Good day, ladies and gentlemen, and welcome to the Prada Group first half 2017 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Alessandra Cozzani, Chief Financial Officer. Please go ahead.
Thank you. Good afternoon, everybody, and thank you for joining Prada first half 2017 financial results conference call. I'm Alessandra Cozzani, the Group CFO. Today, I'm here with the Chairman, Carlo Mazzi, the CEO, Mr. Patrizio Bertelli, and Chiara Tosato, Prada General Manager and Digital Director. During the call, I will first go through the H1 2017 financial overview, followed by Mr. Bertelli to give the business update and Chiara to talk about our digital development. Mr. Bertelli will share with us our strategic outlook before the end of the presentation. We will be pleased to take your questions at the end of the presentation. Before looking into the numbers in detail, I would point out that we are in a business still in a process of transformation.
Secondly, we are working in a challenging competitive environment with volatile currency fluctuation and geopolitical tension that are impacting consumer spending and behavior. Thirdly, we have taken strategic decisions to invest in the strength of our brands, positioning the company for long-term growth. Mr. Bertelli will address these themes in more detail in a moment. Now, let me turn to the numbers. Net revenues for H1 total EUR 1.5 billion, down by 5.5% year-on-year with similar trend at cost and exchange rate. In the period, we were able to increase our gross margin to 74.1% thanks to better quality of sales. During the year, despite undertaking major investment in digital communication, we achieved excellent cost control, which enabled us to maintain the operating expenses at a consistent level with last year. Total operating expenses were up just by 1%, resulting in a satisfactory level of profitability.
EBITDA for H1 reached EUR 280 million or 19% of revenues, and EBIT at EUR 167 million or 11.4% of revenues. Effective tax rate is 30% and is in line with the same period of last year, not yet including the potential benefit from Patent Box. Net income for the period was EUR 116 million. Our balance sheet remains very strong, with 93% of the invested capital financed by equity. We generated strong operating cash flow that is sufficient to fully finance all capital expenditure. Net financial position turned negative in the period after the payment of EUR 307 million dividends and is expected to significantly improve in the second part of the year. Taking a closer look at the net sales by channel.
For retail channel, sales in H1 were EUR 1.2 billion, down by 8% at cost and exchange rate, impacted by the strategic decision to significantly reduce markdown sales in order to protect the brand equity. Without this impact, the retail trend would have been negative by mid-single digit, showing a better trend compared to H2. We have seen contrasting trends across countries and categories, with encouraging results from Asia-Pacific region and a very good reception of ready-to-wear in all major market, as you will see in detail in the following slides. During the period, we continued to actively manage the store network and opened six stores and closed 13 during the period, resulting in a portfolio of 613 DOS at the end of July. Implementation of digital strategies is well on track, with e-commerce growing rapidly. Chiara will provide more details later.
Regarding wholesale channel, sales were up 4.5% at cost and exchange rate compared to last year, benefiting from a very positive result from our partnership with existing and new leading retailers. Let's now look at the net sale by geography. We are seeing contrasting trends across geographies. Asia-Pacific region recovered, driven by an important improvement in Greater China, with positive results in all territories, including Hong Kong and Macau, a sequential improvement over the past year. However, as you may imagine, Korea has been impacted by geopolitical tensions. The European market was down 6.6% at cost and exchange rate, largely due to the strength of the euro, especially in the second quarter. Results for this half were also impacted by the tough basis for comparison in the U.K. market. Better trends were recorded in U.S., albeit still negative, impacted by falling tourist flow.
However, the U.S. department store performed well. There was also positive performance in Canada and Mexico. Sales in Japan continued to be impacted by both weak domestic consumption and tourist flow. Lastly, sales in Middle East were down, mainly due to geopolitical tension, which impacted tourist flows in the region. Looking at the product side in more detail. Performance in leather goods was mixed across price ranges and geographies. There was a strong reception to newness launch in the high-end price ranges, namely Prada Etiquette, Prada Cahier, Prada Paradigme, and Ribbon bag collections. This performance was particularly dynamic in Asia-Pacific. Ready-to-wear saw very good result throughout the entire period, with particularly strong sales trend in Asia-Pacific, Europe, and America, confirming the design leadership position of group brands. Footwear was impacted by a temporary weakness. Net sales by brand.
Sales continued to contract at Prada, but the impact was mitigated compared with H2 2016. Without the impact of reducing markdown sales, the overall trend would have been negative, but only by low single digits. That is an improvement compared to H2 2016. Decline in sales from Miu Miu was mainly affected by the store closures during the half period. We have closed eight stores. Reduced markdown sales also impacted the Miu Miu sales trend. To be highlighted is the trend in ready-to-wear for Miu Miu that has performed extremely well. Sales performance at Church's was impacted by the restructuring of the wholesale channel. Turning to slide nine, let's take a look at gross margin development. The group has a strong track record of generating a high level of gross margin, thanks to our continuous focus on industrial efficiency.
Gross margin reached 74.1% of sales during the period, also driven by the substantial reduction in markdown sales, which positively contributed 80 basis points to the margin, along with a contribution from foreign exchange. Let's now look at operating expenses. Growth in operating expenses was 1.5%, or just 1.1% at cost and exchange rate. The increase in operating expenses was mainly driven by the spending in advertising and promotion during the period. Investment in our brands remains our highest priority. During the first six months, we have also invested in our digital communication projects, and we will continue to increase our investment in this area, as Chiara will explain in more detail in a moment. As you can see, we applied a successful cost reduction program last year, which resulted in a leaner, more efficient, and flexible organization.
With this cost structure, the group is well geared to immediately translate growth in sales into increased profitability. CapEx has now reached a normalized level. Our CapEx spending is strategically allocated to improving the customer experience across our retail network. It is also allocated to building our industrial capacity in order to strengthen our ability to innovate while maintaining flexibility. In the first half of 2017, we invested in 100 store projects to enhance and refresh the concepts for both Prada and Miu Miu. Around 50% of corporate and industrial investment were devoted to production improvement to safeguard quality and secure strategic know-how. As this slide demonstrates, notwithstanding the sales decrease, our disciplined approach to cost, capital expenditure, and working capital allowed us to achieve strong operating cash flow in H1. The strong reduction in inventory was achieved thanks to more efficient and effective production planning and stock management.
Inventory levels are now at 18% of sales, a slight increase compared to last year in order to facilitate restocking stores. This slide provides an overview of how our net financial position has evolved during the period. As you can see, the strong contribution of operating cash flow, also thanks to the efficient working capital management, was able to fully finance capital expenditure. Cash outflow from other includes approximately EUR 40 million from foreign exchange differences. Net financial position turned negative in the period after the payment of EUR 307 million dividends and is expected to improve in the second part of the year. As approved in the annual general meeting, with effective from fiscal year 2017, we are going to change the financial year-end from January to December. As a result, we will be reporting 11-month period from February 1st to December 31st for 2017.
Since this is not comparable with 12 months period of 2016, we will provide the pro forma information of January, December 2016 and 2017 in the next result presentation. Now, I have the pleasure to hand over to Mr. Bertelli for a business update.
Good afternoon. Following what Miuccia Prada just said, I have some comments on the digital world. Last time we had a conference call, we already said we were going to commit to these activities, which we are doing now. As we speak, we haven't seen the full impact of these changes yet, because the implementation of everything connected to e-commerce and to all digital-related activities in China, Korea, and Japan required a pretty extensive organization and reorganization process before we kicked off the project. As to product and retail-related issues, the lower sales in stores were not due to us missing products, we all now understand that consumers tend to buy through both channels at the same time, so through both retail, physical stores, and through e-commerce channels.
Until we complete all of our digital activities, we will not be poised to grasp the full benefit of this new distribution channel. Let me now speak about our collections. Many times we were asked to provide some entry price points, some entry-level products, and so on and so forth. Personally, I think this is not really an issue for us. What we do understand is that products need to mirror the interests and tastes of a new generation of consumers. Cutting prices by, say, 10% would certainly not change the performance of our products in all different geographies and markets. We are confident we have a very current, a very strong product design.
This is actually clearly shown with the new product collections and lines we have introduced, we need to complement that with a number of communication policies, which we've managed in the last 12 months, has not been fully implemented so far. This is actually a very simple overview of what we've been doing in the first half. Let me now talk about retail stores. As you realized, we decided to diversify store image. We did it in Saint Barth, we did it in Porto Cervo and Saint-Tropez. We wanted stores to be pretty diverse. We don't want them to be homogeneous and identical all over the world, we want them to be quite diversified, also depending on the customers we serve in different locations. We actually increased, I'd say, quite sharply, both in Porto Cervo and Saint-Tropez after renovating the stores with the new concepts.
We went on with our pop-up stores project. We were deeply engaged in pop-up stores, especially in Asia, in China, Japan, and Korea now, with both Prada and Miu Miu products. For the month of August, we did a pop-up store in the Galeries Lafayette, the sales performance was absolutely interesting and very successful. In particular, we did it with a strong focus on our millennials customers. As to product development, I believe that unlike what some commentators said, our products have always served as a kind of a guiding light for many other brands, too. The quality of our work is certainly going to pay out in the future. In particular, we will be in a stronger retail position once we complete the whole digital and e-commerce, and social networking part of our offering.
The new products we introduced are absolutely successful, like the new Etiquette with the blue Etiquette, the Paradigme bag, and many other products, and ready-to-wear is really successful in the market, too. Something we should always remember is that this new generation of clients we want to appeal to expect us to clearly show and to clearly display our identity. Our brand identity is actually something that is not fully in line with people's habit of keeping the markets happy with whatever they require. This is not in Prada's DNA. Prada's DNA is about providing products that are really breakthrough and big fashion statements that may surprise, and at times, even disrupt markets and surprise customers. Once again, we want to serve customers, especially thinking that it's not necessarily consumer market we serve.
We want our brand to stand for a certain attitude and to express our customers' viewpoint on many different issues. We should always remember that whenever a new brand comes up in the market, new generations tend to be pretty curious about it, also because it serves as a kind of juxtaposition to the status quo. As brands become more established and more acclaimed and more successful in the market, they need to try and engage in the right communication and the right activities to appeal to younger generations, not just through products themselves, but also through the brand imagery that we can provide.
As far as what we want to express and provide in our communication, fashion shows, digital presence, and so on, we are confident our offer is up to target, and we need to work on further sales incentives through retail stores and through e-channels at the same time. Ms. Chiara Tosato is with us this afternoon. Ms. Tosato is the manager in charge of the digital sales, and she's our digital director. We hired Ms. Tosato because we want to have a very strong managerial drive, and we want Ms. Tosato to provide her competence in sorting out this issue.
As this is the first time you're hearing from me, allow me to introduce myself to you. I joined the company in March this year. My previous experience was in the media, telecoms, and technology industry, with a specific focus on digital. Now, I am the director of digital for the Prada Group, covering all the group brands. Today, I'm going to speak in more detail about our digital strategy, which is built on three pillars. First, driving online sales through our e-commerce platform, as Mr. Bertelli was telling you before. Second, developing a seamless omnichannel shopping experience. Third, increasing our investment in digital communications. The slide you see now talks about Prada Group's customized and localized e-commerce platform, which we're rolling out globally. The rollout is progressing well and on track, and we have already covered Europe and the U.S. to a good reception.
We expect to launch the platform in our key Asian markets and in Australia and Russia by the end of the year. We're aiming to achieve global coverage by the end of 2018. That will include the Middle East, other Asian countries, and Latin America. Our platform brings a number of significant benefits and upgrades, including a much improved and simpler user experience. It offers a global view of inventory and a highly cost-efficient logistics model. In fact, orders are served off the existing retail network, with all products packed and shipped from the closest stores. It is also fully integrated with popular social networks. For instance, it is possible today to log in directly with Facebook, and it can be easily integrated with local payment methods such as, for instance, WeChat and Alipay in China.
Our regional sites can be easily optimized for local languages and market dynamics. Today, we offer sites in 10 different languages. We're evolving the user experience, and this will be updated by the end of the year so that each local site can be customized and updated with ease and maintain freshness and relevance locally. It uses even richer media content to enhance the user experience and increase customer engagement when shopping our products online. We have already successfully launched Prada and Miu Miu ready-to-wear and shop by look on the platform with very promising results. Most of our offer for Prada and Miu Miu is already available on the platform. Our goal is to make everything available, all the collections and all the products available online by the end of the year.
Besides our e-commerce, the partnerships with luxury retailers continue to deliver very good results and to complement our digital strategy. We are now working with all major luxury online retailers. Going to the second pillar of our digital strategy, the new e-commerce platform will power our omnichannel strategy. We're introducing new ways of shopping with the ultimate goal of increasing sales by addressing all customer segments, from millennials to travelers and to well-off but time-poor customers. We have developed four ways to buy. All will be active by year-end. The first is the possibility to shop online and then pick up the product directly in store, which is already available to our customers, as well as the possibility to browse online and book an appointment in store with a personal shopper to buy the product, which is also available on our website.
We're working on giving our customers the possibility to buy in store and have the product delivered directly at home if it is not available in the store at that moment, as well as the possibility to see the product in the store and then have it uploaded to your online account to buy it online later. In this way, we're catering to both traditional and non-traditional shopping habits, meeting rising customer expectations, and providing a highly personalized shopping experience. At the same time, we're building a 360-degree view of our customers to significantly enhance customer relationship management that strongly leverages online data. We already provide email and phone-based customer service across Europe and the U.S. seven days a week. Our goal is to make the same service available worldwide by the end of the year, along with instant digital chat and online personal shopping service.
We're also planning to launch same-day delivery on a city-by-city basis, which will be available in our key markets also by the end of the year. Our enhanced CRM enables us to remain connected to our luxury customers wherever they decide to browse or shop. Ultimately, it will enable us to have more meaningful interactions with our customers and to develop highly focused and informed marketing propositions, all of which drive traffic into our stores. Let's turn to the third pillar of our strategy, which is digital communication. The Prada Group brands are some of the most widely recognized in the world. We're leveraging the opportunity presented by digital to elevate our communication with customers. To this end, we're increasing our investment in digital communications, which now represent a relevant portion of total media spend that we plan to further increase in the near future.
We have created a comprehensive digital communication strategy, which covers all channels, from social to online editorials to one-to-one communications. We have increased focus on product. We're now increasingly using targeted advertising to reach specific audiences. A good illustration of this is the way we develop innovative digital content to support pop-up stores by creating more buzz around our brands and products. We have a pipeline of rich digital content that we plan to leverage in localized campaigns to create memorable experiences for new and existing customers and drive traffic in stores. Our followers on Instagram now total nearly 18 million across the group brands. We expect to see this number continually increase. It is important at this point to stress again that our retail network is the most important touchpoint for our customer and will continue to be so even in an increasingly digital world.
With that, I now hand over to Mr. Bertelli for the conclusion.
Prada is an organization that commands high respect and is well established globally. It enjoys excellent perspectives. As Ms. Tosato just explained, we're now in the process of transforming the company to make it more suitable and more in line, not necessarily with the market, but with, I would say, the geopolitics that our consumers experience. Considering all the different situations that are emerging, I'm referring to the geopolitical turmoil that affects us in places like Dubai or Turkey or Korea. The actions we have embarked on are actually taking longer than originally expected to produce their expected results and desired results. They are the foundation for sustainable growth. We are absolutely confident about this activity and about our ability to properly manage all industrial processes.
As far as cost management is concerned, we'll always be very cautious and very careful about our investments. Right now, we are actually very careful in avoiding excesses, our main day-by-day work and attention is going to be focused around revenues increase. Our financial and capital structure is absolutely robust, this leaves us free to focus our attention on value creation for the shareholders, looking at the long-term time horizon. I think this is a high-standing priority, because we are confident that we have prepared and planned industrial organizational structures that are well-posed to be long-lasting, and the average age of our people is not higher than 36 years today. This allows us to look at the industrial side of our business with a good mid-term orientation. Thank you.
Thank you, Mr. Bertelli. We can now open the Q&A session.
Thank you. If you wish to ask a question, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question from Thomas Chauvet from Citi. Please go ahead.
Good afternoon. Thank you for taking my question. Three question, please. Firstly, on your retail LFL, it seems they were down mid-single digit in the first half for better or less bad than maybe 10% or 11% decline in H2 last year. Can you comment on the trends in the various regions and whether trends have improved throughout the half towards the end of the half or even in August? Have they been positive at any point in the quarter or sorry, in the half? Secondly, gross margin was up strongly to over 74% in H1. I think that's the highest gross margin level ever. It feels a bit counterintuitive given the performance in handbags and retail. Was it just driven by the improvement in full price sales ratio, or were there some one-offs to explain the 200 basis points improvement?
What do you expect for the rest of the year, for the second half? Finally, on the OpEx. Last year, they were down 10%. They're marginally up in H1. Any guidance on the phasing of OpEx given your digital roll-outs and perhaps some specific marketing or retail projects you have in the run-up to Christmas and Chinese New Year? Thank you.
This is Bertelli. I'll answer your questions. The more challenging geographies were the Gulf, Korea, for well-known reasons, and as a consequence, Japan as well, because, of course, tourism that was actually flocking to the Japanese market has been slowing down substantially. On the opposite side, we have improved sales in Japan, Macau, Hong Kong, Singapore, and so on. As far as Europe, the U.K. has been doing better after the Brexit results. As far as the rest of Europe is concerned, we still have a problem with people's concerns of terrorist attacks. An exception is, for instance, Turkey, because Turks do not travel much now, so the local market is performing very well in Turkey. Same is true for Portugal. Some other European countries are performing very well, whereas on the other hand, France suffers because of the decrease of tourist flows in Paris.
Central America is performing well. Canada is performing very well, too. Whereas in the U.S., we do have some issues. Also we have a basic problem there. Our store on Fifth Avenue is actually blocked out. There's people protesting in front of the stores every single day because our store is just in front of the Trump Tower. That store loses a lot of money because we no longer have the same visibility as before and the same pedestrian traffic. There's no way we can avoid protesters from standing in front of our stores because they want to challenge the Trump Tower. As far as operating margin, while OpEx is up because of two fundamental factors. One is the lower incidence of markdowns and good management of industrial costs. This whole management activity is performing well.
We're going to continue along those guidelines, by the end of the year, we'll see whether it's 74%, 73.5%. Actually, this is like to be the year and figure or very similar to it. As to operating expenses in the second half, we are in line with the previous half. We are making a big investment in digital and communication. As far as industrial activities are concerned, we can actually say we have now completed our investments in logistics with the creation of two new logistic warehouses and automation in the second half, we'll have a lower incident on industrial investments because most of these have already been completed. Thank you.
Next question, please.
We will now take our next question from Luca Solca from Exane. Please go ahead.
Yes. Thank you very much. A question for Mr. Bertelli, if I may. You were referring to the drivers of the current Prada's performance. If we refer Prada to its peers, to Gucci and to Louis Vuitton, do you identify the delay in the digital execution as the only element that you need to fix? What would be other elements that you think have to fall in place in order for you not to lose market share versus the other mega brands in the market?
Well, in the past when you were asking questions, you always mentioned other brands that have disappeared from sight. Apparently you are more selective right now. Anyway, the two brands you've mentioned are certainly those that anticipated, more than everybody else, their presence in the digital world. There is a big mistake here. When you speak of digital, people tend to think it's a question of IT systems and so on and so forth. Personally, I think that digital and everything connected to it is a question of marketing more than the IT systems themselves. It's more about strategic marketing, actually. Maybe, what we've done now is we've been pretty good at anticipating our strategic marketing decisions. We started late, but we are making the right decisions now, apparently.
As Ms. Tosato said before, we are going to see the impact of our digital expansion anytime soon. As far as the products themselves are concerned, I don't really think we have a problem in terms of products. Both Prada and Miu Miu are brands that, as you may see from the fashion shows and the reception for the brands, are always fashion-forward. Whatever we hear about changing designers and so on and so forth is just ridiculous for us because, many times, new designers are acclaimed and then they just go after a couple of collections. Chanel has been Karl Lagerfeld for forever. He is 80 years old, and no one ever thinks of getting rid of Karl Lagerfeld, right? I would stay away from lots of statements that don't really make sense. Thank you. Next question, please.
We will take our next question from Nikki Chung from Jefferies. Please go ahead.
Hi. I have a couple of questions, please. First of all, back to the Like for Like. Could you comment on the August Like for Like sales trend compared to February to July? The second question is regarding the price mix and volume for the first half sales growth. Since your gross margin was up very strongly despite the channel mix and product mix dilution, I guess that you have a really strong price mix uplift. I would like to know if you can comment on the volume decline in the first half. Thank you.
Yeah. Your comments are straight to the point because actually our average price for some products in particular has increased. Obviously, we lost a bit on the volumes side. We sold a few less pieces, units than before, but with a better price mix. Finally, we have now reached an average price position in which is, we believe, consistent for a luxury brand. Now what we're doing now is working on intermediate price ranges in order to increase sales volumes.
Talking about your first question, on the trends in August. First of all, August is never a very relevant month in terms of understanding trends. I could say that it has been more or less in line with H1 for us. Next question, please.
We will take our next question from Mariana Kou from CLSA. Please go ahead.
Hi, management. This is Mariana. Thanks for taking my question. I have two small questions. One is on the tax rate. Do we have an update on when the tax benefits will come through? I guess maybe a little bit guidance on the full year tax rate. The second question is on digital. I guess digital is a big push for us now. Could you share a little bit on, in terms of the penetration that we are seeing from the digital side, what sort of target or range that we are expecting, say, in a year's time when all these initiatives have been put through? Thank you.
I will take the question on the tax rate. Yes, I have mentioned in the presentation that we have presented the Patent Box request to the Italian tax authority, we have not received yet an answer because we have been probably one of the last to present this request since we closed the financial year at 31st of January. We are expecting to discuss with the Italian tax authority in the next couple of months. As soon as we start discussion, we may include the tax benefit in the P&L. That will be relevant, I would say also because, in 2017, we will account the benefit for three years in a row, 2015, 2016, and 2017, given the fact that the benefit cover a five years period of time from 2015 to 2020. Going to your question regarding our targets for digital sales.
We are working to achieve a goal that is 5% of total sales once our digital program will be completed. I would say more digital transformation will be completed, which we believe will happen at the end of next year. Next question, please.
We will take our next question from Mélanie Flouquet from J.P. Morgan. Please go ahead.
Yes, hi. I have a few quick questions. Sorry. The first one is regarding this decision to cut on markdowns. Can you share a bit more with us regarding this? Have you done using the bulk of the effort in H1? In other words, your uplift we got from the markdowns, which is 80 basis points, I think, is what we should expect being the maximum impact and will recur in H2. Or is there more work to do on your markdown policy, maybe notably through outlets? That's my first question. The second question is actually regarding gross margin. They went up 200 basis points. You mentioned that the markdowns impact or the non-markdowns impact was 80 basis points. What was the rest? Please, I think you mentioned some Forex impact. My third question is on footwear.
If you could explain what you think happened to this category, for the trend to have been weaker. Sorry, my fourth question is on digital. You're mentioning 5% of sales. Is this internal and through e-tailers as a target, and where are you today? Thank you very much.
Sorry for this delay in the answer. This is Patrizio Bertelli speaking. I was looking at a couple of numbers. As far as markdowns are concerned, we actually sold EUR 50 million less of product. Since we decreased the overall markdown percentage with the same amount of products sold, we improved our accounts by about EUR 16 million. In the second half, Ms. Cozzani was pointing out this was another part of your question. In second half, we'll have the same policy. Actually, maybe we'll have an effect because we will close this financial year at December 31st. Our P&L will only include markdown figures from those countries where markdown season starts earlier than others, like the U.S. market with Black Friday. Whereas in Europe and in the Far East, traditionally, markdowns happen in January, not earlier than that.
As far as the gross margin is concerned, Ms. Cozzani is going to answer this part of your question.
Talking about your question on what is the rest of the improvement in the gross margin. I have mentioned industrial efficiency and also Forex, the magnitude of these two is more or less 50% of the 100 basis point.
As to footwear and what happened with footwear. Maybe we made the wrong strategic decision, we decided to provide and to offer fewer sneakers. Indeed, sneakers turned out to be much more successful than we would think on the market, we have now become equipped to serve that segment better. This is the main reason why footwear was a bit weaker. Footwear is going through a global transformation and big change, we continue to provide more traditional, let's say, footwear, whereas the market has been moving on to sneakers much more than we expected it to do.
Going to your question regarding our digital sales targets, I think it is early now to tell you exactly the split between the sales that will come from e-tailers as opposed to our direct sales. I would say, in general, we aim at achieving this goal overall and hopefully even to do better than that.
Thank you very much. I have just a follow-up. Sorry, this was very clear on footwear. Have you fixed this for the second half? You actually have products in sneakers coming back in, or you think strategically it is wise to not go too much in this trend? Thank you.
Well, we did start correcting the problem. In the second half, in particular, starting from mid-October, I would say we will have more sneakers. However, as usual, in all things, the key issue in business is when a popular sales trend starts, if you're not there at the beginning, you miss out on sales. It's very simple. You have to be there and then monitor the kind of sales, also keeping in mind the other footwear we're going to provide. Of course we will be there, but of course we're not going to provide sneakers only. We will keep our identity with more our own traditional, let's say, footwear plus sneakers.
Thank you very much.
We will now take our next question from Mario Ortelli from Bernstein. Please go ahead.
Good afternoon. The first question is about your store restructuring plan. How many stores are you planning to close in the second half of the year, and how many stores are you planning to close in the next financial year? The second is about ready-to-wear. We have seen an inversion in the trend, ready-to-wear is growing. Can you give us a split between menswear and womenswear? The last question is about Miu Miu. It seems that Prada brand is recovering much faster than Miu Miu. Can you please tell us which initiative have you got in plan to re-accelerate the growth of Miu Miu? Thank you.
As to store closing, we've done everything we wanted to do. What we are doing now is revamping and redeveloping some of our stores. Those stores that were considered to be not necessary for us have already been closed. For the end of this year and next year, we expect a stable situation for stores. As far as Miu Miu is concerned, we have already changed some of Miu Miu's stores. We simplified them, and we changed the color of the tapestry. We still have to complete some stores modification, and we'll do it between January and March, and then that's it. Only Miu Miu stores that have already been redecorated are performing better.
We should remember that minus 9% for Miu Miu has also been due to the fact that even though we closed the stores for as little time as possible, we did close them for one day, one week, 10 days, to redecorate them and to renovate them. Of course, we knew it was going to happen, but there wasn't much we could do about it. We tried to minimize the time when stores were closed for redecoration and revamping, but we did lose some sales because stores were closed for redecoration for some time. Then ready-to-wear, well, good. I'm happy it grows, and I'm not surprised. If you have the right product, it inevitably grows. Ready-to-wear increased both for Prada and Miu Miu, and we'll continue along that road.
In particular, while ready-to-wear increased for all three brands, Prada Women, Prada Men, and Miu Miu, I would say they all grew in a pretty homogeneous way, all three.
Next question.
Excuse me, Mr. Bertelli, a clarification. We should expect that the store count will remain at 613 at the end of this year, and we expect also more or less a flattish store count also for the next financial year?
Yes. There may be some slight changes, just if some interesting opportunities come up, like for instance, the transformations in department stores. Many department stores are renovating their sales floors, maybe it may happen that we consolidate two separate points of sale into one. We're only thinking of some little changes in department stores or malls. We're not thinking of big transformations as far as the flagship stores are concerned.
Thank you very much.
Next.
We will take our next question from Rogerio Fujimori from RBC Capital Markets. Please go ahead.
Hi, everyone. I have two quick questions. Could you help us with any color on the wholesale outlook for the second half? My second question is on Europe. Could you elaborate on your comment that the stronger euro impacted tourist purchases at the end of the period, so how Europe performed at the end of the first half and particularly how the U.K. performance comparative got tougher in August? Thank you.
Would you be so kind as to repeat the first question? We're not sure we heard it perfectly. As far as the second half is concerned, if that was your question, we'll certainly improve our sales with wholesale, and, in particular, sales that are going to be delivered in the first half of 2018. The deliveries we're making right now for the rest of the second half are already performing well, and better than last year.
Okay.
As far as the EUR exchange rate. Please, go ahead.
My question was actually on the wholesale outlook for the second half and the impact of the stronger EUR on tourist purchases at the end of the first half. Thank you.
Okay, as far as the second half is concerned, we're going to have a positive impact. We'll expect higher revenues from wholesale. We already see some very good figures for the first half of 2018. I hope I answered your question here. As far as the impact of the strong EUR is concerned, we had a very positive impact, of course, with the U.K., also because eventually the EUR and the GBP are trading more or less at the same level today, we kept that parity. For other countries, of course, the currency fluctuations did leave a mark, but the most important factor was geopolitical tensions, not necessarily currency swings.
Okay, thank you.
We will now take our next question from Linda Hu from Macquarie. Please go ahead.
Hi, management. I have two questions. The first one is that for the euro appreciation, I'm just wondering what is the percentage of the cost of goods sold sourcing, was denominated in euro, and what about the percentage of OpEx also are denominated in the euro? Do we have any sensitivity analysis regarding for the 1% of the euro appreciation? How could that impact for our profitability? The second one is that, in the presentation, management highlighted the successful launch of the new products, such as Cahier, Ribbon, Paradigme, and Etiquette. I want to know that, So for example, these four are the collection, their contribution to our total revenue, and how is that number compared to 2016? Thank you.
The question around the euro appreciation. Of course, the euro appreciation will have globally a negative impact on our numbers because, as you surely know, most of our sales are denominated in non-euro currency, and most of our costs are denominated in euro. Having said that, we will have a possible negative impact on sales. The cost of goods sold is almost all denominated in euro. We have a sort of natural hedging in our operating expenses, and then we have a hedging policy, according to which we hedge around 80%, 85% of the net cash flow. That in this case, we will have a positive impact that we usually account into the cost of goods sold. All in all, we should be able to neutralize the exchange rate impact on the EBIT margin. To your question about the Cahier, Etiquette, Paradigme, Ribbon, et cetera.
Well, I can't really tell you off the cuff. We should go to looking at the makeup of all our sales, because it's not just the bags, but it's the accessories that go with bags. Pouches, wallets, and so on and so forth. If I were to try and answer off the cuff, I would risk being mistaken. What really matters is that the new products that we have introduced and launched on the market, and in particular, there are some products like Etiquette that are soft bags in fabric and leather, and they have been an instant success on the market. This means that once again, the soft bags are becoming popular again, like they were up until 2010 or so. The stiff bags are actually going to become less fashionable on the market.
They're going down in terms of sales and performance, which is very good news for us because, we are absolutely in line and we are absolutely experienced in providing soft bags. Thank you. We have time now for the last question.
We will now take our next question from Paolo Carbone from Equita. Please go ahead.
Yes. Hello. Good afternoon, everybody. I have a few questions. The first one is still on the e-commerce and the progress of your digital platform. I would like to share with you whether you feel that in the regions where this is already up and running at full steam, like U.S. and Europe, if I understood correctly, you feel your performance are more in line with peers, you are actually feeling that this is the key element for you to succeed. The second question is about your marketing budget, because this was the main reason why for OpEx increase in H1, just to understand what your plan here for the full year. Also, in terms of industrial efficiency, if you can elaborate a little bit more on what is driving the gross margin improvement and whether we should expect this to continue in H2. Thank you.
Okay. It's difficult to answer this question since competitors are not releasing such information to the public. However, what I can tell you is that we have experienced double-digit growth, both in quantity and value in those countries. Namely Europe and the United States, where the new platform is already live. We expect further improvement in sales in these countries due to a wider product offer that will become available during the year, as well as an improved user experience that will also be released by the end of the year, as I was saying. As to our marketing budget, especially on digital, as we are saying, we believe that next year we will have a 40/60 split. By the end of the year, we'll reach 25%-28% invested in digital versus the printed media.
It's nearly 30% this year, and next year it's going to go up to 40%. As to your other question on industrial efficiencies, of course, we're going to continue. We're going to implement our strategy to the fullest. It's a very specific strategy to increase efficiency and planning. Quality is going to be our main tenet, and we will never lose sight of the efficiency in production systems at the same time. Thank you.
Thank you.
Just to conclude in terms of marketing budget. In the second half, overall, we are expecting, again, a slight increase in this expense line. This was the last question. I thank you very much, everybody, for staying with us, and we will see you again after our annual result presentation. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.