Good day, and welcome to the Prada Group First Half twenty eighteen Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Alexandra Cozzoni, Chief Financial Officer. Please go ahead.
Thank you. Good afternoon, everybody, and thank you for joining Prada First Half 2018 Financial Results Conference Call. I'm Alessandra Cozzani, the Group CFO. Today, I'm here with our Chairman, Carlo Mazzi and our Prada General Manager and Digital Director, Mrs. Chiara Tozaps.
During the call, I will go through the financial numbers followed by the business update and outlook from Mr. Mazzi. And after that, myself, Mr. Mazzi and Mrs. Suzato will be pleased to take your questions.
First of all, I would like to highlight that for transparency and performance comparison, we have provided the pro form a numbers for the 6 months from January to June 2017, following the change of our year end to 31 December last year. I will now go through the key figures for the group. I'm very pleased to say that the first half of twenty eighteen delivered a very solid performance with revenue growth across all brands, geographies and product categories as well as margin improvement despite continuing investment in brands, retail networks and digital communication. Net revenues for the period reached €1,500,000,000 up 9% at cost and exchange rates. As you surely know, exchange rates have been a strong headwind with a negative impact of 6 percentage points.
As a consequence, revenue in the period were up 3% at current exchange rate. The strong performance in sales was mainly driven by improvement in same store sales growth of our global retail networks, which obviously contributing operating leverage for the group. Thus, EBITDA for the first half reached EUR 271,000,000 or 17.6 percent of revenues, up 8% compared to last year. EBIT was €159,000,000 or 10 point 4% of revenues, up 16% compared to last year. As you may easily imagine, the combined effect of ForEx and hedging was negative at EBIT level, both in absolute terms and also as a percentage of sales.
So the underlying margin expansion was higher than the 120 basis points that you are seeing. Net income for the period was €106,000,000 up 11% comparing to the same period of last year. Turning to our balance sheet and cash flow. Our financial structure remains very strong. Operating cash flow reached €180,000,000 which enabled us to self finance all the capital expenditure during the period.
Increase in working capital compared to last year was part of our merchandising strategy to maintain right inventory levels in stores. Net financial position ended negative at €240,000,000 after the payment of €186,000,000 of dividend during the month of June. Overall, balance sheet remains very strong as usual with a very low gearing ratio at 9%. Now let's look at Slide 4, net sales by channel. We have seen a strong performance across both retail and wholesale channels in the 1st 6 months of the year.
In the retail channels, sales were up 10% at cost and exchange rate, mainly driven by improvement in same store sales growth as well as a higher contribution from full price sales. As we have anticipated during the last call, we kept strategically reducing Mardau sales in order to protect brand equity. Now they represent around 10% of retail sales and are expected to continue to decrease. During the period, we opened 17 stores and closed 13 in line with our strategy of optimizing our store network. In terms of online sales, implementation of our digital strategy is well on track with e commerce sales growing strong double digit during the 1st 6 months.
Regarding the wholesale channel, encouraging trends have continued into 2018 with sales up 8% at constant exchange rate compared with last year, benefiting from e tailer partnership. Exclusive capsule collection have been launched with our existing and new e tailer partner during the period to enhance sales performance. Let's look at slide 5, which shows net sales by geography. There was a strong growth in Asia and U. S.
As well as solid progress in Japan and Europe. The growth was also driven by the positive growth from all nationalities with the notable strength from Chinese and other Asian consumers. European market was up 7% at cost and FX notwithstanding weaker tourism due to the strength in Europe. As mentioned, we saw strong momentum in Asia Pacific region, particularly in Greater China, which was up 17% at cost and exchange. Performance in Americas remained strong across both retail and wholesale channels, up by 8% at cost and FX, mainly driven by the recovery in domestic consumption.
Solid trends were also shown in Japan, thanks to the recovery of tourist flows and domestic consumption. The Middle East also returned to growth with strong results from all countries. Let's turn to net sale by product. We have seen very positive trends across all product categories in the first half of twenty eighteen. This excellent performance reflected the results of our strategic initiatives aimed at meeting customer expectation while combining our iconic heritage that defines our brands with the strong support of digital campaign.
Performance in leather goods was very strong with solid revenue growth across both Prada and Miu Miu brands during the period. The strong performance was supported by the successful reception of our new collection as well as iconic products including Prada Black Nylon. Remarkable performance was shown in ready to wear results with the acceleration trend for both men and women collection. This excellent performance plus 20% confirmed the design leadership position of Prada and Newmills. Lastly, we saw the rebound of footwear business with the successful launch of sneakers including Prada Cloudbuffs and other lifestyle collection both men and women.
Let's turn to Slide 7, let's say by brand. As you can see in this slide, Prada Brands saw continued strong growth at 10% in the first half at cost and FX, benefiting from the improving trend across all product categories, particularly from ready to wear and leather goods in both new collection and iconic line. Miu Miu performed well and made a return to positive growth across all product categories. These again demonstrating the success of our strategic This again demonstrating the success
of our strategic initiatives
to enhance distribution network and to fuel stores with new collections. Sales performance for churches was just temporarily impacted by the restructuring of the whole network. Turning to Slide 8, let's take a look at gross margin development. The group has a good track record of generating a high level of gross margin, thanks to our continuous focus on industrial efficiencies. Gross margin remained pretty stable at 72% of sales during the period with a small positive contribution from higher full price sales, but Operating expenses.
During the period, operating expenses were well under control. OpEx were broadly flat year on year at current exchange rate and up 5% excluding the exchange rate impact. The increase was mainly due to higher advertising and digital media spending. We will continue to increase our investment in this area. Our CapEx spending is strategically allocated to enhancing the customer experience across our retail network.
During the first half, we have opened 17 stores and closed 13, resulting in a portfolio of 629 BOS at the end of June. Among the new openings include the SKP Mall in Xi'an, China and in the Dubai Mall's Fashion Avenue in Dubai. In addition, we invested around 30 renovation and relocation projects to refresh the concept for both Prada and New Year stores. A portion of CapEx is also located to our industrial platform in order to strengthen our ability to innovate while maintaining flexibility. The new Prada Logistics Hub with cutting edge geothermal system in Tuscany was completed during the period.
Slide 11 provides an overview of how our net financial position has evolved during the period. As already mentioned, the contribution from operating cash flow was able to fully finance capital expenses. Net financial position ended negative at €240,000,000 in the period after the payment of €186,000,000 dividends. With that, I would like to hand over to Mr. Mazzi to go to the business update.
As you can see from the numbers that Alessandro has just discussed, there's been excellent half year for Plata in which we have started to see the concrete results of transformation process as we have been working hard at over the past couple of years. We are constantly working to reshape the group, but up to rapidly changing times and interpret the spirit of new generations without losing sight of our roots. Strong results we have announced today and the feedback we have received from the market show that the strategic choices we took were the right ones. Our strategy is, of course, still have around the trade name pillar, channels, merchandising, communication. Channels and retail, we are increasingly leveraging how to global retail network as the heart of the customer experience is fully integrated with digital and social media campaigns to maximize engagement with us.
During the period, we launched 36 pop up stores across both Prada and Miu Miu with unique concepts to drive excitement and interest. This will also be important during the second half of this year. And among other projects, we are planning special setup in our stores dedicated to Linea Rosa. We are continuing to invest in the retail network in in order to refresh and renovate the stores. We performed at 30 projects this half, 23 Prada and 7 Pyumu, almost completing the rollout of the blue concept at Pyumu with 120 stores now updated.
In addition, we continue to reshape the portfolio, ensuring we are present at the best locations with selective new openings, including the Dubai Mall Fashion Avenue and Xian SKB
Mall.
15, our wholesale channel performed strongly once again and this was driven largely by our partnerships with the retailers. Our collaboration with the retailers are growing and strengthening reinforced by the use of exclusive capsule collections to generate additional interest and drive traffic to the website. This half, we have collaborated with Mr. Porter on the Bowling Prada men collection. Prada women collaborated with Myteresa with the ready to wear capsule collection promoted by Famous Singer.
We also continue to work closely with department stores creating the drop shopping experience at Varnish. Finally, just among retail and wholesale, Prada and NewMe both launched with Farfetch during the first half of this year with products available across the U. S, Europe and Japan. E Commerce. With regard to direct e commerce, this is increasingly integrated with the retail network.
With the Prada platform now rolled out in all our key markets, enabling an omni channel Prada experience in Europe, U. S. And China. This has been complemented with the launch of a number of special projects, including the cloudbus speaker launch online capsule collection in markets, including Germany, UK, U. S.
And Canada. And we recently launched the ability to preorder the Linea Rossa collection online. The Miu Miu platform is now enabled in China and other key Asian markets. And again, we launched a number of special projects to drive traffic and interest including Miu Miu Blue Tapes T shirts, Summer Dreaming and Miu Delight. Customers can now also preorder new lines online.
In merchandising, we are always working to combine our unique DNA and creativity to provide a more effective offer to our customers. Leather Goods returned to organic growth across all brands and regions, driven by positive market response to our new collections and the launches of our iconic lines reinterpreted with a contemporary twist. In particular, Bex and the Viadro collection registered a very good performance this semester. We have continued to see an outstanding performance in Ready to Wear, further confirming our design leadership. We have seen an acceleration in both men and women collection, a successful reception of our lifestyle collection and an excellent response to both where we have successfully where we have successfully leveraged our strong identity in format collection and sportswear.
The new men and women's sneakers collection performed particularly well. Our new collaborations with 4 acclaimed architects and designers to reinterpret the iconic Prada black nylon collection across all categories were very well received among our customers and we have accelerated the base on introducing drop collection in the stores. Communication, the increased our investment in communication to support our brand equity across all touch points. At the 6th floor of the recently opened wide concrete tower, the Fondatione Prada, Marchesi, our food brand, inaugurated a restaurant named Torre Tower in English. The restaurant has become one of the most attractive points in Milan.
Store was also the space where Prada held its latest autumn winter fashion show as part of the group's strategy to leverage its huge global following by showcasing the collection in different location worldwide. Again, regarding communication, Prada Resort 2019 show was held at Prada's New York City headquarters, the piano factory. For the first time in the group history, the show was also projected live on Times Square 3 iconic buildings, the Nasdaq Tower, the Thomson Reuters building and the central street of the tribal space. Doumio has also held its Croisserie 2019 show in a new location, the Hotel Regina in Paris, taking place in a stunning Belle Epoque location overlooking the Louvre. This show hosted an eclectic cast of high profile models and actresses with strong social media for lowings and on and run away with a cinematic set designed by award winning Sara Greenwood as backdrop.
Again, communication. This semester, we have also launched a number of digital projects targeting new generations and presenting our product in innovative context when to obtain our regular followers. The projects you see on this slide were shown as videos or short movies linking to the online collection of the products showcased in the videos and the leverage through our social media channels. Sustainability for Prada Group. Sustainability is increasingly becoming another real to explore and another frontier for the business.
I take this opportunity to touch upon the conference we are hosting at this autumn called Shaping A Sustainable Digital Future. The event will be the 2nd edition of Prada Group's Shaping a Future Conversations and will explore the impact and implication of digitalization on business and sustainability within society. Turning now the outlook, the next last slide. H1 2018 confirms that Prada Group's successful transformation is on track, whilst remaining true to our unique brand DNA. We are now focused on working to completely integrate all of our channels and communication tools onto a single digital view.
This project will embrace the entire business right through from designers to staff working in our stores. Within Ollon luxury sector and through strengthened customer engagement, we are confident that the disciplined execution of our clear and direct strategy will further unlock the potential of our global retail network and will drive long term sustainable growth. Thank you. I would now be happy to take any question you may have.
Thank We will now take our first question from Nicky Chong from MainFirst. Please go ahead.
Good afternoon. Thanks for taking my questions and congratulations on very good first half. My first question is on the retail organic growth. I remember back in May, a management guided for 7% to 8% retail organic growth. And now that you've printed that 10 percent, can you confirm that the exit rate was double digit?
And are you confident that the relaunch of Linea Rossa will drive the second half organic sales even higher? And my second question is on the outer year EBIT margin. Are you confident of sustaining at least high single digit organic growth over the next 3 years? And in such a case, do you think a return to 20% EBIT margin is achievable by 2020? And my last question is on fragrance.
I think I read on the press that Prada the Prada brand is ending the fragrance partnership with Puig Group. So should we expect any major license decline in the second half in twenty nineteen? Appreciate it's a very small part of your business. Thank you so much.
Hello, Nicky. I will take the first two questions Regarding the organic growth, of course, we have seen a slight acceleration after February, during March, April and the other months. And what we are seeing in also in July is confirming trend. So no big changes, no different vision of the future compared to what we said in March. Talking about ABN margins, of course, you have seen from the number that the operating leverage was partially offset by the exchange negative impact.
So of course, there is an operating leverage inside our P and L with this level of sales growth. Let's see what is going to happen in terms of exchange rate in the next half of the year to see if it is possible deliver more than what we have done in this first half.
Regarding Prada and Puigy agreement, it's true that in the next 18 months, the agreement will expire. And of course, we'll discuss with Bouygues and his other, let me say, big companies in this sector for the renewal or a new agreement depending on the, let's say, opportunity that we can catch. Any case, the relationship with Baza and Puigia is important one, but it's not let me say crucial. No, our fragrance for us is something on less than €10,000,000 in terms of royalties. But in any case, we are considering the opportunity to increase our activity in this segment.
Thank you so much. Alexandra, just one follow-up. In the first half, if I triple FX, what is the underlying EBIT margin expansion? Because you mentioned it's bigger than the 120 basis points you printed. Thank
you. Of course, it's higher than this. I think that you can easily calculate having said that the OpEx expansion was 5% at the constant exchange rate. Thank you. Next question please.
Thank you. We will take our next question from Anton Belge from HSBC. Please go ahead.
Yes. Hi, it's Anton Belleg with HSBC. Three questions actually. The first one is actually a follow-up on the previous question, but more on the gross margin level. I think you mentioned that on a reported basis was down 50 basis points, but you had a higher share of food price sales.
So can you quantify the impact at the gross margin level of FX? Or at least tell us that without this FX headwind, I mean, the gross margin would have been positive. 2nd question, I mean, when we look at H2, we should have the benefit from the relaunch of Linea Rosa. Do you think that this could help the sales together pace or that because of the tougher comps, it's more reasonable to expect a pretty similar top line compared to the first half. I mean, also here, there is obviously a below impact on wholesale.
I think there was a mention about the new collaboration with Farfetch. So is wholesale expected to accelerate in the second half? Finally, in terms of product mix, I mean, we've seen that some categories seems to be in advance in terms of their recovery. So how do you see the more meaningful categories, especially in terms of margin developing in the second half on next year? Thank you.
I would hi Antoine. I will take the first question on gross margin. Of course, we mentioned that the exchange rate had an impact that is the vast majority of the number that you have seen in the slide that is around 60 basis points of dilution in the gross margin. Iara will answer the second question.
Regarding your question on Linea Rosa, of course, we believe it will have a positive impact on our revenue. In general, our ready to wear collections are performing very well. With Dineroza, we want to further develop our lifestyle offer
also with
items that are using advanced fabrics and materials. That said, though, we believe that in the second half, we will have a positive contribution also from the rest of our categories and in particular on leather goods, where we see a very positive trend. And we believe that this trend will continue also in the second half of the year. For what concerns your question on the wholesale business and on Farfetch, On the wholesale, in general, we will continue with the current strategy. So meaning that we will develop with the selected partners special projects also in the second half of the year?
And for what concerns Farfetch, where we are now directly selling our products, Here too, our aim is to further widen the coverage worldwide with Farfetch, as Farfetch is planning to open in new markets.
Regarding the product mix, of course, that our product mix is the right one. It's also true that some categories like that have good They distinguish our product category. RADA and Miu Miu are proposing a, let me say, total look offer. This is our identity. So we will continue with the same product, which of course as France, where you more than the other, but this doesn't change in an effective, let me say, measure our mix.
So we consider that we continue with this kind of offer and this is I repeat the Prada and the Miu
Miu.
Okay. Thank you very much. I mean, maybe just I understand you don't want to provide guidance, but H1 was robust. I mean, it doesn't seem that there should be any reason for things to massively change in the second half, both in terms of top line and at least organically and then in terms of margin expansion. I mean, is that a reasonable assumption?
Or because again, you showed already some improvements in the latter part of 2017, then maybe we should be a bit more cautious on taking into account that more difficult basis of comparison?
Yes, we think that it's important to be robust. We continue to gym every morning in order to maintain our, let me say, feetsy performance. But of course, we consider that the new trend is not just, let me say, contingency situation. It is the result of the work that we made not just in some weeks or some months, but in a couple of years with the program that now is not completely finished. This group is also continuing to be developed, but we are confident that this is the right path to go on as much as quick.
I don't know exactly, but I'm confident that this is the right path. Thank you.
Next question please.
Our next question comes from Thomas Chauvet from Citi. Please go ahead.
Thank you for taking my questions. Good afternoon, Alessandro and Mr. Madzi. Three questions, please. First one coming back to the first question on retail trends.
Could you be a bit more specific on retail LFL? You had indicated earlier this year 7.5% growth in Jan, Feb. What was the overall LFL in H1 and ideally in July, please? Secondly, if we look at your Prada handbags business, could you perhaps comment on any divergence in trends by price points between entry, mid and high? And how much is the Galleria business now as a percentage of total handbag sales following the success of some of your newer lines?
And thirdly, on Miu Miu, it shows Miu Miu is going through a new beginning every few years back into a positive LSL. Could you share with us what the plans and the targets are for the next few years to transform this niche brand into a strong resilient and profitable business? And if we could get a sense of the margin of Numero in the first half, that would be great. I know you don't provide margin by brand, but I'm sure there's been a lot of margin recovery there. Thank you.
Hello, Thomas. I will take the first question. Of course, since we have not opened many stores, you can assume that your organic growth is close to the like for like. I have already mentioned that the July has been another good month, slightly improving the trend that we have seen in the first half, mainly due to better trends in Europe. That's it.
Regarding our later goods products, especially back you mentioned. No, I don't see any significant difference in the different price categories of our bags. It's true that we, DiChamu, completed our, let me say, categories of prices recently. But generally speaking, the average price is increasing. But it does I don't want to say that we are selling better high price packs because the point is if we have a complete offer, we can sell better every kind of bags.
This is the result of the work we made recently. I don't know if you remember previous the other discussion when we recognized that we have some luck in the, let me say, medium price bags. We introduced medium price bags and we had good results, not only in this new category of Bags, but also in the other categories with the result of an average price, I repeat, higher than in the last year, a little bit of course. Having said that your question of Miu Miu is true, is a new, let me say, start for Niu Yu with the new image of Niu Nu, we renewed as mentioned. Alessandra, almost all our new stores with the new blue image, LBLUE Image.
And we are again, we are confident that we can continue to develop Miu Miu and to let me say, let's grow Miu Miu in order to get very good result also from this brand. At the moment, our position is, let me say, breakeven point for Miu Miu, let me say, roughly speaking, for Miu Miu, let me say, margin. And I repeat, our program is to view with IMU in order to reach at least €800,000,000 in the next couple or 3 years.
Thank you.
Next question.
We will now take our next question from Francesca Di Pasquonello from Deutsche Bank.
Yes. Hi, good afternoon. I have a couple of remaining questions, a follow-up. One is on the gross margin. With the work that you have done on markdowns and with improving average selling price in handbags and with the recovery of the handbag category, I was actually expecting gross margin to move a little bit more.
And I appreciate the negative impact of currency. But if we set the currency aside, can you maybe help me understand what the reasonable expectation would be for second half improvement on the gross margin? And that's my first question. And then I may have a follow-up. Thank you.
Good afternoon, Francesca. I'll take your questions. Of course, we the significant improvement that you have seen in the second half of twenty 18 was mainly due to, as we have explained, of a significant reduction of markdown. We mentioned last time that there are some additional steps that we are going to do, but not with the same magnitude. That's why we have seen a slight improvement from this measure in this half, but lower than 2017.
Talking about the next half, I am expecting to have, let's say, an underlying stable margin compared to the first half, so similar trend, similar level of margin. Then we could see probably see again another dilution coming from the exchange rate. Also considering the base of comparison and of the hedging effect in the second half of twenty seventeen.
Okay. And my follow-up question is actually on OpEx. Given that it seems the top line is enjoying very good momentum, I'm actually interested in understanding what you can control further in your P and L to enhance the operating leverage. And so if I look at all your 5% on at constant effects. Do you 5% on at constant effects.
Do you expect a second half run rate, which is very similar to the first half, can we see maybe a slower constant currency growth in certain OpEx? And especially in P, what would be your ideal target spend as a percentage of sales?
I have already mentioned during the presentation that particularly in terms of advertising and communication, let's say, spending, we are going to spend more. We have a pipeline of projects that are going to be to be released in the second half, pop ups, communication project, digital communication that is increasing its portion and but also this setup in the store for the presentation of the Lina Rosa collection. That's what we are expecting in terms of advertising and promotion. Then overall, I have also mentioned many times that there is an inflation rate also in the other cost line because there is a portion of operating expenses that are variable, particularly a big portion of rent, a big portion of labor costs. So there is an inflation rate.
And on top of this inflation rate, we are going to spend more in communication.
Okay. My final question is on inventories. And I understand the logic of having merchandise ready. What is the visibility that you had on the rollout of this on, let's say, the sell through of this incremental inventory that you are investing on? In other words, you are I assume you are not taking any material inventory risk?
My view is absolute damn. Our inventory totaling 20%. This is normal. But I can assure to you that we have no, let me say, products not possible to pay. We have an inventory that is made by raw material that are always good for power production and we have final products that are, let me say, the last one, mainly the last one.
And we I can mention that we this year destroyed what was not more possible for sale that was seems to me a couple of billion, something like this very, very few amount. This is very important. And it's very important to let me say have products available in the shops, products available in the market. It's important that this product could be sold without risk. This is our position.
Our completely satisfied with the lever of lever and quality, please, lever and quality of our stock.
Thank you very much.
Thank you to you.
Next question.
Thank you. Our next question comes from Helen Brand from UBS. Please go ahead. Your line is open.
Hi, afternoon. Just a couple of questions from me. Although you didn't open a big number of new stores in H1, I think you may have said that you had 36 pop ups. So I just wanted to understand whether you include them in your like for like growth and what was the magnitude of this contribution? Was it not that material?
I think secondly, just putting together the gross margin and the additional OpEx comments for H2, do you think that the consensus EBIT margin, which I think is around 13.1% for the full year, is feasible? And then just finally, just a little bit on the Chinese consumer growth. What was the Chinese consumer group growing globally in H1? And how did this trend between Q2 and Q1? I assume that given your comments on July continuing strong momentum that we saw no slowdown from the Chinese consumer.
Okay. Of course, I mentioned that the organic growth was made in like for like because the space contribution is small considering that the net number is just for stores. Of course, the pop up is difficult honestly to quantify how much of the pop up are contributing to the growth. Of course, we are talking about stores They are of course, they are contributing because they are increasing also the traffic in the store surrounding the surrounding the pop up. So they are part of or one of the reason of the good results in the retail during the period.
In terms of consensus, let's say that we are quite comfortable with the level of sales. In terms of margins, of course, it will depend on the impact of the foreign exchange on EBIT and EBITDA. But we have already mentioned that in the second half, we are quite confident to have a similar trend in terms of sales growth. I have already mentioned that we are going to spend something more in advertising and promotion. So I think that you have all the elements to understand the evolution of the EBITDA in the Q2.
Talking about Chinese, the Chinese consumers as a group, they grew in the period, let's say, low teens.
No real slowdown in July or any acceleration even?
For Chinese? Yes, exactly. They are stable. I mentioned that in July, the trend is slightly better, mostly because we are seeing better trends in Europe.
Perfect. And just a quick follow-up on the pop ups. Was there any particular phasing over the half in terms of pop up openings or contribution?
Actually, most of the pop ups were done for the Chinese New Year in the first half of the year. So I would say in January February was concentrated most of the activity concerning pop ups. Of course, we had the pop ups also in spring and now in summer, but I would say that the most of the business was related to the Chinese New Year event. As Alessandra was saying, what is important to stress for what concerns pop ups is not the revenues that are generated directly when the pop up is open. When the pop up is open.
And this is really what we feel is that we benefit from this type of retail initiative.
Perfect. Thanks so much.
Next question.
Our next question is from Melanie Sukesh from JPMorgan. Please go ahead. Your line is open.
Yes. Good afternoon. Thank you for taking my question. My first question is regarding gross margin. Sorry, just to confirm, in H2 'eighteen, you are guiding for a similar level to that of H1 at around 72% or similar year on year to what you posted last year, which I think was closer to 74%.
And if it's down year on year, is that mainly because of the underlying price hedges of the prior year? That's my first question. The second question is in Sorry, the second question was not clear. Could you repeat the second question? Sorry, this is the interpreter speaking.
Yes, I haven't started it. The second question is regarding the slight acceleration that you saw since March July, is this across categories? Or are you seeing a pickup in certain category in particular and notably I'm interested in leather goods? Thank you.
Hello, Melanie. Yes, I'll take the question about gross margin, one of the hottest of the day, I have to say. So my answer is, let's see, the underlying margin will be similar to H1. That's my simple answer. Then on top of this, we could have the impact of the exchange rate that again is expected to be negative.
Then your second question was around?
The acceleration.
The acceleration. The acceleration. No, the acceleration is across the categories. Probably I have to say that maybe leather goods and footwear recently are performing particularly well. We have time for the last question now.
And our next question is from Luca Solca from Exane. Please go ahead.
Yes, good afternoon. Thank you for taking my question. You recently updated the market on senior management changes in
the marketing organization.
I wonder if you
could update us on merchandising responsibilities. On the pop ups, you and going back to that point, you seem to be doing particularly well, and you seem to be proactively managing this area ahead of your peers. Is it fair or is it very wrong to assume that overall their contribution to boosting growth is close to 50% of the organic growth you're reporting? Or is that wide off the mark? And last, some of your peers are sort of reducing the extent of their brand portfolios.
Could you update us on your thinking on Church and whether the brand is performing according to your expectations? Thank you.
Good afternoon, Mr. Stork. How are you?
Well, if you are.
Thank you for your question. Always very interesting. Our marketing and merchandising news for the future, and I repeat, the real new that Prada is setting up strategy is the integration among, let's say, the different channel and among distribution and communication in through the digital tool. This is the real new from our point of view, of course, the real new in our activity, in our activity. Of course, we are for this reason, you are right, we needed to, let me say, renew some manager because everyone is right for specific work for a specific time.
For instance, my time is over. But I repeat, it's not an opinion, but it's necessary sometimes to, let me say, consider the change in the world and as consequence to change some bodies, some manager without any, let me say, fight, without any different reason. But simply in order to have new energy and new, let say, ideas. And our first result, I repeat, are good enough in order to encourage us to continue in this direction. Regarding pop up, what is the weight in our result?
This is a very, very difficult question. You can imagine what I can say. We are very happy the result in term of interest also in, let's say, Internet relationship is very clear, is very good. So is a real good result. How much?
This is difficult, please. No, I can't say 50%, 40%, 60%. Can you choose the figure? But you are again, you are right. The result of this initiative is really very, very effective.
Brand portfolio. Regarding the brand portfolio, we don't have any project. It's true that some competitor decided to reduce the portfolio. But we reduced our portfolio 10 years ago. You remember very well, I know.
At the moment, we have, let me say, in apparel 3 brands considering that cash flow at the moment is, let me say, dormant. And we maintain this brand for a future, let me say, develop the future initiative. At the moment, you are noticing, I know that the only brand that is not good performing is shares. But this is in this case, there is a specific reason, just because we decided to we changed first of all, we changed the manager of the brand and we appointed him with a very clear, let me say, goal to review all the, let me say, wholesale network debt for Church was very high. It was among 50%.
The wholesale activity is not consistent with our strategy where we are, let you say, 80 percent in retail. So we appointed him in order to close or review his channel and to develop the retail channel. In the second part of the work, he already succeeded because retail sales of church are growing. But this increase is offset at the moment, but I think this is just for a short time is completely offset by the wholesale reduction sales. But I repeat, we don't have any intention regarding new acquisition of brand or regarding, let's say, sales of our brands.
Ben? Thank you. Okay. I thank you very much. I hope to have the occasion to meet you personally in the next month, but after August, please.
Good afternoon.
I wish you happy holidays. Bye. Thanks.