Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to the Samsonite International 2019 first quarter 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. Hello, everyone. Thank you very much for taking the time to join our first quarter 2019 earnings call. With us presenting today are our CEO, Mr. Kyle Gendreau, as well as our CFO, Mr. Reza Taleghani. Without further ado, I will begin. We will have our CEO, Mr. Kyle Gendreau, begin with a few opening remarks. Thank you very much.
Okay, great. Thanks, William. William, you will turn the pages and I will just indicate what page I am on just so we stay lined up.
Yes.
Thanks, everyone, for joining. Thanks, good morning or good evening, depending on where you are. Reporting our Q1 results. As we indicated at our year-end results, that we were seeing some challenges in those select group of markets, and that has played out in Q1. On page four, our underlying business has remained stable, but the macro headwinds in these few markets has definitely impacted our Q1 results. From a sales perspective, we had downward pressure on really four key markets, our U.S. business, off the back of the tariff noise, which obviously elevated over the weekend. Our China business, particularly China B2B, where we are adjusting the size of that business along with those customers scaling back. Korea and Chile are both continuing to feel some pressure. If I adjust for these markets, our underlying business, which I would label as stable, is up 3.4%, constant currency.
There is an FX impact in our numbers this year from a sales perspective, fairly meaningful, around $34 million-$35 million negative impact on currency on the sales side. The U.S.-China trade tensions, as we all know, are leading to impacts on our U.S. business with inbound traffic to the U.S., particularly in our gateway cities, which has impacted our North America business and, to a lesser extent, but impacting our Tumi business. Our wholesale customers on the back of concerns on consumer sentiment have been cautious in ordering and managing their inventory. On a positive note, our Tumi business continues to perform very well. We were up 8.5%. We launched Alpha 3 this beginning of the year with a very good advertising campaign. If I adjust for some of the adjustments in transshippers, our Tumi business was up just about 10% for the first quarter.
We continue to push our e-commerce business and our direct-to-consumer business overall, but particularly e-commerce. If I adjust for eBags, where we are consciously reducing our sales of third-party brands to improve profitability, e-commerce was up 27% for the quarter. On page five, I thought this bridge would be helpful to give you just the scale of the Q1 sales numbers. First thing I would point out is, if you remember last year, Q1 was a record quarter from a growth perspective for us. We were up 15.5% in Q1 2018, largely with the launch of the American Tourister campaign, which was highly successful in 2018, and with a very large initial launch as we launched the advertising campaigns and several new products for Tumi. We had a very strong Q1 last year.
As we step into Q1 of this year, you'll see impact on FX is our first bar here. Against the strengthening dollar, we've seen translation effects to our sales of around $35 million. We always break that out for you so you can get the constant currency. Going across the page, you can see the markets where we're seeing more significant strain. U.S. business that I've touched on. Our China B2B business, this sales drop is just China B2B, down $10 million. We've gone from last year Q1 close to 29% to this year Q1 close to 18%, so pretty dramatic reduction in the B2B business. If I adjust B2B out, our China business is actually up around 6%. South Korea, which continues to be a strain for us off of inbound traffic and general sentiment in Korea, down 7.6% or $4.7 million.
In Chile, which we're seeing some strain last year, continues with a sales drop of around $3.5 million. Chile as a business is down a little over 12%. If I take all of our other markets, we're up $16 million for the quarter or 3.4%. We can really see in isolation the markets, the challenges. A few of these markets are obviously our bigger markets that have an impact on the overall sales growth for the quarter. The next page, Reza will cover this a little more detail in the back, is we have also this year IFRS 16 kicking into place, which is lease accounting. What we're doing on this page is showing the adjusted EBITDA as reported on the left. You'll see Q1 to Q1 2018 adjusted as a big step up and down.
The more important piece is the charts on the right, which is what you will see in the rest of our presentation here, which is adjusted EBITDA taking out the impacts of IFRS 16. It is more relevant to the way we have looked at the business. There is a small dip in 2018 if I adjust for IFRS 16, and you can see the impact on our EBITDA, which I will go into more details off the back of the sales drop that we have seen in the first quarter. On the next page, I bridge EBITDA for you. I am on page seven, William Yue. If we started with Q1 2018 adjusted for IFRS around $117 million, we saw around a $30 million dip in our EBITDA for the quarter. There is a small portion of FX there.
I have taken all the FX on the EBITDA line and put it into one spot. It is around $4 million just with translation. The next column is the gross margin impact of the sales drop in constant currency. Around a $12 million drop in gross margin, just because of the sales drop. Our gross margin rate actually was up for the quarter, so we are up around 14 basis points. That is a net positive in our numbers. We also have some advertising decreases, which is really just a function of the lower sales and the advertising carrying across. We have other SG&A, which, as we talked about at the year-end, we have a few markets where we are seeing pressure on the SG&A side as we have pushed initiatives around direct-to-consumer.
This is particularly in Europe, and a little less extent in Asia with the Tumi push, which has had an impact on our EBITDA of around $19 million for the quarter. On page eight, I just break that out in a little more color so you can see how our non-advertising SG&A is moving within the quarter. You can see there is a currency impact that is a positive. It is really Europe at $12 million. This is where we consciously were investing at the end of 2017 and through the first half of 2018 on retail stores. We had opened 84 stores in the last year, and 40 of them were in Europe, and most of them happened in the first two months. You are getting the continued effect of those retail store openings within the SG&A side.
We throttled that retail expansion back, as I indicated on our last results announcement. This is really just the effect of these stores continuing to ramp, having a negative impact on the SG&A side. Latin America and North America were fairly light. Latin America, a tiny bit as we push Brazil's strategy. North America's SG&A was very stable, as you would expect in that business. Asia was up a bit on SG&A, with more than half of that coming from the expansion of Tumi. Now that Tumi is settled and we really start to push the retail strategy within markets like China, you see the SG&A side for that. Our corporate costs were down $3 million for the quarter. As we manage costs within the business overall, you will see that our corporate expenses are down in Q1.
That next page really just bridges it to adjusted net income. The largest part there is just the EBITDA impact push-through on adjusted net income. Our adjusted net income is down from $45 million to $27 million. Most of that is the sales drop. We have a net interest benefit of $3 million off of the restructuring last year, and our effective tax rate is slightly lower with just the mix of the business. The tax associated with stock compensation. We've got a benefit on the tax rate carrying into the net income as well. That's the overview. I'm going to turn it to Reza to go through a little bit more details on Q1, and then I'll come back at the end of the presentation.
We're on slide 11. As Kyle said, overall constant currency growth this quarter ended up being down 2.4%, the reported number will be $832 million on sales. We did get a pickup in margin of 14 basis points, that's flowed through. As you will see, the adjusted EBITDA is, and I'm going to have a separate slide on IFRS 16 because at the year-end presentation, there were a lot of questions. I want to be very transparent in terms of how this was all calculated. What you see here in terms of adjusted EBITDA, is adjusted EBITDA including the lease and amortization interest expense. That means that we're factoring in the expense of amortization and interest. The reason we're doing that is our purpose of reporting adjusted EBITDA is to give you as much clarity around the performance of the underlying operations.
By doing that, it gets us as close to the pre-IFRS world as possible for comparability purposes. What you see here is, if we adjusted last year's numbers for IFRS 16, there was about a $6 million impact. It would've been around $117 million for the quarter. This quarter, we're reporting at $84.6 million in terms of the adjusted EBITDA that we're focused on. That is a 300 basis point decline as it relates to the lower net sales. We also have some non-advertising operating expenses, specifically the SG&A that just Kyle went through, as we wait for the European stores to ramp further and some of those store investments to materialize. The flow-through to net income, if you're going from left to right, it's basically the impact of the sales rolling into net income.
There is some benefit, as we just went through, in terms of interest expense and taxes that happened there. On the next slide on page 12, what is driving some of these headwinds? I mean, the overall business does remain strong, we have sales growth of 3.4% on a constant currency basis. The largest component, obviously, as we look at this, are the U.S., China, and to a lesser extent, South Korea and Chile. In the U.S., it's been the impact of tariffs. As you are well aware, a large component of our U.S. business is driven by sales to wholesalers. Even though the full tariff impact did not come in in the quarter, the wholesalers were looking at what the consumer impact was going to be of that and anticipating and waiting.
As a result of that, some of those wholesale customers had not been purchasing. Obviously, that noise continues as we go through the weekend and into this week. There is also the impact of the Chinese traffic and Asian traffic overall to U.S. gateway cities. If we look at what is happening on a comp basis in those stores, there has been a decline due to that. Then there has been some actions that we have taken actively in terms of improving the profitability of the U.S. business. Specifically, as we look at eBags, we have taken actions that we mentioned at the year-end in terms of reducing the proportion of third-party brands. That had a $5.5 million impact in the quarter that we think is better for the business in the longer term. Obviously, it impacts sales for the quarter as we adjust.
Finally, Tumi, we mentioned the transshipper issue, so that continued, and there was a little bit of overhang into the first quarter of about $2 million due to the transshippers as well. As we focus on China, I think it is very important to distinguish between the consumer and China B2B. The largest component of what is affecting our China business is really this move out of reducing the percentage of China B2B. We mentioned with many of you at the year-end that as we think about strategically where the China business needs to be, we do not like it being in that 25% ZIP code. I think strategically, we are aiming for something in that 15% area, which is where we are right now. Our B2B sales are down to 17.8%, which we think that is a healthy number.
That obviously impacts overall China, which is going to end up being down $10.7 million, or on a constant currency basis, it was down $6.5 million for the quarter. The Korea business, there is a component of it driven by Chinese traffic into the country in terms of tourism, and then there is the overall economic environment in Korea that is impacting it. Chile, it is a smaller decline, and there has been some recovery as we sit here looking at April and the May numbers , but Chile during the first quarter, it remained slow, largely due to the consumer sentiment in the country and some impact from Argentine tourists coming over the border. Our favorite topic on page 13 from a CFO perspective is IFRS 16. I am going to just lay out a lot of numbers just to make sure that everybody has them.
Again, you will see this in the earnings release, but I just want to draw your attention to them, given the fact that this is the first quarter we are reporting this. Overall, the right of use asset that came on the books in the quarter was $705.9 million. What that is it is within the range of what we indicated at the end of the year, so that is what we expected it to be. The breakdown of that is that there is a lease liability on the other side of the balance sheet of basically $578 million of lease liability, and the current portion of that is about $128 million that rolls in.
What ends up happening here is we wanted to basically show you quarter-over-quarter, if we had basically been in IFRS all along, what the adjusted number would look like, and how does that compare to our as-reported number. The reason we're going through all these machinations is because if the only thing you did was pull our financial statements under the old accounting rules last year, you would have seen an adjusted EBITDA in the first column of $123 million. Right now, you would look at it and say we're at $142.3 million. We would be saying that there's growth in that. For full transparency, a lot of that impact is basically due to IFRS changes that are happening. What we're trying to do is, again, to normalize for that.
The reason we're showing you two specific lines of adjusted EBITDA is to basically be able to give you clarity around, if all you were trying to do was to solve for what our adjusted EBITDA has been for the past few years, that would be the first component of it. However, we feel the right way to report the business is to readjust and basically back out what the lease amortization expense of roughly $49.9 million and the lease interest expense that comes as a result of IFRS 16 of $17.7 million. Our adjusted EBITDA, including the impact of that expense, is basically $84.6 million. Hopefully, you'll have a chance to digest this because I know there's a lot of information on here, but we've tried to lay it out as clearly as possible, and if there's questions, we can follow up.
On page 14, we covered a lot of this already, but overall, first quarter net sales by region, obviously North America was down 6.2% on a constant currency. There is some Canada effect there, but the currency is partially neutralized just given that it's dollar. Asia, although it is down 1.2% constant currency, if you were to exclude that China B2B issue and South Korea, overall, the region is performing, and it would've been up 4.4%. It really is these isolated parts of the business that are impacting it. Europe is up 2.3%, despite some of the headwinds, they continue to perform. Latin America, off of a smaller base, down 2.8%, but again, that's largely been isolated to Chile and Mexico, and there has been a recovery there, and we forecast that that's going to rebound in the second quarter and by the end of the year.
Looking at it by brand on the next page, on page 15, if you're looking at Samsonite, largely because of what's happening in the U.S., China, and South Korea, the Samsonite brand constant currency growth is down 4.2%. Tumi, as Kyle said there a little bit earlier, continuing to perform, up 8.5% off the back of increased sales, specifically in Asia, which was up 17%, and Europe 22.5%. We're really, really pleased in terms of the international expansion and adoption of Tumi. American Tourister is really comparable if you look at it. The Q1-over-Q1 growth was 22.7% growth between 2017 and 2018. Although constant currency growth for American Tourister is down 5.2%, that's just largely because we don't have that large campaign going through.
The other brands, there's been some headwinds around High Sierra, and eBags, we purposefully have been reducing some of the third-party brand sales, as I alluded to earlier. On page 16, the DTC growth, again, Kyle touched on this. We're pleased with the e-commerce growth that's continuing, so net sales growth of 7.4%. Overall, 9.8% of the total company sales in Q1 came from DTC e-commerce. Retail stores, if you're looking at the net sales, we did have an increase of 3.5% in terms of the new stores that have come in. We only opened up nine new stores in the first quarter, so I think you should know that we're taking a very measured approach in terms of the continued implementation of brick-and-mortar retail, especially as we focus on the SG&A and given the sales environment and the consumer sentiment that we see.
On page 17, non-travel continues to be an area that we're focused on, and there was some growth in that. Despite the fact that travel was down 4.4% constant currency, non-travel was up slightly as well as we continue to focus. As it relates to advertising, we're basically in line year-over-year in terms of advertising, so we continue to invest in the brands. You'll see some of it on here. Hopefully, you've had a chance to look at some of our ads online as well. There's been a big push into Samsonite. We have some new innovations that are coming up that we're going to be focusing on. Tumi, there's been a couple of campaigns, the Lenny and Zoë Kravitz campaign, as well as the Chris Pratt campaign that recently launched in Asia as well.
As it relates to the balance sheet, net leverage for the quarter was 2.67, so well within our bounds for our covenants. We're continuing to focus in terms of where we stand on debt. As we continue to generate cash flow, we're focused on continuing to de-lever. We have $624 million of revolver availability, so plenty of financial flexibility still available to us, and we're continuing to manage inventories, which we'll talk about on the subsequent slide as well. We do have a focus. As the sales environment has put some pressure, working capital has not come down as much as we would've hoped in the quarter, but that's largely driven around the payables number as you'll see there.
We are slowing the pace of purchasing that's happening, and as you'll see, inventories, we have managed to keep that down slightly year-over-year, but we continue to have a focus on that, and we hope that as sales pick up, that inventory level will continue to come down. One area that I'll also draw your attention to, as we think about CapEx overall for the rest of the year, we are actively managing our CapEx numbers from a forecast perspective and trying to make sure that we maintain discipline. A focus on cash flow is going to continue for us as we continue for the remainder of the year. With that, I'll turn it back to Kyle for views on the rest of the year.
Okay, thanks, Reza. Just before we get to questions, I'll give you some outlooks based on where we're sitting today. As you can imagine, as I indicated at the year-end, the ability to get outlook as crisp as possible is a bit more challenged with the noises around tariffs. From our view today. We're seeing in April and May a bit of an improvement from what we saw in Q1. My view on our Q2 numbers is we'll probably be slightly up, around somewhere between 1% and 2% is my best guess on Q1. Again, we're watching carefully tariffs, which the world was semi-expecting something to happen anyway, so it was already well built into the sentiment. It seems like it's obviously elevated quite dramatically over the weekend.
As we're watching that, I think for the first half of this business, this is probably in line to slightly different than what I was thinking at the year-end. I think for the first half, we will be probably flat to slightly down. From where I'm sitting today, I would probably say more slightly down than flat. The business in the same markets that we're seeing noise, particularly the U.S. market, I think will continue to have some strain. We'll be watching China, underlying China, which has been performing well when you take B2B out. My optimistic view is that will continue, but we'll watch as sentiment picks up on the tariff side. From a full-year perspective, I still think this business will deliver single-digit growth.
I think second half will be in the low to mid-range on single digit, and for the full year, I think we'll be low single digit growth. I would caution that with general kind of noises and macro pressures around tariffs, this is harder to predict. From what we can tell off of, again, a softer Q2 last year, I feel pretty good that we'll be in that range. I just want to remind, last year, the first half was up close to 12%, and our second half was up around 4% or 5%, roughly. When you think about our first half numbers this year, it's against a very strong first half last year that settled out at the second half of the year. That's our view on outlook. I think from the gross margin perspective, I think we're slightly up for the quarter.
I think we will continue to work on the margin side, particularly with tariffs, with this second round of tariffs going in. My sense is we'll have some good discipline on margin, ideally flat to maybe slightly down, but I'm not seeing major margin pressures. Our ability to manage margin, gross margin has been one of our strengths. Reza quickly touched on working capital and cash flow. I do think by the end of the year, we'll be in line with our targets in working capital. We have the teams very focused on that, and I think we will get there. If last year we had some investments in working capital that had our cash flows down a bit last year, you should expect that our cash flows in the back of all of this will be up year-over-year.
The teams are very focused on that as well. That's my best on outlook, William, we can go to questions now.
Great. Thank you very much, Kyle and Reza. Operator, we can begin to take questions now.
Thank you. Ladies and gentlemen, we'll be now open for questions. If you'd like to register for a question, please press star one on your telephone. Thank you. Once again, ladies and gentlemen, that is star one key for questions. Our first question comes from Trent Lo with BofA Merrill Lynch. Please go ahead.
Thank you, management. I've got two questions. First of all, just now Kyle mentioned that there have been a lot of noises on the trade war. On the other hand, we think that a lot of U.S. retailers are simply delaying their purchase decisions and try to manage down the channel inventory. Based on our current observation, how low the current channel inventory is, and are they going to actually do restocking anytime soon, or simply because of the renewed trade tension, they may still continue to postpone the purchase decision to a later stage? Also, if later the U.S. government hikes the tariffs on China goods from 10%-25%, what are we going to do? Are we going to raise price again, or there are other alternatives? This is my first question.
There's two questions there, right? Those are your questions, yeah. For the channel, I think you're exactly right. What we've seen in our U.S. wholesale customers is, given the potential kind of challenges of consumer sentiment, they've been much more cautious on buying. Clearly in Q1, a big piece of our drop is these U.S. retailers, wholesalers holding back on buying. We're seeing that pick up in the second quarter, as you'd expect. There is a period of time where they'll need to start rebuying, and they've been just managing that very closely. You'll see a U.S. business which was down 6% in the first half be much more improved as we move into the second half. For example, in the month of April, the U.S. business looks to be down around 2% or 3% versus 6%. There's still some pressure.
I think with this kind of renewed kind of noise, it'll have some impacts. You have to remember, all of these guys had already assumed a second round was coming in. If you remember back in September, the second round was threatened to go in on January 1st. Many of these people were managing assuming that. If there's any sort of light in any of this, it's we have a little bit more clarity in what I think is going to play out so people can kind of get on with the world and where we're at. My sense is people will continue to be cautious, and I think the next two, three, four weeks will be really important. It sounds like it could kick into the end of June before we get some clarity on this.
That's why I think second quarter will be better than first quarter because of exactly your point. They don't have lots of inventory in their pipes. When you really think about our products, anywhere from one to two months of inventory. They'll need to start buying in. We're seeing that as we move into Q2. As far as what we're going to do with the pricing, we've already had discussions with our customers even back in December of last year, because we've been waiting for this kind of foot to drop here on this second round. Like we did in the past when the first round of tariffs goes in, we're working with customers to manage through how do we maintain margins. We're very clear on that. The whole industry is subject to this.
Generally, we will be attempting to push the price increases in to cover as much of the margin as we can. We'll be also working with our suppliers to make sure that they're able to cover some on their side. As you know, we're generally under an initiative to kind of shift what we can from China, which we were doing even ahead of tariffs, and we're just continuing to accelerate on the mix of what's coming from China to kind of mitigate the impacts here as well. All of that stays in place. You should assume that we'll be doing our best to maintain the margins, the gross margins on our U.S. business on the back of this second round of tariffs, if it does make it all the way in.
Okay. Thank you, Kyle.
Yeah.
One more question on margin. Just now you mentioned the guidance of flat to slightly down margin. Are we talking about the EBITDA margin? If that is the case.
Yes
Given the pretty sharp decline of normalized adjusted EBITDA margin in Q1, where do we have the confidence to actually achieve largely flat to slightly down EBITDA margin for the full year? Thank you.
Yeah, that was gross margin that I was covering, but I'll give you an overview of what I think is going to happen with EBITDA margin. As a team, we're very focused on kind of driving as much cost reductions in the business to navigate the headwinds we're seeing. We're clearly in Q1 down. Q1's our smallest quarter from both the size of the business and also the margin for the business. We pick up in the rest of the year. I think our full year margins, EBITDA margins, will be slightly down. When I say slightly down, anywhere from 50-100 basis points year-over-year on an adjusted EBITDA margin. That's my sense on where we are with the sales levels I think we can achieve for the full year. That's with us very actively pursuing cost initiatives within the business.
As you'd expect from management team, we are aggressively looking at our cost structures and cutting where we can cut to navigate the bit of turbulence we're seeing right now. You'll see the benefits of that as we move into You'll see a bit of it in Q2 improving from what you saw from Q1. For sure, in the second half of the year, you'll see some of that benefit as well.
Keep in mind, there's a comparison that happens as the year goes on as well. A lot of the store openings and other investments that happened were happening in the second half of last year as it continued.
Okay. Thank you.
Thank you.
That's all my questions.
Thank you. This question comes from Owen Rambert with HSBC in New York. Please go ahead. Thank you.
Hi. Good evening, gentlemen, or good morning, depending. Just I wanted to check on the guidance in terms of the actual top line. Are you talking constant currency in the sense that when you're saying-
Yes
flat to slightly down in H1, okay, and single digit for the full year, that's constant currency. Okay.
Yes. Yep.
Thank you. I just had two questions, one on the B2B business. You're saying the right level in China eventually will be at around 15%? Do you have other markets where B2B is actually an important chunk of the business, where you can have a bit of a reset like this as well? Secondly, I was wondering in terms of cash generation, we've had a few discussions with investors talking about what you do with cash between paying down debt, looking at other acquisitions, and actually some investors thinking it could be interesting for you to signal to the market that you think that the shares are a bit low by potentially announcing a buyback program. I'm just wondering what you think about those three options.
As far as B2B, China's probably the biggest. In certain markets in Asia, we tend to run in this kind of 10%-15% of our business, particularly in those markets. China was unusually high, and I think that's probably the biggest reset that we have happening in the business. The reality is, what we want to get it to is some level of sustainability and predictability. The challenge with last year is it was very high in Q1, and Frank's been adjusting this. We've talked about this in the past. I think a normal run rate for China is in this 10%-15% range. When we get there, we'll be able to take out the volatility of B2B. It's not bad business. We make really good money on it, but it has ups and downs, as you know.
We're just managing so that we have a consistency in that, and I think that's also helpful for the business to be in that consistent mode. From a cash generation perspective, we're highly focused on, obviously, cash flow. We always are. You'll see an improvement in our cash flow this year versus what you saw last year. We know that off of the working capital numbers last year. You'll see our CapEx a little tighter than the range. We put out our outlook for CapEx for the year. We'll be a little tighter there as we manage that. My view on cash flows for this business is continue to de-lever. One of the challenges with share buyback for us is the way we would go into market is challenging. We'd be very limited to what we can buy based on the volumes.
I would rather see us continue to de-lever versus use leverage to buy back shares at the moment. I think that's a better balance for the business when I listen to the blended feedback from investors. I think this business naturally has the ability to de-lever, and I'd like to see us continue that. Again, we'll have a strong cash flow from our view for this year, which will largely go to debt repayment as we get to the end of the year.
Thank you. Good luck. Thanks.
Thanks. Just one, you threw in M&A there. As I indicated last year, we do have capacity within the management team on M&A. We're not actively engaged in pursuing anything, but we are kind of keeping our feelers out there. I think this business has the ability to continue that. At the moment, we're very focused on managing and navigating the business at the moment with what we have for turbulence in front of us.
Okay. The next question is one from online from Ferdinand Groos of Cryder Capital Partners. His question is this, and I think this is for Reza. What is the annualized impact of what looks like an increase of $20 million in SG&A expense? Is this basically the cost of running stores that had not been opened in the first quarter of 2018?
William, the short answer is yes. If you looked at the layering of the SG&A that happened, it was largely due to the push to D2C. A component of that was e-commerce investments, but obviously we're happy with what we've seen on the e-commerce side in terms of the pickup in sales that's happened that we just reported. In terms of the brick-and-mortar retail, you're seeing the full-year effect of that in terms of the stores that were built Q1 of last year and now it's coming in as we look at the layering that happens in this quarter.
Thank you, Reza.
Any other questions?
I think so. We have at least three more callers waiting online.
Sure.
Okay.
Our next question comes from Hugo Shen with Macquarie in China. Please go ahead. Thank you.
Hi, gentlemen. Thank you for taking my question. I have one small question regarding the competitive landscape. Are you seeing increasing competition from those brands, especially in U.S. and China, such as private label brands from Xiaomi, Amazon and websites like that? Thank you.
I would say there's not anything new. These were all the competitive pressures that we're seeing through last year. One of the things I look at when we're in this turbulence is just where we are from a positioning and share perspective, I would say we're not losing any footing on that front. There's nothing new elevating from a competitive perspective. The same kind of noisy players at the bottom. I would say this is at the very entry-level zone where we see things, but that's not any different than what we were seeing through last year.
Got it. Thank you.
Yep.
Thank you once again, ladies and gentlemen. That is dial one key for questions. Our next question comes from Richard Cooper with Deutsche Bank in U.K. Please go ahead.
Hi, guys. Thanks for the call. Just a quick one from me. In terms of your exports out of China into the U.S. and the whole tariff question, it looks as if you were able to pass most of this on. The American consumer, I guess, was footing the bill at the-
The end of the day. Now with tariffs going up again, do you think that you can continue that? Or do you think you may need to adjust prices downwards to offset a drop in demand in the U.S. with obviously a much bigger increase going through at the other end?
It's the fine line of the discussion, Richard. It's a very tricky zone. Our approach is to maintain the margins in the business. I think that's important for the business, and if you can imagine, in the U.S., we do that customer by customer. We're very focused on positioning and managing the margins of the business. Our intentions are to cover as much of the margin impact as we can. We do that with pricing, we do that with pressure on our suppliers, and we do that with product re-engineering, which has a little bit longer tail. As you can imagine, we've already been thinking about that, so you get some benefits of that. Lastly, we do it from shifting sources, and we've been very successful with our U.S. business of quickly moving sources, and there's plenty to do.
We were north of 90% in the U.S. By the end of the year, we'll be closer to 75%, 76%. We're dramatically or quickly moving some of the sourcing locations, and we're actively pursuing that as well. When you blend all of the initiatives we have together, our intentions are to cover as much of that margin as we can. The bigger piece of this tariff, if it plays all the way through, is just what does it do to U.S. sentiment and probably causes pressure on the U.S. sales number. That'll have more of an impact on just the flow through to profitability versus, I think, the margin side, which we've had a good history of being able to manage. You're right. On the first round of tariffs, we've managed that very well. We saw very little margin impact in the U.S. business.
Okay. Thank you.
Yep.
Thank you. Our next question comes from Dustin Wei with Morgan Stanley in Hong Kong. Please go ahead. Thank you.
Thanks a lot. My first question is regarding to the sales growth. Could you please give some color, region by region? I think you mentioned about in North America. What about other region in the second quarter?
Well, I think, just in rough guidance, I think the second quarter is going to be up somewhere in this 1%-1.5% range. I think you'll see a bigger recovery in Latin America. Our Q1 Latin America numbers were lower than usual. I think you'll see Latin America get back into a double digit zone for Q2. We've seen a pretty good bounce back just in the month of April. Our Europe business will be in the zone that it's in now. I think it's in this 2%-3% range, and I think Q2 probably feels about the same way for Q2 versus what we saw in Q1. Our Tumi business in Asia, where we see it will be up blended. Our Tumi business, I think for Q2, will be in this 6%, 7%, 8% range for Q2.
There's a little bit of noise in North America just on some timing of some bigger orders last year. Blended Tumi will be in that same zone. In our view, Asia will shift from slightly negative in Q1 to positive lower single digit Q2. If you blend that all together, you get fairly close to what we're thinking for the quarter and the half.
Okay, thanks. From the new product perspective, you sort of mentioned that you are going to have several rounds of the new product push for Samsonite brand.
Is that in your sort of your guidance, or you are not going to do as big as what you did for American Tourister last year?
We're doing some evaluating on advertising spend at the moment. My intentions are to keep advertising in the zone that we spend, and last year we were focused on American Tourister, and we had some shift to Samsonite and Tumi this year. I'm watching carefully just the tariff noise, and you might see us throttle a little bit of the advertising back, but still push the initiatives that we've talked about. We have some really exciting products coming in, really starting at the end of Q2 and really Q3 and Q4. Some really innovative products, some new materials that we're working in that we'll start to launch, and we continue to be extremely excited about those. Those are baked into our numbers, and we'll be supporting those as they go out. I'm quite excited to get out with these products so the markets can see them.
I think they're really wonderful. All of that stays intact, and we're just managing the overall spend on advertising, and we're evaluating where we might be. You might see us shade advertising down a bit for the full year versus where we are at the first quarter. Really just managing the business. It's one of the levers we can manage.
Okay, thanks. On the GP margin side, do you have the breakdown for the Tumi and the non-Tumi for first quarter?
No, William can get back to you with that.
All right.
I don't have it right in front of me. Sorry about that.
No, not a problem. Is that fair to assume the Tumi is close to 70% GP margin, and it should-
Yeah
sort of stay the same, roughly the same going forward?
Yeah. I would generally say our margins are consistent. They haven't dramatically changed. We had achieved most of the Tumi margin upside last year, so our run rate leaving the year was in that zone, and it's still in that zone. That overall margin maintenance for the first quarter is consistent across the business. There's no real changes there.
Mm-hmm. Just to clarify on the GP margin side, in terms of the guidance, are you guiding the flattish to slightly down GP margin or what GP margin you think-
Yes
you are going to see? Okay.
Flat to slightly down.
Yeah.
As the world continues to be challenged, you can imagine margin and the efforts we put into maintaining margins. It's a piece of the headwinds we're seeing. I think as a company, we do a very good job with that. We were slightly up in Q1. I just want people to be careful that they don't assume that will trend up from there. My sense is it might stay in the flattish range for the year.
Okay. On the OpEx side, if I look at your distribution costs for the past couple of quarters, that sort of stay at a similar number, like $305 million or $307 million or so. Should we look at that as like fixed cost in terms of dollar amount? That should be sort of a dollar amount for distribution cost for each quarter this year.
Well, as Reza said earlier, we continued to open stores off of Q1 last year. In Q2 and a bit into Q3, we had store opening. In a period where you would have expected my SG&A to be down a bit, it's up a bit because of these retail investments that we've made. That's why we bridged and showed it by region where the SG&A costs are. As a % of sales, you should start to now see SG&A as a % of sales coming down from where we were.
Yeah. Dustin, just on the quarterly breakdown of it, just so you have it for last year. We opened 46 stores Q2 of last year, and in the second half of the year, we did another 32. It does normalize eventually, but those investments, you have to look at the full year effect that's hitting this quarter. Just be aware of that.
Yeah. Thanks for that. My question is more on, if I just look at the dollar term for the distribution cost since that Q2 2018 to the Q1 this year. You have roughly that $302 million and $306 million and the $7 million. This is sort of similar amount in dollar terms. If you are not adding more stores to that, is that fair to assume even your sales growth is going to accelerate to recover, but in terms of the dollar term, is not going to getting bigger because you are not opening more stores.
Probably just without having all the math in front of us, I would generally agree, but a percent of sales is coming down because a lot of that is the footprint that was laid for these stores. As you know, there's a component of store cost that is fixed in many ways, and that's what you're seeing. As a percent of sales, it should naturally come down as these stores continue to play out. We've throttled the new store investments down. I don't think I would call it all fixed, but there's a component of it that you're seeing. There was cost laid in Q2 and Q3 of last year as we continue to push out on the distribution expense side.
We've throttled that back, you'll see as the sales growth picks up and recovers a bit in the second half of the year, that as a percent of sales will dramatically come down.
You're sort of guiding the EBITDA margin to decline like 50 basis points to 100 basis points on a year-on-full year. It's kind of the gradual recovery process starting from Q2, or for Q2, we should still expect a little bit decline in terms of EBITDA margin.
I think you'll see a little bit of improvement. The piece I'm watching is just where gross margin plays out on the back of tariffs in the U.S. Definitely on the distribution cost, you'll see improvement. I'm just watching the margin side. Hopefully, you'll see some improvement. You'll see more of it in the second half of the year than the first half of the year, for sure.
Sorry. My last piece on the questions regarding the tariffs. I think the trade tension or trade talk, that abrupt turn last week just surprised everybody, I suppose.
Yep.
Could you talk about your discussion or negotiation with your customer? Because I feel previously the U.S. retail, like you said, they're starting to replenish their inventory. Would you think that this will change their mind and keep even lower inventory and that's going to only start kicking in the next few weeks, but not now? Could that be another negative downside to you? And also, it sounds like you're going to maintain your GP margin for the U.S. market. If you're going to increase the prices again, what kind of the retail price increase eventually that we're going to see? For example, I am thinking you are going to increase the export price by maybe 10% or so. Is that going to 5% increase in the retail price?
I just want to get a sense about how much impact from the retail demand, if there's going to be a price increase.
Yeah. Well, you and I both. I agree that's part of the challenge, right? To be totally honest with you. When we think about the U.S. team and how they're managing, that's exactly what they're working through, right? How do I maintain margins? The hardest part of that equation is, not even just this piece of tariff, but not only is the news this weekend about this, but the second round of tariff on everything that's coming from China, which really feeds into what is the consumer sentiment really going to be and what's the impact to the U.S. consumer. Which to me, hasn't fully baked into the consumer's mind in the U.S., but after this weekend and what I think will play out over the next few weeks, they'll be much more attuned to it. That's the hardest piece of the equation is, what's the sentiment?
We'll do a good job managing margin. The one piece with our customers is we already had this discussion back in the end of last year, as I said earlier. The original assumption was the second round of tariffs was going in in January, then it's been kicked down the road all along. This isn't a new topic for any of both our teams and our customers. It just became a little more alive this weekend because I think most people were thinking there could be some positive outcomes, and it quickly kind of turned the corner this weekend. That's what the teams are kind of navigating through. As you can imagine, this is a customer-by-customer discussion.
I think generally we'll be increasing prices in some range that allow us to maintain margin that's not 15%, but obviously somewhere in kind of the higher single-digit price increase range to cover the margin component of this. Off of the 10% that went in last year, our blended increase was around 5%-6%, if that's helpful in your math.
Yes. Is that-
There's lots of other factors we're doing to kind of shift things around.
Is that going to be the sort of the similar magnitude of the increase at the retail price, or is more at the sort of wholesale price?
We're figuring that out still, to be totally honest. That's why I think directionally it will, but we're figuring that out. That's part of the work that we have to do. We've been kind of doing all along this year because we've always had this kind of backdrop, but now that it's kind of pen to paper, that's exactly what we're doing. Probably in that same direction. We'll be obviously trying to mitigate as much as we can.
Okay.
The wild card is consumer sentiment, which is not just kind of us and luggage, it's general consumer sentiment in the U.S. If all of the next rounds of tariff go through, that'll be I think more impactful. Again, not just us, it's the U.S. in general.
Understood. Thank you very much. Thank you.
Yep.
We have three questions from online. Two of them are relating to the tariff increase. The first one is: have we seen our competitors increasing prices in the U.S., and are the price increases that they're taking similar in terms of scale to our own?
We have.
Yep. Okay.
I'll just answer as they come, William.
Okay.
On that one, we have everybody's kind of stepped in at different time points, but we definitely have seen because at the end of the day, this is impacting most of our competitors. I'm sure on this second round, even if someone was a little softer on the first round, they can't hide from the second round. Again, what's important here is we kind of assess our footprint on the floor and share in the floor. We haven't seen any deterioration in that.
Okay. Second question relating to tariffs. Just to be clear, this caller wanted to know if we're actually shifting sourcing out of China faster than we originally anticipated, and can you provide more color around how we're doing this, and where that is coming from?
I would say that we're at the same pace, William. We've been pushing this fairly quickly. If you go back a year ago, we were north of 90%. In Q1, we were around 75% or 73%. I think the same initiatives will probably get closer to 70% by the end of the year. We are elevating our thinking is the way I would think about it. We've done a lot of very fast moves. As you know, you have to be cautious in the shift because not only are we shifting, but we want to make sure that we're shifting with the same quality levels and the same DNA that Samsonite's known for from a sourcing perspective. The teams are hyper-focused. One of our benefits in this business is we can shift volume from one region to the other.
Some of the wins that we get is we can shift some Europe volume to a Chinese supplier, and the U.S. business can take some of that volume. We've shifted some production from China to India fairly easily. These are things that we're doing very actively. I wouldn't say that we haven't been actively, aggressively pursuing this. We'll continue that, is the way I'd say. It's not that we've changed our views that we need to move faster. We've already been moving pretty quickly here.
Okay, great. Thank you. Another question around guidance. Regarding the 2019 sales guidance, does that already incorporate the assumption about a slowdown in U.S. sales from the price hike and the recent consumer sentiment, or is that still subject to?
We're starting to factor that in. As you know, it's fairly fresh, but what I've kind of guided is taking into account that this has become a little bit more complicated. I think at the end of the year, I was feeling like there'd be some resolution to this, and I probably would've been slightly more cautiously optimistic. What we're talking about today for kind of outlook for the year, this is our initial assessment of how this factors into the business.
Thank you very much, Kyle. Operator, can you just make one more call to see if there are any further questions before we close the call?
Certainly. Once again, ladies and gentlemen, to register for question, please press star one on your telephone. Thank you. This is Amy. There seems to be no further question at this point in time. Thank you.
Okay. Let's see. I think that's all the questions we have tonight, gentlemen.
Okay.
With that.
Thanks, everyone, for joining. Yep. I appreciate everybody dialing in, and we'll keep charging away here at Samsonite. Thank you very much.
Thank you.
Thank you for participation. This concludes the conference.