invest in research and development around real product innovation, as I said earlier. We're really excited about what we've come out with and more to come here at the end of this year and into next year. Just a quick recap on initiatives, because we obviously, as a management team, have a lot going on. Part of my job in this role is making sure people are feeling energized and empowered, so that we're delivering growth as best we can in each region. I would say our team is very energized and delivering against what's more challenging moments. The team is really focused, and I'm quite happy with the team. We continue to push Tumi in international markets with great success and building momentum.
I covered direct consumer e-commerce, which we're super focused on. We're also focused on getting the eBags business into a profitable state, which I think we'll be very close to by the end of this year. We're monitoring the sales trends and really focused on adjusting EBITDA margins. If you're taking away that we're focused on cost initiatives, on retail fleet, on everything that we can do to position the profitability in the right place. I think you'll see, as you saw Q2 improving over Q1, you'll see a building, continuing trend there. I'm very excited for the second half on the initiatives that we've laid out so far. Working capital we've covered. We're focused there. We're focused on our sourcing base, as you'd expect us, particularly with the trade tensions.
We're constantly renegotiating pricing with vendors and also focused on the shift of our sourcing as we move forward. Just lastly, we continue to weave ESG into the fabric of our business. We're building momentum here, and I'm excited, and our teams are excited about this as we move forward on the ESG front. With that, I'll turn it back to William and open for questions. Sorry for the long presentation. We wanted to be thorough. Thank you.
Okay. Thank you very much, Tim, Kyle, and Reza. We have a first question from online from Tianyuan Shen from Prescient Investment Management about advertising. Regarding the reduction in advertising expense, how did you decide which area of advertising to cut, and what are your plans on spending in the future? Second question, how do you ensure that the Samsonite brand stays relevant when compared to internet-based companies?
Yeah. Okay. From the cut side, I think Reza covered this. We took a small cut, so it's not such a big. This is a company spending a little over $200 million on advertising. We're going to shave off around $20 million-$25 million. We're focused on not touching advertising that's driving digital action within our business, as you'd expect. Over the last few years, the shift of our business to digital spend has increased. Across the business, we've really empowered regions to make decisions to produce some of the savings. We've cut things around the edge without having things that will impact our digital success. The teams have, I might say, for that level of reduction, just trimmed around the edges. As I said earlier, we will bring this back.
I think this business spending around 6% advertising is the right level, and I think it's where you'll see us probably put it back for next year. As far as keeping Samsonite relevant, it's a very relevant point, and part of the campaign you saw this year was around Born to Go with Samsonite, and that has a big impact on how we're messaging. That is a much younger, energized message. So if you haven't looked at that campaign, I would look at it. The other piece and one of the real historical strengths of the brand Samsonite is around real innovation. You'll see within that campaign and within everything we're doing as far as driving real product introductions around bringing innovation to the market, which we have this long 100-year history of doing. You should not expect that to change at all for this business.
We've had some good things launch so far this year, some of the things I showed you. We have some very exciting stuff that I was talking about the last time around, launching really towards the end of this year into next year, all around the brand Samsonite to really make sure this brand stays well-positioned as a real innovative leader in the space. Innovation coupled with the right messaging from an advertising campaign is how we're managing the Samsonite business.
Thank you, Kyle. Operator, we will now open the Q&A to callers. Who is first online, please?
Ladies and gentlemen, if you'd like to register for a question, please press star one on your telephone. Thank you. Our first question comes from Chen Lo with Phil, Merrill Lynch in Singapore. Please go ahead. Thank you.
Hi, management. I've got three questions. First of all, on the U.S. side, just now we mentioned that there is a 12% price hike. I think we are actually referring to the cumulative price hike, how much have we repriced in Q3 in the second round of price hike? After all the price hikes and trade war concerns, what's our projection on the U.S. organic sales growth out of the second half? This is the first question. Secondly, on Hong Kong, we noticed there has been a lot of protests going on in Hong Kong, which negatively impacts Hong Kong retail sales. I think Hong Kong is only around 5% of our sales. In terms of earning contribution, it could be higher given the better margins in Hong Kong. What's our assessment of the impact in Hong Kong on the overall business?
Lastly, what's our projection for the full year adjusted EBITDA margin in 2019? Thank you.
Okay. On the U.S. side, blended, we've issued around a 12% increase. On the first round, when we saw the first round of tariffs, we put an increase in, which was just shy of 7%. That's against a 10% tariff. Our view at that moment was we should manage most of the margin impact with that. If you looked at our Q1 numbers, our gross margin was well-maintained. On the second round of tariffs, it was more challenging to push through an equal amount to cover the full margin impact. We roughly put a 5% kind of, I'll call it blended increase against the 15% tariff. We also had had some time to manage some resourcing and also working with our vendors for price reduction. On an apples-to-apples basis, we're a little better positioned as we moved into the second tariff.
There was enough pressure and pushback on the market that the ability to fully pass on enough to cover margin felt a little bit strained in the North American business. The blended, and really the second increase that we've taken is balanced with all the other initiatives that we have. We do start to see a little of margin pressure in the U.S. I think for the first half, the U.S. gross margin was down around 120 basis points. My sense is for the full year, we probably stay in that pressure point, maybe a shade higher, but in that kind of ZIP code.
As far as U.S. outlook, I think, based on where I see traffic and trade tensions and continued uncertainty around tariffs, not that it'll impact our costing going forward, but uncertainty around tariffs for the rest of the business, or the rest of the U.S. marketplace. My sense is our U.S. business will probably stay in the ZIP code of down 5%-6% for the full year. A similar trend to what we saw in the first half. We're not seeing that dramatically change as we move into the second half of the year. On the Hong Kong protests, it clearly an impact. Our Hong Kong business is around 4.6% of sales. In the half, it was down around 0.6%, so not so dramatic. It'll be a little more impactful in Q2.
We've had, obviously, store closures at the end of the day or some of the weekend protests within Hong Kong. I think it will have some impact. I don't think it'll be dramatic to our overall Asia business when we think about it as a percentage of our total business. We will see some impact. I haven't fully quantified with the team, but you'd expect that there'd be some reduction in sales off the back of this. Next time we're together, we'll have a better view of that. Lastly, on adjusted EBITDA. We are making progress here. We're down. We saw the progress from Q1 to Q2.
I expect for the second half of the year, our adjusted EBITDA margins will be up year-over-year, but it won't be enough to offset the first half impact, which was down around 200 basis points in the numbers. I think we'll probably have EBITDA margin in some range of 60-90 basis points lower year-over-year for the full year, which if you do the math, you'll know that the second half we should be positive on EBITDA. We're seeing some early signs of achieving that. The first half is what it is, and we won't cover all of that. I think that'll be a good outcome to this business. I think we'll be maybe just shy of 15% EBITDA margin, somewhere in that ZIP code, ±, versus last year, I think we were around 15.7 or 15.8 for the full year.
I think you'll see, and we've already started to see it, a noticeable shift on EBITDA as we move into the second half of the year. Okay.
Thank you, Kyle. Operator, next caller online.
Yes, I do. Our next question comes from Dustin Wei with Morgan Stanley Hong Kong. Please go ahead. Thank you.
Thank you, management. The first question that I got is that throughout this call, I feel there are a couple of the contradictory information. I think there's a positive comment toward the second half that it seems like we are going to see the positive sales growth into the second half, and also on the second half year-over-year basis, we are going to see the EBITDA growth. The tariff is only sort of kicking in May and the price increase in the U.S. is starting in the third quarter. You mentioned the gross margin pressure, the wholesale and the retail customers, they will have a pushback. Also in terms of the impairment, that's gone on the forward-looking basis instead of the backward-looking basis.
It suggests that you kind of take a more conservative view into the second half, but you still expect the sales and the EBITDA growth in the second half. Could you provide some more color there?
Yeah. I would draw your attention just to the slide that we talked about a little bit earlier that shows the comparables, because don't forget that every single quarter that we're comparing, the first half last year was unbelievably high in terms of the sales growth. Compared to that, obviously, there's been a decline. Naturally, as we get into Q3 and Q4, the comparison gets better. The other thing that you should note is, yes, there's a lot of pressure on the U.S. still. Although we're starting to see some improvement there, and if we're looking at this kind of down 5% number from a U.S. perspective, that's the U.S. The other regions, and if you look at the quarterly trends, have started to improve Q1 to Q2.
Also if you look at it for the half, the other regions were actually in positive territory despite the tough comparison with Q1 of, or the first half of 2018. As we get into the second half, we expect there to be a greater contribution that's coming from the international regions as compared to the U.S. market to offset that. You're right in terms of the second round of tariffs and in terms of the margin pressure, and there's going to be continued margin pressure in the U.S. specifically. Bear in mind, from an end consumer perspective, we're also looking at what's happening in our D2C channels as compared to wholesale as well. It's not just that we have a wholesale business in the U.S. The hope is that as you have some product mix, you can offset that.
We have a little bit of greater control in our own channels in terms of what we put into the stores versus what's going into the wholesale channel. That mix should be able to help us on the margin side as well.
Okay. Thanks a lot. Regarding this impairment, what kind of the subsequent financial implication, like, meaning you talk about some of the stores being loss-making, but I guess some of them haven't been shut down. After this impairment, when you actually shut them down or terminate the lease, you don't have any P&L impact. Is that what impairment does to the P&L in the next few quarters or maybe next few years?
There's two different questions in that, really. From a financial statement standpoint, the impairment, you reduce the carrying value of the asset on your books. The financial impact of that is the amortization, which is really the lease expense, because it's a smaller number now. That flows through the financial statement. There is a benefit that happens in that regard as you're looking at amortization specifically. Having said that, your question in terms of what we're trying to do operationally, we are trying to exit certain ones of the stores. As you can imagine, it's a negotiation with various landlords. If you're able to exit the stores, it would have an EBITDA benefit that would happen if we do that.
The two are almost disconnected in a certain regard in that there's an impairment that just is a financial statement, non-cash issue that's there that will work its way through. Then what we're trying to do operationally in terms of managing the business to improve EBITDA. The landlord negotiations, especially in the U.S., have not been that easy in terms of being able to actually exit the stores. We have been able to get some concessions on rents, which I think would have a positive impact on it. In terms of pure exit, we're contractually obligated to stay there. What we're trying to do is to try to basically trade new store openings elsewhere with letting us out of the lease or reducing some of the rent expense that we have. Those are the kinds of negotiations that are happening.
The amortization benefit on an annualized basis for the impairments we've taken is probably around $5 million. You'll see an improvement in net income off of kind of reduction in amortization of around $5 million on a go-forward basis, annualized. You'll get some of that in the second half, obviously. The loss-making stores that are coupled in with this on balance, I think they were around $7 million negative EBITDA. Not the biggest of numbers when you think about the size of the business. As we can exit some of those, either through getting some rent concessions, which can lower that, but if we're able to exit a few of those, that could yield scale for what might be an EBITDA impact or benefit, if we're able to exit. There'll be some kind of middle road there on those as well.
Net-net, you should see P&L operating ongoing, P&L benefit, right out of the gate with the impairment fees.
Again, I said it on the call, but just to refresh it, the history of it's not like these things have been on the books forever. It's literally IFRS 16. We put them on in January, now we have to start to continuously monitor this. Obviously, we did a very thorough scrub as we went through this, given the impact of tariffs. It's something that we're going to have to do every quarter in terms of looking at it.
If actually the company start to close some of the stores via the negotiation with the landlord, could that still have some of the losses like termination or early termination costs that's separated from this impairment?
Yeah, we could have some exit costs. Yes.
Okay.
Yeah. Sitting here today, again, the point, we don't anticipate significant numbers based on how negotiations are currently going right now. Obviously, that could change, and we would exit it. We would do the analysis to make sure that it's net positive and accretive to us to do that. As Kyle said, it's about $7 million of negative EBITDA with these stores right now. There's a positive trend, but sitting here today, we don't necessarily anticipate a big number coming out of that.
Going to the second half, if there's no more impairment from this IFRS 16 review, can we suggest that sort of that's a positive forward-looking comment or forward-looking thought into 2020, that the rest of the stores within the portfolio, they are good, they are fine?
Based on our current assessment, yes.
Yeah. Again, look at the total store fleet, right? We're talking out of a fleet of almost 1,300 stores. It's like 1,268, if I remember correctly. We're talking about 44 stores. It's not like there's a massive number of stores. We do literally look at these store by store in every single region, so
Got it. Thank you. Finally, could you just provide some of the guidance for the sales trend by region for the second half?
Yes, I think as I said, the North American business probably stays in the ZIP code of where it is. Maybe a shade better. I would probably say right in the same ZIP code. I think Europe will stay fairly consistent. Our view is Europe's probably slightly higher in the second half versus first half, just because it was coming from such a high first half last year with the American Tourister launch. You should expect slightly better kind of growth number for Europe. For Asia, blended Asia should be slightly better second half, first half for the same reasons. Asia had a very large first half last year. We're blended with everything in it. Asia is probably a good comfortable mid-single digit, maybe a shade higher blended with Tumi.
In Latin America, as I said, I think is back into its kind of teens territory for the second half. Blended kind of low teens growth for Latin America. You blend that all together, we do think the second half of the year is a positive number. Where is that? It's somewhere between 2%, 3%, 4% is probably the way I would think about it from where we're sitting today. Blended together, that would actually shape the business to be slightly positive for the full year. That's our view at the moment when you blend together what we're looking at across the business. It's not some dramatic transformation from where we are.
The U.S., we do think continues to see pressure, but the blend of it all puts us at a slightly more positive spot than where we were, particularly out of the gate in Q1 of this year. We've seen Q2 is obviously slightly better.
And you-
On a constant currency basis, yeah.
Okay, thank you. You did mention earlier on the call that the June was flattish and the July up 33% on constant currency.
Say it again.
Did you say-
Oh, yeah. We saw a positive trend for June and July for sure. These were positive growth months for us, yes.
Okay. Thank you very much.
Yep.
Thank you. Our next question comes from Erwan Rambourg with HSBC London. Please go ahead.
Hi, gentlemen. Thanks for taking my questions. I just have two follow-ups. On the margin side, you said that June was up a point and July up three in terms of sales. What's needed actually to stabilize margin? If you could answer this more in a holistic way, i.e., disregarding the advertising to sales ratio cut. I'm more thinking, what sustainable top-line growth do you need for margins to be swapped up? Secondly, looking at the U.S., I'm just wondering if you have means to contrast what's down to tourism flows versus locals, i.e., I understand the Chinese are not coming as much, not spending as much in the U.S., and other tourists probably as well. Is it fair to assume that the locals are more flattish and that the bulk of the pain is coming from inbound flows, which are evaporating?
On the locals as well, if you can give us a sense of, are you seeing big differences in terms of sales by price points or channels or what are the moving parts in the U.S.? Thank you.
Okay. On the margin side, this is really going to need the margin, right? We'll see a positive trend, a noticeable positive trend in the second half the way I described, but that's muddled with initiatives. As we've kind of talked in the past through, and as this business, as it starts to get into a 4%, 5%, 6% growth level, and I think the right kind of natural place for this business on a go-forward basis is somewhere between 5%, 6%, and 7% growth on a very sustainable, kind of repeatable basis, take out some of these headwinds. We're actually not so far off from that today if we adjust for these few pockets of territories that are seeing impact that I think we'd all agree are kind of unusual in nature at the moment.
We're not so far off from getting to a point that we deliver leverage, this operating leverage. Our view for next year is we should be in that kind of ZIP code, and we should be able to easily maintain and ideally deliver. We'll be moving into a budget cycle. The wild card is U.S. tariffs and where that ultimately settles with U.S. consumer confidence, particularly the second round of tariffs. If you read the news, you would read the U.S. consumer is chugging right along, and the U.S. economy is chugging right along. I think there are pieces of that, which I think is what you're trying to get at in the local versus inbound traffic. I think we're unusually pressured because a big part of our U.S. business is tied in with bigger wholesale customers who are managing expectations in their own kind of way.
We've got this kind of lumpy wholesale business. On balance, our wholesale business in the U.S. is down. I believe the number's around 7% or so. Actually, our direct consumer business from the blend in e-commerce, taking out eBags, is actually fairly strong on a blended basis. Our D2C e-commerce in the U.S. is up 22%, 23% or something like that. I might argue that has some measure of what's cooking in the U.S. Our U.S. non-gateway comps are probably flat to slightly down. I don't know how you want to read into that on a blended basis. It's a combination of both, but this inbound traffic really impacting gateway stores is a meaningful impact. What's the exact mix? Is it 70/30 kind of inbound traffic versus tariffs? That'd be my guess at the moment, but we don't have those clear visibility for that.
We do see our non-gateway stores performing okay. Muddled with wholesale, we see wholesale customers just acting and managing through the tariff stuff in their own way. They're managing things like inventory levels and just general flow of their traffic. If you look at the releases of some of these companies, they're talking very similarly about inbound traffic impacting their own stores that are tied in with gateway stores. I think Macy's release last week has a very similar kind of tone and feel to what I'm saying here right now. That's the kind of general way to answer that, Erwan.
Yeah, that's very useful. Thank you and good luck. Thank you.
Yeah. Thank you.
Thanks.
Thank you. Our next question comes from Jeffrey Chen with CRFA in Hong Kong. Just go ahead. Thank you.
Hello, management. Thank you for taking my question. Only one question from me. Could management explain more on the cost to implement profit improvement initiatives? This is found a new icon.
Yep. Want to do it?
In terms of what it is, think of it as severance. If we're taking actions in terms of our cost structure and we have to remove headcount, you'll have charges based on the different jurisdictions and what contract terms you have for the various employees of what we'd have to pay in terms of severance. When we go through the actions of terminating employees, we have to basically take those charges in and then you will see a run rate benefit that comes from that, or an annualized benefit that comes from that headcount being removed. The math that we do, and which you've seen in the presentation here, is we obviously want it to be accretive. If we're taking a one-time hit in order to be able to terminate an employee, obviously the run rate savings should exceed that.
Which is the way that it looks based on the actions we've taken thus far.
Okay. Got it. Thank you.
Thank you.
Thank you. Once again, ladies and gentlemen, to register for questions, please press star one on your telephone. Thank you. Once again, ladies and gentlemen, press star one key for questions.
Okay. Operator, thank you very much. Jamie? Oh, we have a question? Okay.
Sure. Our next question comes from Dustin Wei with Morgan Stanley in Hong Kong. Just go ahead. Thank you.
Hi. Just one last thing on the EBITDA margin for North America. In the first half it's down quite a bit, down to like 11.6% adjusted EBITDA margin. In order to get to the EBITDA profit growth for the second half for the whole company, what kind of the EBITDA margin we should look at for the second half for North America?
I won't give you the exact number, but if you remember initiatives that we put into play, we talked about really saw just a piece of that in the second quarter. A big chunk will be really in the second half. A meaningful amount of that was in kind of initiatives in North America. You'll see some of the benefit of those initiatives, which really haven't fully played in the first half numbers play into the second half numbers for the U.S. That coupled with margin, which we're kind of managing through in the U.S. business, my sense is you'll see EBITDA margins consistent, if not slightly up, off the back of the initiatives that we've played out there.
The EBITDA margin for the second half of 2018, that was in a very high base. That was a normal sort of, like 18% was in the high base for the second half, right?
Well, yeah, the second half is always a slightly higher kind of margin for us anyways. If you remember, right up until Q4, the U.S. had a strong year last year. It's against a kind of better performing last year for sure for the U.S.
Especially Q3, Dustin.
Okay. Thank you very much.
Thank you.
Great. Thank you very much everyone, for the call. Thank you again, Tim, Kyle, and Reza for presenting today.
Thank you everyone.
Thanks everyone.
Thank you. Thank you for your participation. This concludes the conference.