Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Prada Group full year 2018 results conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I would now like to hand the conference over to your speaker today, Ms. Alessandra Cozzani, Chief Financial Officer. Please go ahead.
Thank you. Good afternoon, everybody, and thank you for joining Prada full year 2018 financial results conference call. I am Alessandra Cozzani, the group CFO. First of all, let me introduce, as usual, the executive team on today's call, our Chairman, Mr. Carlo Mazzi, our CEO and founder of the company, Mr. Patrizio Bertelli. I am also very pleased to introduce to you for the first time, Mr. Lorenzo Bertelli, who is in charge of marketing and communication for the group. During the call, Mr. Bertelli will first give us an overview of 2018 and an update on the business. Then I will go through the financial numbers. Afterwards, Lorenzo will talk about our digital transformation and technology projects. Mr. Mazzi will share with us some final remarks before the end of the presentation. After the presentation, we all will be very pleased to take your questions.
Mr. Bertelli, over to you.
Good afternoon. What happened in 2018? Well, our business and our work was mainly designed to consolidate all the work we've done in 2017. We achieved a positive safe trend across all regions and products. In particular, a very good performance of full price sales was recorded. We shouldn't forget all the uncertainties that were present in many markets and Europe in particular, where both England and France were pretty difficult. We worked on different fronts, distribution channels, merchandising, and communication. We invested in creating infrastructures and production facilities, which are absolutely fundamental for us to keep our quality standards and suitable deliveries. Most importantly, we started a full technological development, both on the industrial side and in terms of digital communication.
Another fundamental activity for us is research and training, and in particular, I'm referring to new human resources, because we certainly need to train new technicians, because otherwise, the average age of the sales force or the workforce would be far too high. We have introduced several new activities, amongst the most strategic choices that we have made, may I go back to our decision to cancel markdowns altogether. We decided to stop doing markdowns, end of season sales, because of the market complexity. We're all familiar with this. We are sure this strategy will yield very good results in the medium to long run in terms of brand soundness and commercial performance. Also, we continued our activities in pop-up stores and all new initiatives designed to renovate and refresh our stores.
We're actually transforming our stores to be more dynamic and to be more consistent with the new generation of customers we're serving. We did start a merchandising activity, where we're not just emphasizing our brands in individual markets, but also we want to provide a consistent image to newer consumers. It's not just millennials we're talking to, it's Generation Z that's actually coming up of age, as they grow older, they're likely to become luxury consumers more and more frequently. We started working not just for supporting the stores activities, but also we started several new communication projects. We organized events to enhance our brand experience, we want to highlight and continue with this kind of events in 2019. As to the other events we are engaged in, I'm sure you're all familiar with America's Cup.
We sponsored the America's Cup, we are actually continue working on the whole project, which concerns the challenge itself. Also, we are presenting the Prada Cup, which, starting in 2021, is going to replace what used to be known as the Louis Vuitton Cup, and it's going to be the Prada Cup from now on. We are actually committed to a lot of work on the organizational and product related and mid-image related and communication front. All of this is geared to enhance growth and to support have achieved so far. However, we thought we needed to work to lay down the foundations to accommodate this further development. We are confident that in 2019, we'll have excellent results and performance. Thank you.
Yes.
Now let me give the floor back to Ms. Alessandra Cozzani. She's going to present the financial performance.
Thank you, Mr. Bertelli. Go through the key financial figures for the group. Net revenues for the year reached EUR 3.1 billion, up 6% year-on-year at constant exchange rate. Forex headwinds have impacted sales by 300 basis points. As a consequence, revenue in the year was up 3% at current exchange rate. Growth in the year was mainly driven by full price sales following our strategic decision to reduce markdown sales. We saw organic growth across all countries and products. EBITDA for the full year was EUR 551 million or 17.5% on margins, down 6% from last year. EBIT was EUR 324 million or 10.3% of revenues, down 10% compared to last year. As you can imagine, it's not just revenues that have been impacted by Forex headwinds. Margins have also been significantly diluted by Forex. Excluding this factor, the underlying EBIT margin was stable.
This was a satisfactory result, taking into account that we have increased our investment in brands and organizational structure. I will explain in more detail in the later part of the presentation. Net income for the period was EUR 205 million. The tax rate was slightly above last year. I would like to share with you a good news. In the recent months, we have started the discussions on patent box with the Italian tax authorities. We have made a lot of good progress on it. We are reasonably confident to sign the agreement in the second quarter of 2019. As a consequence, the amount of the patent box benefit will be entirely recognized in the P&L of 2019. According to our internal estimation, it will be in the range of EUR 80-EUR 90 million. Turning to our balance sheet and cash flow.
Our financial structure remains very strong as usual. Operating cash flow reached EUR 365 million, which enabled us to self-finance all the CapEx during the period and to contribute EUR 198 million of dividend payment. The increase in working capital compared to last year is in line with our merchandising strategy to maintain a wide and deep inventory level in our stores. Net financial position ended negative at EUR 314 million. The gearing ratio remained at a very low level, 11%. Let's look at the net sales trend through the different dimensions of our business. Let's take net sales by channel. We have seen a good performance in retail. In this channel, sales were up 7% at constant exchange rate. Full price sales trend was pretty stable across the two semesters and was consistently up above the 7% of all the retail channel.
Ongoing strategic reduction in markdown sales to preserve brand equity impacted sales by 2% in H1 and 4% in H2. Markdown sales represents about 7% of our total retail sales and is expected to go down further. E-commerce continued to grow by strong double-digit, thanks to our successful rollout of our e-commerce platform. In wholesale, we are pleased to say that the e-tailer sales have still grown despite strong comparatives from prior year. We continue to make a selective approach to find suitable wholesale partners in line with our quality and standards. Let's look at slide 13, which shows net sales by geography. We saw positive trends across all regions. Europe remained resilient with 3% growth despite the negative impact from store closures since November relating to the protests in France and consequently decline in tourist flows.
Local consumption drove the growth during the year, also thanks to the various retail activities that we held in the stores. Sales in the American market increased by 4%, mainly driven by local consumption, while tourist spending weakened in H2 on the back of the strength of the US dollar. Strong performance in the Far East was driven by Korea and Greater China, with some slowdown in H2, mostly attributed to Hong Kong and Macau due to the devaluation of the RMB. Strong trends were also shown in Japan, mainly thanks to domestic consumption, and we also saw very good trends in the Middle East, with stronger results from all countries in the region. Let's turn to net sales by product. We have seen positive trends across all product categories in 2018, which also reflects the delivery of successful product launches.
Leather goods grew 6% thanks to solid and consistent retail growth at Prada across two semesters. This good performance was supported by the ongoing refresh of iconic products, as well as the successful reception of our new collection, with the objective of effectively balancing the product portfolio in all strategic price ranges. We are seeing good results. Ready-to-wear performance was strong, up 10% in organic growth, with positive trends across all brands and markets. Within this segment, our lifestyle collection outperformed, also thanks to the positive response to the relaunch of the Linea Rossa collection. Positive retail growth was also shown in footwear, with successful reception of sneakers and lifestyle collection for both men and women, thanks to our strong sportswear identity and our long-standing industrial expertise. Let's now turn to net sales by brand.
Continuing the positive trend which began in the last months of 2017, the Prada brand ended the year with growth of 7% at cost and exchange rate, with positive trends in all markets and all product categories. Miu Miu also remained in positive growth, with ready-to-wear up 7%, and the other two product categories which confirmed the same level of last year. Sales performance for Church's was impacted by the restructuring of the wholesale network, while the retail trend remained positive. Turning to slide 16, let's take a look at gross margin development. As you can see from the slide, gross margin maintained a very high level at 72%, notwithstanding the negative impact from exchange rate, including hedging during the period. Excluding this, the gross margin was stable compared to prior year.
I wanted also to mention that our focus on increased full price sales has produced a positive contribution to gross margin that was offset by our ongoing investment in supply chain, which we deem are crucial to enhance our competitive advantage in terms of quality and time to market. Let's have a look at the EBIT margin evolution during the period. As I mentioned before, EBIT margin had been significantly impacted by Forex headwinds this year. The effect, including hedging, was a dilution by 140 basis points. In addition to this, there were some one-off expenses of around 30 basis points related to staff, which drove further pressure on margins. Excluding the two above factors, as you may see, the underlying EBIT margin was stable compared to last year.
More in detail, the positive EBIT contribution from top line was absorbed by more advertising and promotion activities, including store events strategic to fuel sales, as well as an increase in our workforce to strengthen the organization structure, paving the way for the future growth. Turning now to CapEx on slide 18. 2018 was a year of investing as we focus on driving sustainable organic growth. This year, we had nine net openings consisting of 29 openings and 20 closures. There were 123 projects dedicated to retail, mainly for relocation projects, of which there were around 90 for Prada. Our IT investment plan is part of the Group's broader digital transformation strategy, and it's now becoming a strategic asset in order to compete in this fast-changing market environment. CapEx was also allocated to expand our industrial capacity to ensure timely response to various demand of each market.
As an example, in 2018, we completed our new logistic hub in Tuscany, which is part of a major plan to reorganize the warehousing and distribution for finished products. It is a state-of-the-art logistic hub, but also environmentally friendly and is a reference point for the Group's cutting-edge industrial structure. Slide 19 provides an overview of how our net financial position has evolved during the period. As already mentioned, the operating cash flow has financed capital expenditure and contributed to the payment of EUR 198 million dividends. Net financial position was negative at the end of December and amounted to EUR 314 million. This year, the board of directors has proposed a final dividend of EUR 155 million. This represents a dividend per share of EUR 0.06 and a dividend payout ratio of 75%.
With that, I would like to let Lorenzo, our Head of Marketing and Communication, to go through the innovative technology rollout throughout the company.
Good afternoon, ladies and gentlemen. It's a pleasure to finally meet you all. Let me briefly introduce myself. I joined the company in September 2017. My focus so far has been on supporting the digital transformation of the company, working together with Chiara Tosato. I have recently enlarged my role and my responsibility. Now, it includes marketing and communication. Today, I would like to discuss how the continuous investment in our brands is also reflected in a series of recent and planned strategic step to ensure the Prada Group develops a best-in-class digital platform that reaches all consumer interaction points without losing touch with our brand DNA. Let me update you on our patch rollout based on e-commerce, investment in technology, and finally, digital communication. Our focus this year has been on ramping up e-commerce activities with the aim of reaching global coverage for all brands by 2020.
Successful steps in 2018 lead the strong double-digit growth in sales, both on our e-commerce platform and through e-tailers. We have launched the new miumiu.com in Europe, church-footwear.com, and pasticceriamarchesi.com. We have enhanced access to Prada and Miu Miu's online experience, which we call Pradasphere and Miu Miu Club. These are two immersing digital content archives providing access to the brands, storytelling around products, special project, and events. Our focus in 2019 will be to invest more on the omni-channel experience of our platform and improve our customer journeys. We now have the technical capabilities that can be deployed to reach our consumer in a more efficient and effective way. As part of our broader digital transformation strategy, we are investing in technology to boost operational efficiency and effectiveness. Our investments are bringing benefits across the whole group, impacting more and aspects of the business and daily activities.
In terms of digital retail, we add the new mobile functionalities to the Clientsphere in store, like wish list, stock on hand, made to order, sales analysis, and newsletter. Investment in technology have been strengthened in order to improve the merchandising planning, increasing particularly the accuracy of buying, replenishment, and forecasting. Better customer service, thanks to the launch 2018 of five regional hubs in Milan, New York, Tokyo, Shanghai, and Hong Kong. In terms of CRM, we set up a data science team in 2018, and we are now implementing a data strategy through business analytics. We will enable you to better understand data, explore data for ad-hoc campaign, and at the same time, we are increasing integration of data from stores and social media.
We are now finalizing a radio frequency identification project that will improve logistic management to gather information from product which are distributed through every channel. Finally, product identification will also be available through an app that we are developing. Finally, continuing from the first half of the year, we had placed a greater focus on digital communication with project driving brand engagement and increasing brand visibility. Let me give you some example of how we have been ramping up our digital communication. The relaunch of Linea Rossa in September 2018 was supported by a program of events traveling across New York, Hong Kong, Tokyo, and Shanghai. The events were tailored based on the local clientela, and the collection was well received as also thanks to an effective digital campaign.
To support the Prada Cahier bag, which has now become a best seller, we launched a digital campaign called The Delivery Man, which was a cinematographic project directed by Ryan Hope. As for Miu Miu, two video project were very well received across social media. Iconic Wardrobe and Other Conversations, both focused on ready-to-wear collection. We also launching new digital channels, allowing us better reach younger and more local audience. For example, Twitter in Japan, both for Prada and Miu Miu in 2018, KakaoTalk in 2019, and the launch of Prada Spotify official profile this year to expand the Prada connection with the music world. To summarize, it's clear that the digital transformation has radically altered relationship with consumer, making them even more aware of their purchasing choice. In this context, communication takes on even more strategic importance to effectively reach our customer.
With this object in mind, we will continue to invest in all our digital asset to create an increasing massive brand experience with a unique and engaging involvement at all touchpoints.
Thank you, Lorenzo. I yield the floor to Mr. Mazzi for the final remarks.
Good morning or good evening. Regarding our outlook, what I can say is that the strategic review process launched a year ago has already begun to show positive results, as illustrated by Alessandra Cozzani in her review of the numbers. The process of profound technological renewal has been set in motion, which remains ongoing. Through the digitalization of relations with customers, we expect further competitive advantages to emerge. In terms of organization and renewal, in addition to the pivot towards digital already reported, radical changes will be necessary in the coming months to allow the full development of the potential of our brand. It is on the basis of these plans that our expectation of a progressive recovery of volumes and margin is based. Thank you.
Thank you, Mr. Mazzi. Now we can open the Q&A session.
Thank you. As a reminder, it is star and one if you wish to ask a question. Our first question comes on the line of Niki Ito from MainFirst. Please go ahead.
Hi. Good afternoon, Mr. Bertelli, Mr. Mazzi, Alessandra, and Lorenzo. This is Niki Ito from MainFirst. I've got three questions, please. My first question is on the markdown policy and the end of season sale. I just want some clarification whether you reduced the sale period, in 2018 for the summer season and also the winter season, or did you completely stop the sale within the full price stores? Did that sale policy already start in fall/winter 2018, or will it start in the current spring/summer 2019 season? How big do you think the negative impact is going to be on sales this year? My second question is on wholesale. What do you exactly mean by selective strategy? Is it more Miu Miu driven, given that Miu Miu decelerated quite substantially in the second half?
If you could provide more granularity in what caused the decline in wholesale in the second half, that would be great. In the last two years, wholesale has seen quite a bit volatility, more positive, though. How should we look at wholesale this year? My last question is also on the top line for the slowdown in the fourth quarter, which is driven by Greater China and the U.S. Greater China, that sounds a bit counterintuitive because, if we look at your peers, there has been a sales repatriation to Greater China, and I understand that the macro environment has been more volatile in the region. Besides that, do you think there was something that you missed in capturing the sales repatriation? Finally, if you could provide a trading update year-to-date, within retail, and if possible, wholesale, that would be great.
Thank you.
Hello.
This is Mr. Bertelli speaking. As far as markdowns are concerned, let me specify that we decided to stop doing markdowns from 2019 onwards. As far as 2018 is concerned, we had already reduced markdowns by as much as 30%, I think. What kind of impact we expect on the market? Well, first of all, we believe this decision is actually going to strengthen the brand's image. In particular, it's going to guarantee higher margins for us. As to your question on being more selective, Mrs. Cozzani is going to answer that part of your question.
In talking about wholesale, it's an ongoing strategy to progressively reduce the wholesale that we started many years ago. Do you remember that we have recently had some new relationship with e-tailer partners, that had increased the wholesale level in the last couple of years. We want to continue to work with the leading partner in the sector and including U.S. department store.
Sorry if I could jump in a bit before you answer my last question. For the markdown policy, did you already have any kind of commercial agreement with the wholesale? If I look at the past few years, I think your wholesale partners marked down your products way more than you did in your full price store. I'm just wondering whether you are able to control that already in 2019.
Well, you should know that international regulations and laws actually do not allow us to give full control. We can certainly give our guidelines, and then each player is free to proceed the way he or she feels is more appropriate. However, there are some markets, especially the U.S., where markdowns are a fundamental fact of life, especially for some products. We are actually talking to our partners to try and reduce the timing of markdowns. As far as the European market is concerned, I'm sure that wholesale partners will comply with our guidelines, whereas our DOS is our own source, that's not a problem of course.
I have to say that the question of markdowns is a policy that has become more and more diversified in the market, because the market is generally flooded with products, there's a greater and greater tendency towards trying to cut markdowns. Can I take your questions on China? Okay. As far as China is concerned, of course I agree with you, maybe the biggest problem is we need to increase our ability to manage the Chinese market. We'll have to work on that market more and more intensively. Of course, the Chinese market has become more selective than it used to be in the past. As far as luxury brands are concerned, I don't think it's a challenging market. There's no big challenge there. Next question.
The next question comes to the line of Luca Solca from Bernstein. Please go ahead.
Yes. Thank you very much indeed for taking my questions. I was just wondering, where you stand as far as supporting your brand in terms of digital marketing, how much of the total your digital communication and marketing budget represents. By comparison, how big is the investment that you're making in the America's Cup? I seem to understand that you're doubling down on that with the institution of the Prada Cup. How you went through the logic of increasing the commitment to that, what do you expect in terms of potential advantages? Another question on digital. I'm intrigued by the fact that you've been now establishing a partnership with Farfetch for a few months.
I wonder how you are working with them if you're satisfied with their approach, in particular to their approach to pricing, if you commit to this kind of solution to accelerate digital development, if you see a long-term commitment to platforms like that. Last but not least, if you could potentially elaborate on what you envisage as far as the development of the Miu Miu brand which seems to be more effective at the moment in the apparel category, what you are expecting to do in terms of leather goods in particular. Thank you very much indeed.
Lorenzo Bertelli speaking. I will answer to your first three questions, and then my father will answer to the Miu Miu question. About the digital budget, I can say that the split is generally between 50% digital and 50% ordinary communication. We are increasing the general budget of the communication inside the group, generally because for sure we have to support it. We think that generally, America's Cup as a sport activity, is very easy to be used to create digital assets, is very young and can reach, I think, a younger audience than usually we reach with Prada. This is to answer to your first two questions. About digital partnership with Farfetch and other platforms. Farfetch is very important. We are looking to do some activity in the following months.
We are working strongly with them, and because what you can sell on Farfetch is very related on what kind of activity you do on the other channels. Now we are trying to work more in a concert way to develop a growth on the marketplace and generally on retailers. We have to take in consideration all the channels when you want to grow in marketplace, especially. To look to other platforms, at the moment, the only real marketplace where we are is Farfetch. We are looking to other marketplaces, but nothing has been decided yet because we have to see if the market is ready for other marketplaces and if we are ready to go on other marketplaces. For sure, we have an eye on it, and it's part of a wider strategy.
As to Miu Miu, I'd like to answer by saying that we've just concluded a new collection for leather wear and for leather and for Paris shows, and this was very much appreciated by our customers. It's true that as far as clothing goes, Miu Miu has a good trend, but ready-to-wear shows a positive trend both for Miu Miu and for Prada, and also for men. Our group is very much committed in the development of ready-to-wear because we believe our price quality ratio is more than reasonable.
Thank you very much.
Next question, please.
The next question comes from the line of Thomas Chauvet from Citi. Please go ahead.
Good afternoon. Thanks for taking my question. I have three. The first one, sorry to come back to the retail like-for-like. I don't think I heard the numbers clearly. It seems you had about 3% like-for-like in H2. I remember, Alessandra, July was close to 10. Could you comment on the LFL run rate in Q4 and January, February combined for the group? How much has it slowed down to? Secondly, in your outlook comments, you referred to a progressive recovery in volumes and margins, I think in part because of the disruption from the tech rollouts and the industrial investments. What type of revenue growth margin expansion you're expecting this year? It feels it looks like a year of transition, I see consensus EBIT margin for the year at 12.5%.
On cost, are you expecting the H2 cost inflation of plus 5% to be the new norm for the full year 2019? Finally, on Prada handbags, there was a very interesting pipeline of new products last year. How much do you expect new lines to account for total handbag sales going forward? Can you perhaps comment on the contribution from volume and price mix in this important category? Thank you.
Hello, Thomas. Sorry for this delay in the answer. I will take the first question. I will take the question related to the LFL. Of course, you have correctly noted that the second half had a slowdown. I have mentioned also during my comments that was mostly related to a general macro environment that has been more uncertain, first of all, and talking about us, was particularly Asia-Pacific impacted by the slowdown. Within Asia-Pacific, Hong Kong and Macau. Don't forget, of course, that the French protest started beginning November, and this has impacted not just the Paris market, where I have recalled that we had 16 closures in a row every Saturday. This not only impacted the Paris market, but impacted also the tourist flow towards Europe, generally speaking.
Alessandra, have you LFL returned to positive in January, February? Could you help us understand where you are?
For talking about, let's say, the current trading in the beginning of 2019, I have to say that we are quite in line with our expectation.
Okay. Low single digit LFL positive?
Of course, the like-for-like of the regular sales is positive, yes.
Thank you.
I mentioned regular sale, of course, because you have to remember that we are continuing with the decision of reducing markdown sales, and January was heavily impacted by this.
This is Patrizio Bertelli speaking. I'll take your question on margins. As you will see from our documents, we did make investments in acquiring production facilities for footwear and leather goods. What's happening in Italy right now is that there is a pretty high level of conflict, so to speak, because all international brands are producing in our market. Those who do own the factories are trying to protect their ground as much as possible. The acquisition of those production factories is motivated by the fact we want to keep a high quality standard. Also, we should consider there is a whole generation turnaround in the industry. Many of the original businesspeople and entrepreneurs have reached pension age, and so many times, their children do not want to continue their business. There's a lot of generation turnaround in the industry.
As far as margins are concerned, we believe that better product performance will allow us to absorb the higher structural costs that we are incurring right now. In the next two years or so, these costs will be more than offset by a bigger development in sales. As far as the development of different price points in our collections is concerned, I'm sure you realize we did a lot of work there, and we're still doing it, especially in the price range between EUR 1,400 and EUR 1,800 retail price. Of course, these tend to be the price points that give the best performance. Next question?
The next question comes from the line of Rogerio Fujimori from RBC Capital Markets. Please go ahead.
Oh, hi, everyone. Thanks for taking my question. I have one regarding retail productivity for Prada and especially Miu Miu. It's kind of lower than your peers. Also, when you think about your rental cost to sales in excess of 20%, also higher than your peers. Any action plans in terms of improving this ratio, and any thoughts on the retail square meter footprint, especially for Miu Miu? Anything that can be done? My second question is on shoes. I think you flagged the successful launch of sneakers and lifestyle propositions for both men and women. I was just wondering what kind of trends you see for full priced in shoes in recent months. Thank you.
Hello, Rogerio. I will take the first question related to the rents. Honestly, I have to say that, not now, but at least in the last couple of years, we have progressively reduced the level of rent because we have renegotiated most of our lease agreement with the old landlord in Asia Pacific and also in Europe, and the level of rent, and also in U.S. We have reduced the fixed rent, but we have been also able to get better negotiation also in terms of variable rent.
As for shoes, I'm Mr. Patrizio Bertelli. Yes. With sneakers, in the last 18 months, we've had a consistent launch, and we actually got very positive results, and this trend will continue. I would say that sneakers are changing into more of a lifestyle type of shoe. More than a sneaker, which is considered as a running shoe, they're becoming lifestyle. I think we've developed very interesting products, and I think we will be strongly competitive in the second half of 2019. The trend is not so much the sneaker, but rather a lifestyle type of shoe for leisure time that can range from sneakers to sports shoes. Again, with the idea in mind of having light and comfortable shoes. As for prices, sorry, I was forgetting. Prices are exactly in line with those of shoes.
The average price is EUR 550 for Prada, and, if I'm not mistaken, EUR 490 for Miu Miu shoes. Thank you. Next question.
The next question comes from the line of Melanie Fluke from J.P. Morgan. Please go ahead.
Yes. Good afternoon. Thank you for taking my questions. The first one is actually regarding gross margin. I wondered, Alessandra, if you could help us understand the dynamics of full-year 2019 on this important line. Full-year 2018 had a hedging impact that we should continue to have in H1 2019. I wondered whether at spot rate, you could help us quantify the pressure that we would get from that, and on the other end, the positive impact of promotional activities, if any, and the initiatives on the manufacturing investment. On the whole, if we take the positives and the negatives going through, what would you expect out of full-year 2019 gross margin, please? The second question is on the Americas. I appreciate that the deceleration in the second half seems to have been mostly due to Asia Pacific, but there was also one in the Americas.
I was wondering whether you could help us understand what happened there, and whether this recovered in January and February. My third question is on inventories. They are up 11%, I think, if I'm not mistaken. Can you help us understand whether this is a change in the way you're actually delivering or the manufacturing, or in other words, whether you're comfortable with this level of inventories. My last question is just really on the pipeline of products that are coming through. There are a lot in leather goods coming through, in on bags for Prada. At the moment, we're seeing a lot of presence of the Odette.
I was wondering whether this was just accidental, and it's just that the next one, the Sibylle, et cetera, will be pushed in a similar manner, in the future, or whether Odette is actually one of the most important pillars that you foresee in full-year 2019 and beyond. Thank you.
Hello, Melanie. I'll take the question, related to the gross margin. I would clearly explain that the most important negative factor for the gross margin evolution this year was not just the hedging, but foreign exchange including the hedging. Honestly, the foreign exchange, including the hedging, is one of the most difficult things to forecast. It's better to take under control the underlying evolution because in front of the foreign exchange, let's say that we don't have a lot of things to do. Having said that, of course, the gross margin will benefit even next year from a better quality of sales. More full price sales, less markdown. We are expected to have a gross margin, likely improving. Of course, I'm not able to give you a guidance on foreign exchange.
The likely improving excludes Forex?
Sorry?
The comment on likely improving would exclude any Forex impact.
Exactly.
Okay, thank you. That's clear.
There are no further questions. I would now like to hand back to the speakers for closing comments.
Sorry, Melanie, I will take the question related to stock. I have already mentioned that this level of stock, that to me is reasonable, also considering the crazy number of merchandising that we have added to our collection in the last couple of years, needs a higher level of inventory in the stores. Of course, if we want to follow sales. Don't forget that this is a level of inventory that I don't honestly think that is high, also because we came from a period where the level of inventory was even higher, and this was not a problem at all for the company. Talking about the strong pipeline of new models, of course, we will continue to renew the collection with new models.
I think that we have accelerated the pace of introducing novelties in the last 18, 24 months, together with leveraging, of course, the iconic products, where we continue to refresh the model in order to have also in the iconic and in the best seller collection, some novelties to offer to the market. Regarding to related to U.S. market, that it is doing well, honestly, at the beginning of 2019, of course, particularly in the second half, was impacted by a lower level of touristic flow because of the strength of the dollar, because the local consumption has remained quite good. Next question, please.
The next question comes from the line of Louise Singlehurst from Goldman Sachs. Please go ahead.
Hi. Good afternoon. Thank you very much for taking my questions. I'll keep them brief. Firstly, just on e-commerce, I wondered if you could just update us, a simple question in terms of, are all the regions now fully omni-channel compliant? I know Asia started first, then the U.S., I just wondered where we were in the European rollout as well. Finally on e-commerce, how much of sales today are actually from your brand.com and e-tailers? How does it come from digital in total? Then just on the OpEx, I wonder if you can help us just try and understand the margin dynamics.
I think Thomas touched on this earlier, in terms of how we can think about the underlying inflation plus growth that we should expect in that cost base going into 2019, cognizant obviously of the moving parts and the digital expense as well. Can you help us think about the moving blocks or the key items of the cost base and the growth there? Thank you.
Hi, it's Lorenzo Bertelli speaking. I will answer to your first two questions. Which country are, let's say, fully omni-channel, to say omni-channel depends from the quality of the omni-channel. It will take hours to discuss about the details, I can say that Europe, U.S.A., and China is where we are already omni-channel. We've not reached yet the level omni-channel that we are aiming to, we have a big improvement this year, they are omni-channel definitely. About the percentage that we deliver with our website on how much with the foreign website or marketplace, I would say most of the sales come from our website.
How much is that, sorry, as a %? Thank you.
Hi, Louise. I'll take the question related to the inflation rate, if I have understood well your question. Of course, in this kind of sector where the margin are quite high, the inflation rate increase has never been a real issue, if this was your question.
I suppose to put it another way, Alessandra, can you help us think about the level of LFL that we really need for a sustainable margin progression? If we think about just a flat margin, the LFL that's required to obviously cover the cost of inflation. Thank you.
Not really something different from what we have always said, that with mid-single-digit like-for-like increase is enough to keep the level of margin flat, roughly speaking.
Thank you.
Next question, please.
The next question comes on the line of Paola Carboni from Equita. Please go ahead.
Yes. Hello. Hi. Good afternoon, everybody. I have a question on your level of investment, which 2018 was a bit higher, at least what I had in mind. I don't know if there's anything we should be aware of as for your investments last year and what we could expect for the next couple of years. Thank you.
This is Patrizio Bertelli speaking. For the next years, we believe industrial investments have been complete for the vast majority. In the last three years, we have basically renovated all of our industrial facilities, and we completed this year for logistics. They were a bit higher than you would expect because we actually found ourselves having to step in in pretty challenging situations with some of our suppliers. Some of them were so mature in their growth that there was no future for them. We decided to step in and take them out of dire straits, and we anticipated some investments that had originally been planned for 2019. The situation in Italy is not too brilliant for the raw material suppliers or for the different companies that we buy from, because technology has changed the name of the game completely. Margins have become very low.
People are getting older and older. The whole turmoil that goes on in different parts of the world is certainly creating a lot of anxiety and uncertainty on the markets, especially with trade protests and Brexit and the shape of Italian politics. It's certainly not making people happy and living in full peace of mind, especially older people. We had to step in some unpredicted investments.
Okay. Thank you.
Okay. If we don't have any other questions, we can close the call. Thank you very much for staying with us. If you have any other details to understand, please feel free to call Alberto and Cinzia that are available for you. Good evening.
Thank you. That does conclude our conference call for today.