Good day, welcome to the Prada Group first half 2018 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, thank you for joining Prada first half 2018 financial results conference call. I am Alessandra Cozzani, the Group CFO. Today, I'm here with our Chairman, Mr. Carlo Mazzi, and our Prada General Manager and Digital Director, Mrs. Chiara Tosato. During the call, I will go through the financial numbers, followed by the business update and outlook from Mr. Mazzi. After that, myself, Mr. Mazzi, and Mrs. Tosato 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 forma numbers for the six months from January to June 2017, following the change of our year-end to 31st 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 2018 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 reach EUR 1.5 billion, up 9% at constant exchange rates. As you surely know, exchange rates have been a strong headwind, with a negative impact of six 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, the EBITDA for the first half reached EUR 271 million, or 17.6% of revenues, up 8% compared to last year. EBIT was EUR 159 million or 10.4% 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. The underlying margin expansion was higher than the 120 basis point that you are seeing. Net income for the period was EUR 106 million, 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 EUR 180 million, which enable 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 EUR 240 million after the payment of EUR 186 million of dividend during the month of June.
Overall, balance sheet remains very strong as usual, with a very low gearing ratio at 9%. Let's look at slide four, net sales by channel. We have seen a strong performance across both retail and wholesale channels in the first six months of the year. In the retail channels, sales were up 10% at constant 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 markdown sales in order to protect brand equity. 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 first six 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 partnerships. Exclusive capsule collections have been launched with our existing and new e-tailer partners during the period to enhance sales performance. Let's look at slide five, 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 constant FX, notwithstanding weaker tourism due to the strength in the euro.
As mentioned, we saw strong momentum in Asia Pacific region, particularly in Greater China, which was up 17% at constant exchange. Performance in Americas remained strong across both retail and wholesale channels, up by 8% at constant 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 sales by product. We have seen very positive trends across all product categories in the first half of 2018. This excellent performance reflected the results of our strategic initiatives aimed at meeting customer expectations while combining the iconic heritage that defines our brands, with the strong support of digital campaigns.
Performance in leather goods was very strong, with solid revenue growth across both Prada and Miu Miu brands during the period. This 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 collections. This excellent performance, plus 20%, confirmed the design leadership position of Prada and Miu Miu. Lastly, we saw the rebound of footwear business with the successful launch of sneakers, including Prada Cloudbust and other lifestyle collections, both men and women. Let's turn to slide seven. Let's stay by brand.
As you can see in the slide, Prada brand saw continued strong growth at 10% in the first half at constant FX, benefiting from the improving trend across all product categories, particularly from ready-to-wear and leather goods in both new collection and iconic lines. Miu Miu performed well and made a return to positive growth across all product categories. These, again, demonstrating the success of our strategic initiatives to enhance distribution network and to fuel stores with new collections. Sales performance for Church's was just temporarily impacted by the restructuring of the wholesale network. Turning to slide eight, 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 offset by the negative impact from exchange rate fluctuations. Operating expenses. During the period, operating expenses were well under control. OPEX were broadly flat year-over-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 DOS 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 Miu Miu stores. A portion of CapEx is also allocated to our industrial platform in order to strengthen our ability to innovate while maintaining flexibility. The new Prada logistic 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 expenditure. Net financial position ended negative at EUR 240 million in the period after the payment of EUR 186 million dividends. With that, I would like to hand over to Mr. Mazzi to go through the business update.
As you can see from the numbers that Alessandra just discussed, there's been excellent half year for Prada, in which we have started to see the concrete results of the transformation process that we have been working hard at over the past couple of years. We are constantly working to reshape the group to adapt 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, built up around the three main pillars, channels, merchandising, and communication. Channels and retail. We are increasingly leveraging how the global retail network at the heart of the customer experience is fully integrated with digital and social media campaigns to maximize engagement with customers.
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. Among other projects, we are planning special setup in our stores dedicated to Linea Rossa. We are continuing to invest in the retail network in order to refresh and renovate the stores. We performed 30 project this half, 23 Prada and seven Miu Miu, almost completing the rollout of the blue concept at Miu Miu 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 SKP Mall. Wholesale. Turning now to slide 15. Our wholesale channel performed strongly once again, this was driven largely by our partnerships with the e-tailers.
Our collaboration with the e-tailers 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 Mytheresa with the ready-to-wear capsule collection promoted by a famous singer. We also continue to work closely with department stores, creating The Drop shopping experience at Barneys. Finally, just among retail and wholesale, Prada and Miu Miu 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, it is increasingly integrated with the retail network. With the Prada platform now rolled out in all our key markets, enabling an omnichannel product experience in Europe, U.S., and China.
This has been complemented with the launch of a number of special projects, including the Cloudbust sneaker launch, online capsule collection in markets including Germany, U.K., U.S., and Canada. We recently launched the ability to pre-order the Linea Rossa collection online. The Miu Miu platform is now enabled in China and other key Asian markets. Again, we launched a number of special projects to drive traffic and interest, including Miu Miu blue taste T-shirts, summer dreaming, and new delight. Customers can now also pre-order new lines online. 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 a positive market response to our new collections and the launches of our iconic lines reinterpreted with a contemporary twist.
In particular, bags and the Viaggio 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 Prada's and Miu Miu's cruise fashion shows. We have also seen positive sales in footwear, where we have successfully leveraged our strong identity in formal collection and sportswear. The new men and women's sneakers collection performed particularly well. Our new collaborations with four acclaimed architects and designers to reinterpret the iconic Prada black nylon collection across all categories were very well received among our customers. We have accelerated the pace on introducing drop collection in the stores. Communication, the third pillar.
As mentioned earlier, we have increased our investment in communication to support our brand equity across all touch points. At the sixth floor of the recently opened white concrete tower, the Fondazione 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. Torre was also the space where Prada held its latest autumn/winter fashion show as part of the group strategy to leverage its huge global following by showcasing the collection in different locations 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, three iconic buildings, the Nasdaq Tower, the Thomson Reuters building, and the central street of the [inaudible] .
Miu Miu has also held its Croisière 2019 show in a new location, the Hotel Regina in Paris, taking place in a stunning Belle Époque location overlooking the Louvre. This show hosted an eclectic cast of high-profile models and actresses with strong social media followings and on, ran away with a cinematic set designed by award-winning Sarah 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 contexts to entertain 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 leveraged through our social media channels. Sustainability for Prada Group. Sustainability is increasingly becoming another realm to explore and another frontier for the business.
I take this opportunity to touch upon the conference we are hosting this autumn, called Shaping a Sustainable Digital Future. The event will be the second 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 to the outlook, the next last slide. H1 2018 confirms that Prada Group 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 a buoyant 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 you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow anyone an opportunity to signal for questions. We will now take our first question from Nicky Cheung from MainFirst. Please go ahead.
Good afternoon and thanks for taking my questions and congratulations on a very good first half. My first question is on the retail organic growth. I remember back in May, management guided for 7%-8% retail organic growth. Now that you've printed at 10%, can you confirm that the exit rate was double-digit? Are you confident that the relaunch of Linea Rossa will drive the second half organic sales even higher? 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? In such a case, do you think a return to 20% EBIT margin is achievable by 2020? My last question is on fragrance. I think I read in the press that the Prada brand is ending the fragrance partnership with Puig Group.
Should we expect any major license decline in the second half in 2019? I appreciate it's a very small part of your business. Thank you so much.
Hello, Nikki. 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. What we are seeing also in July is confirming this trend. No big changes, no different vision of the future compared to what we said in March. Talking about EBIT margins, of course, you have seen from the numbers that the operating leverage was partially offset by the exchange negative impact. Of course, there is an operating leverage inside our P&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 to deliver more than what we have done in this first half.
Regarding Prada and Puig agreement, it's true that in the next 18 months, the agreement will expire. Of course, we'll discuss with Puig 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. In any case, the relationship with Prada and Puig is an important one, but it's not, let me say, crucial. No. Fragrance for us is something of less than EUR 10 million in term of royalties. In any case, we are considering the opportunity to increase our activity in this segment.
Thank you so much, Alessandra. Just one follow-up. In the first half, if I strip out FX, what is the underlying EBIT margin expansion? You mentioned it's bigger than the 120 basis points you printed. Thank you.
Of course, it is 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 Antoine Belge from HSBC. Please go ahead.
Yes. Hi, it's Antoine Belge at HSBC. Three question, actually. The first one is actually a follow-up on the previous question, but more at the gross margin level. I think you mentioned that, so on a reported basis, was down 50 basis point, but you had a higher share of full price sale. Can you quantify the impact at the gross margin level of FX, or at least tell us that, without this FX headwind, the gross margin would have been positive. Second question, when we look at H2, we should have the benefit from the relaunch of Linea Rossa. Do you think that this could help the sales to gather pace or that because of the maybe tougher comps, it's more reasonable to expect a pretty similar top line compared to the first half? Also here, there is obviously a bit of impact on wholesale.
I think there was a mention about the new collaboration with Farfetch. Is the wholesale expected to accelerate in the second half? Finally, in terms of product mix, we've seen that some categories seems to be in advance in terms of their recovery. How do you see the more meaningful categories, especially in terms of margin, developing in the second half on next year? Thank you.
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 six basis points of dilution in the gross margin. Chiara will answer the second question.
Regarding your question on Linea Rossa, 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 Linea Rossa, 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. Meaning that we will develop with selected partners, special projects, also in the second half of the year.
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, we consider that our product mix is the right one because it's true that some categories like leather goods bear higher margin, but not possible in our perspective. They distinguish our product category. Prada and Miu Miu are proposing a, let me say, total look offer. This is our identity. We will continue with the same product mix. Of course, ready-to-wear yield more than the other, but this doesn't change in an effective, let me say, measure our mix. We consider that we continue with this kind of offer, and this is, I repeat, the Prada and the Miu Miu offer.
Okay. Thank you very much. I understand that you don't want to provide guidance. H1 was robust. It doesn't seem that there should be any reason for things to really massively change in the second half, both in terms of top line and at least organically, in terms of margin expansion. Is that a reasonable assumption? Again, you showed already some improvements in the later part of 2017, then maybe we should be a bit more cautious and take 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, physical performance. Of course, we consider that the new trend is not just a, 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, is also continuing to be developed. 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, Alessandra and Mr. Mazzi. Three question, 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 % of total handbag sales following the success of some of your newer lines? Thirdly on Miu Miu, it feels Miu Miu is going through a new beginning every few years, back into a positive LFL. 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. If we could get a sense of the margin of Miu Miu 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 the organic growth is close to the like-for-like. I have already mentioned that 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 leather goods products, especially bags, you mentioned. I don't see any significant difference in the different price categories of our bags. It's true that we completed our, let me say, categories of prices recently. Generally speaking, the average price is increasing. I don't want to say that we are selling better high price bags, 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 the other discussion, when we recognized that we have some lack in the, let me say, medium price bags.
We introduced medium price bags, and we had good result, 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. It is a new, let me say, start for Miu Miu with the new image of Miu Miu. We renewed, as mentioned, Alessandra, almost all our Miu Miu stores with the new blue image. We are confident that we can continue to develop Miu Miu and to, let me say, let grow Miu Miu in order to get very good result also from this brand. At the moment, our position is, let me say, break-even point for Miu Miu, let me say, roughly speaking, for Miu Miu margin.
I repeat, our program is to grow with Miu Miu in order to reach at least EUR 800 million in the next couple or three years.
Thank you.
Next question.
We will now take our next question from Francesca Di Pasquantonio from Deutsche Bank.
Yes. Hi, good afternoon. I have a couple of remaining questions, follow-ups. 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. If we set the currency aside, can you maybe help me understand what a reasonable expectation would be for second half improvement on the gross margin? That's my first question. I may have a follow-up. Thank you.
Good afternoon, Francesca. I'll take your question. Of course, the significant improvement that you have seen in the second half of 2018 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'm expecting to have, let's say, an underlying stable margin compared to the first half, so similar trend, similar level of margin. We could 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 2017.
Okay, thank you. My follow-up question is actually on OpEx. Given that it seems the top line is enjoying a very good momentum, I'm actually interested in understanding what you can control further in your P&L to enhance the operating leverage. If I look at all your expense lines, most of the expenses, excluding A&P, have been flat, plus 5 at constant FX. Do you expect a second half run rate which is very similar to the first half? Can we see maybe a lower constant currency growth in certain OpEx? 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 released in the second half. Pop-ups, communication project, digital communication, that is increasing its portion, but also this set up in the store for the presentation of the new collection. That's what we are expecting in terms of advertising and promotion. 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 portion of labor cost. There is an inflation rate, and on top of this inflation rate, we are going to spend more in communication.
Okay, thank you. My final question is on inventories, and I understand the logic of having merchandise ready. What is the visibility that you have on the rollout of this, let's say, the sell-through of this incremental inventory that you are investing on? In other words, I assume you are not taking any material inventory risk.
No. My view is, in absolute term, our inventory totaling 20%, this is normal. 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 our production, and we have final products that are, let me say, the last one, mainly the last one. 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. 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. We are completely satisfied with the level in 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. 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 growth 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? 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 mainly 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, they are contributing because they are increasing also the traffic in the store surrounding the pop-up. They are 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. We have already mentioned that in 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. I think that you have all the elements to understand the evolution of the EBIT in the second quarter. Talking about Chinese, the Chinese consumers as a group, they grew in the period, let's say, low teens.
No real slowdown in July? Any acceleration, even?
For Chinese?
Yeah, exactly.
They are stable. I mentioned that in July, the trend is slightly better, mostly because we are seeing better trends in Europe.
Perfect. Just a quick follow-up on the pop-ups. Was there any particular phasing over the half in terms of pop-up openings or contributions?
Most of the pop-ups were done for the Chinese New Year in the first half of the year. I would say in January and 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 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 by the pop-up, but the significant increase in revenue that we have seen on the stores surrounding the pop-ups when the pop-up is open. This is really what we feel is the key benefit from this type of retail initiative.
Perfect. Thanks so much.
Next question.
Our next question is from Melanie Flouquet from JPMorgan. Please go ahead. Your line is open.
Good afternoon. Thank you for taking my question. My first question is regarding gross margin. Just to confirm, in H2 2018, you are guiding for a similar level to that of H1 at around 72%, or similar year-over-year to what you got the best year, which I think was closer to 74%. If it's down year-over-year, is that mainly because of the unwind of the price hedges of the prior year? That's my first question.
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 and in July further. Is this across categories, or are you seeing a pickup in a certain category in particular, and notably I'm interested in leather goods. Thank you.
Hello, Melania. Yes, I'll take the question about gross margin, one of the hottest of the day, I have to say. My answer is that the underlying margin will be similar to H1. That's my simple answer. On top of this, we could have the impact of the exchange rate. That, again, is expected to be negative. Your second question was around
The acceleration.
Acceleration. No, the acceleration is across the categories. Probably, I have to say that maybe leather goods and footwear recently are performing particularly well.
Thank you.
We have time for the last question now.
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 this, especially for what concerns marketing and the merchandising responsibilities. On the pop-ups, 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? 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. Solca. How are you?
Well, thank you.
Thank you for your questions. Always very interesting. Marketing and merchandising news for the future. May I repeat, the real new that Prada is setting up strategy is the integration among, let me say, the different channel and among distribution and communication through the digital tool. This is the real new, from our point of view, of course, the real new in our activity. For this reason, you are right, we needed to, let me say, renew some manager because everyone is right for a specific work, for a specific time. For instance, my time is over.
I repeat, it's not an happy new, 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 add new energy and new, let me say, ideas. 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 I can imagine what I can say. We are very happy. The result in term of interest also in, let me say, internet relationship is very clear, is very good. Is a real good result. How much? This is difficult. Please, no, I can't say 50%, 40%, 60%. Can you choose the figure? No.
Again, you are right. The result of this initiative is really 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 parallel, three brands, considering that Car Shoe at the moment is, let me say, dormant. We maintain this brand for, let me say, develop a future initiative. At the moment, you are noticing, I know that the only brand that is not good performing is Church's. In this case, there is a specific reason. Just because we decided to, 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 that for Church's was very high. It was among 50%. The wholesale activity is not consistent with our strategy, where we are, let me say, 80% in retail. We appointed him in order to close or review this channel and to develop the retail channel. In this second part of the work, he already succeeded because retail sales of Church's are growing. This increase is offset at the moment, but I think that is just for a short time, is completely offset by the wholesale reduction sales. I repeat, we don't have any intention regarding new acquisition of brand or regarding, let me say, sales of our brands.
Understood. Thank you very much indeed.
Okay.
Thank you.
Okay. I thank you very much. I hope to have the occasion to meet you personally in the next months, but after August, please. Good afternoon.
I wish you happy holidays. Bye. Thanks.
This concludes today's conference call. Thank you for your participation. You may all now disconnect.