Ladies and gentlemen, welcome to the Burberry first quarter trading update call. My name is Emma, and I will be the operator for your call this morning. If you would like to ask a question during the question and answer session on today's call, you can do so by pressing star followed by one on your telephone keypad. I will now hand you over to Julie Brown, Chief Operating and Financial Officer. Please go ahead.
Good morning, welcome to Burberry's first quarter conference call. Slides are available to accompany this presentation on the IR section of our website. In today's presentation, I'll spend the first few minutes running through our retail performance in the quarter, sharing the progress we've made against our strategy, then close with guidance. With me this morning is Annabel Gleeson, our Head of Investor Relations, we will be happy to take your questions at the end. Turning to slide one. This quarter, Riccardo design products became a meaningful proportion of our offer, building from 10% to 15% of the assortment at Q4 to around 50% by the period end. The customer response to the new product has been very positive. We saw strong double-digit % growth across runway, summer, and autumn 2019 collections compared to the equivalent collections in the prior year.
Sales from the new product were ahead of the prior year in all regions, with Chinese and Japanese customers delivering the strongest trends. Consumers reacted positively to the new aesthetic and the new Burberry house code. Men's and women's benefited from the outfitting initiative with strong growth in tops and bottoms. In accessories, we continued to build out our product architecture and increase emphasis on solid leather bag collections. Whilst the new product is performing well, lines of previous collections continue to weigh on the overall performance of the business, resulting in comparable store sales growth of 4%. Turning to the second slide by region. Asia Pacific led the growth, delivering a high single-digit improvement year-on-year. Mainland China grew mid-teens as customers responded positively to the new product line, the country benefited from some repatriation of spend towards mainland China.
By nationality, Chinese spending globally was up high single digits, a marked sequential improvement on the low single-digit trend in the prior year. In Japan, we continued to expand our retail footprint, gaining concessions in Hankyu and Isetan. On a comp basis, Japanese sales were up mid-single digits, including the benefit of new space, Japan grew mid-teens as our new product resonated well with fashion-forward consumers. Elsewhere in Asia, Korea grew low single digits, whilst Hong Kong was lower year-on-year, impacted by the protests. EMEA grew low single digits with a mixed performance across countries. The U.K. and Italy both delivered good growth, whilst France was softer year-on-year. The Middle East remained challenging, impacted by the macro situation. Finally, the Americas was flat year-on-year. The U.S. grew low single digits was offset by Canada, which was impacted by a later markdown period. Turning to slide three.
This slide shows the major components of retail sales. Again, you can see the 4% growth in comparable store sales. Space was minus two in this quarter, and we still anticipate space being flat for the full year. During Q1, we continued to invest in our store network, opening nine stores, including three larger new stores in China, IFC and IAPM in Shanghai, and China World in Beijing, and two additional concessions in Japan. Offsetting these openings were 12 closures, including four from the previously announced rationalization program. We also continued our store refurbishment program, which included completing store refreshes in Canton Road in the Ocean Center in Hong Kong. In aggregate, 23 of our stores are now aligned to the new creative vision, and we remain on track for 80 stores to be complete by the end of the year.
In total, retail revenue was up 2% at constant exchange rates. Finally, currency had a 2% benefit this quarter, resulting in reporting sales of GBP 498 million, up 4% year-over-year. Before I turn to guidance, I wanted to talk you through some of the brand highlights in the quarter on slide four. We engage frequently with consumers through our monthly B Series drops and the newly launched Monogram capsule, which continued our investment in the Thomas Burberry print as a new house code. The Monogram collection resonated strongly with consumers, particularly with Chinese millennials. We supported its launch with high-impact activations, including pop-up stores and department store window takeovers. This was highly successful in driving brand heat, reaching 120 million consumers globally. Social posts of the Monogram product drove higher than average engagement rates. More widely, our traction across Instagram and WeChat continued to progress positively.
We saw growth in the number of followers and double-digit gains in the engagement rate per post compared to the previous quarter. We continue to innovate on new platforms like TikTok and Douyin in China. For example, on Douyin, users generated content, which drove over 1 billion views by taking up our Monogram challenge. In addition, key influencers continue to organically endorse Burberry products, and our editorial return on investment was higher than an already strong Q4. Turning to slide five, I wanted to talk about the top-line dynamics for the remaining quarters this year. Over the coming months, the new product will build from around 50% now to around three-quarters of our offer by the end of the financial year. In terms of comparable store sales growth, mainline is expected to accelerate as the new product builds through the year.
However, we anticipate this will be partially offset in the second half by reduced markdown inventory compared with prior year. Turning to the outlook on slide six. With this top-line dynamic in mind, we maintain our guidance for broadly stable revenue and adjusted operating margin at CER in full-year 2020. As previously announced, we anticipate a more pronounced weighting of adjusted operating profit in half two relative to half one than the prior year. Cumulative cost savings of GBP 120 million will be delivered by the end of the year, and our CapEx program is on track. Finally, turning to currency. We now expect a GBP 15 million benefit to adjusted operating profit and a GBP 45 million benefit to revenue as a result of the further weakening of sterling against major currencies. This compares with prior guidance of a headwind of GBP seven million at operating profit.
Turning to the final slide. In summary, this was a good quarter in our multi-year journey to transform Burberry. We continue to build out the proportion of Riccardo product in stores. We continued our journey of aligning distribution to a luxury positioning and our new creative vision. We launched our Monogram capsule and improved brand heat and consumer engagement sequentially. The implementation of our strategy is on track, and we maintain our full-year financial guidance. With that, we're happy to take any questions.
If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. When preparing to ask a question, please ensure that your phone is unmuted locally. To confirm, that's star followed by one to ask a question. One moment for the first question. The first question is from the line of Elena Mariani with Morgan Stanley. Please go ahead.
Hi. Good morning, Annabel and Julie. A few questions from me, please. The first one is on the underlying moving parts of your like-for-like in the quarter. I guess 50% of your retail sales are now growing strong double digit. What about the rest? How much is older collections and carryovers, and how much of this remaining 50% was discounted and perhaps going through outlets? I'm trying to better assess whether part of your comp was driven by higher discounting activity or whether the level of discounting was exactly in line versus last year. Then the second question, you seem to manage expectations on the like-for-like in the upcoming quarters, suggesting it might not be progressing in a linear way. Could you help us understand why this might be the case?
If the new collection is growing high double digit, then it's going to represent 60%-70% of sales by the end of the next quarter, in theory, you should see like-for-like progressing positively, given also that the overall like-for-like comp base gets easier in the second half. Then perhaps one final question on the gross margin guidance. You haven't changed it, and you're still talking about higher profits in the second half of the year versus the first half. How should we tie in your gross margin guidance versus what you're expecting in your top line? Should we see the higher gross margin decline in the first half, the reflection of higher discounting, then in the second half, there should be less gross margin downside because you're going to discount less? If you could help us understand this better, it would be great.
Thank you.
Okay. Thanks, Elena. Just to run through the questions. The 1st one relating to the underlying like-for-like in the 1st quarter. The strength has really come from Riccardo's collections in the 1st quarter. As we mentioned, summer 2019, the pre-collection for autumn and the runway have performed very strongly. We've delivered a strong double-digit performance. It's not been driven by the discounting. Obviously, outlets are always a proportion of our sales. We don't disclose the amount. The success this quarter has been driven really by the strong response to the new product. Within the number, as we mentioned, the older lines, previous collections, and the replenishment business is going through a softer period and facing declines. What we're doing now in this next phase is we'll be rebuilding some of the main Burberry icons to support that replenishment business going forward.
The focus to date has been on establishing the new collections and establishing Riccardo as the great designer that he is. In terms of the like-for-like progression, Riccardo's product is potentially of our sales at the end of this quarter was 50%, as we mentioned. We expect it to be around 60%-65% by September and 75% by the end of the year. In terms of overall, what we're flagging in terms of forecasting this through the courses is the main sale periods for Burberry and major luxury brands are post the main seasons. We have the sale periods in Q1 and also in Q3, with Q3 being the most significant.
What we're flagging is that this year, we will have reduced inventory going into markdown in Q3, basically for the purposes of modeling, we're guiding towards the comp in Q3 in aggregate across all channels in all likelihood being lower than Q1 due to this factor. In terms of the gross margin guidance, the major thing that we highlighted is the investment that we're making in product. It started last year with the investment in design and the new product, the gross margin was under pressure in the second half of last year already from this feature. We therefore anticipate greater degree of pressure in the first half of this year for the same reason.
We come to the second half of this year, that impact will be more muted because we're lapping an already investment period in half two of the prior year. Absolutely no change to the guidance on gross margin. We're anticipating a headwind of around 100 basis points, largely due to product investment, and we expect a more pronounced effect of this in the first half, basically as we guided.
Two very small follow-ups. The first one is that, if I understood correctly, we should expect like for like to sequentially improve in Q2 versus Q1, given that we're going to have more products from Riccardo in stores, and we might see a bit of a deceleration in Q3 and a re-acceleration in the fourth quarter. This is the sort of trend we should expect.
Yeah. That's the sort of trend we expect.
Okay. Last point on the gross margin. By next fiscal year, we should start to see an improvement instead because you're done with your investments in new products, you would expect to see a positive effect on the gross margin coming from perhaps the growth of leather goods, and of new products in general. Should we model it this way?
I think we'll give further guidance in May when it comes to the gross margin specifics. Obviously, heavily depends on the product mix.
Yeah.
In the first few years, we are investing in the leather franchise. We are elevating the leather that we're using and the designs that we're using. Because we want the value to be perceptible, and that's our number 1 objective, we're not putting the prices up commensurately, in the early stages of implementing the strategy. I would see a recovery in gross margin as we gain scale in this area, but it won't happen immediately. We'd encourage you to model that gross margin headwind for a period of time until we guide otherwise.
Great. Thank you very much.
Okay. Thank you.
The next question is from the line of Thomas Chauvet with Citigroup. Please go ahead.
Good morning, Julie and Annabel. I have two question, please. The first one on the Riccardo strong double-digit LFL. Would you be able to single out some categories, collections, or price points that did particularly well? As you mentioned, Julie, the replenishment business is still weak. I understand Tisci hasn't refreshed the Heritage Trench Coat. That's a significant part of his selling profit. Why is that, and when can we expect him to modernize perhaps this important category? Secondly, on greater China, you mentioned the benefit from repatriation of demand into the mainland, driving that mid-teens LFL. With regards to Hong Kong, what are your teams saying on the ground? Are they concerned about the situation, about the future traffic? Do you have already a contingency plan in place on this profitable market in terms of, I don't know, staffing levels, store closures, rent renegotiation?
I think you took some action in 2015 after the student protest of the autumn 2014 in Hong Kong. Thank you.
Okay. Thank you. Riccardo's product, as we mentioned, is growing strong double digits across the two collections and the runway that he's launched. We've actually seen positive trends in all regions. We continue to build out the solid leather bag architecture, and we've seen the new product resonate very strongly, in particular with the Asian population and very strongly with the Chinese. Wholesale is also seeing significantly higher sell-throughs than previous collections, and the sell-in at the May market recently with wholesale was very encouraging. In terms of specifically product categories, the apparel range has gone very well.
Women's and men's apparel have seen a double-digit growth, and what we see is across Riccardo had the persona of the man and the boy, the woman and the girl, and we've seen a success across all of those categories, including the younger generation, which has been very positive. Just moving on to the second part of your question relating to the Heritage Trench. Riccardo oversaw that at the time we were launching it, but it only had a modest impact. He will be turning his attention to some of the iconic Burberry styles as we approach this next year. His first focus, as I'm sure everybody understands, has been on the main collection and on the runway. China. You're absolutely right. We've seen a mid-teen growth in Mainland China, a very positive response from the Chinese consumer.
We've also seen because of, I think, government supported local consumption, we've seen a repatriation of spend away from some of the other Asian countries towards China, which overall, the key metric we look at is the Chinese as a nationality. Here again, we're very pleased with the trend because we were on a low single-digit growth last year, and we've just delivered a high single-digit growth in China or the Chinese globally. We're happy with that. Coming on to Hong Kong, clearly we keep this situation under very close review. We did see an impact due to the protests. We saw an impact on Alexandra House and Pacific Place. We monitored the situation and decided to make closures to the stores to protect our employees. They were closed in total for about five days.
It has had an impact on Hong Kong performance in the quarter, not that material at the group level, but we obviously keep the situation under close review. No change really to the rents. It happened a few years ago because of the downturn in the business with the economic cycle, no really major change to the rents to date.
Thank you, Julie. Thank you.
Thanks very much, Thomas.
The next question is from the line of John Guy with MainFirst. Please go ahead.
Thanks very much. Good morning, Julie and Annabel. Just following on from Thomas' points there, looking at the performance of the non-Tisci product during the first quarter, you mentioned that replenishment and old collections were in decline. Could you maybe sort of flesh that out a little bit in terms of looking at the replenishment versus the older collections and maybe quantify that? The second point is, I think the average penetration of Riccardo's product over the quarter was around 35%. Appreciate that you ended at 50. Can you give us the scale of the performance of Riccardo Tisci's sales within the accessories category during the quarter? And can you make also some sort of, I guess, a little bit more detailed comment around the performance of the refurbished stores against the non-refurbished stores? Thanks very much.
With regard to non-Riccardo products, we've got a number of categories within there. We've got the replen lines, we've got the older collections. It's quite normal to expect to see a decline in older collections as fashions change. Replen, as I mentioned on the call, we are in the process of rebuilding the Burberry replen icons, and that will be the next phase of our transition that Riccardo will turn his attention to. At this stage in our transition, we completely expected this to be the level of performance. In terms of the average penetration of 35%, yes, that's about right. We do see variability in that percentage across the store network. We put prioritization on the flagship stores and the stores in the major cities, so they tend to operate on a higher percentage.
Basically, yes, it was 35%, 50% by the end, and we anticipate that moving to around 60%-65% by September, absolutely in line with guidance, 75% by the end of the year. That's what drove the success in the quarter. Just in terms of the categories and the scale of Riccardo's product, as we mentioned, the leather franchise and accessories or leather bags within that franchise, we anticipated this being a longer journey, partly because we are elevating the product in this category, investing in solid leather shapes, investing in high-quality leather, investing in new designs and fabrications. Therefore, we anticipated this category being under some pressure in these initial stages, and we've guided to that. It's within our guidance. We don't guide specifically by category on what's Riccardo's and what isn't. It's not dissimilar to the overall shape that we've got.
Then in terms of the store refurbishment, we are really pleased with how this is progressing. As you know, we've got an ambitious plan of store refurbishment. We plan to reach 80 by the end of March 2020. The reason we're focused on this is because what we see is when we have three ingredients together, we see an inflection in the performance. 1 is a refurbished store, 2 is a larger proportion of Riccardo's product in the store, and 3 is a retail excellence program having run through, raising the capability level of our teams. When we see the three together, we see an improvement. We track it rigorously as part of our KPI dashboard internally, we don't disclose the performance of the stores externally. We do see a good return on that investment.
Thanks, Julie. Just maybe following up on that, over the course of the quarter and for the entire quarter, looking at the sales densities, they seem to have gone up by the mid-single digit rate over the quarter. That I would expect to be probably running at a double-digit pace for those refurbished stores. Would you be able to sort of confirm that that's the kind of sense that you see based on those three magic ingredients you just mentioned.
We do overall see an improvement in the productivity of those stores when we've got the three factors in play, we don't disclose sales sensitivities, as you know, John.
All right. Thanks, Julie.
Thanks. Cheers. Bye.
The next question is from the line of Anne-Laure Bismuth with HSBC. Please go ahead.
Yes. Hi, Anne-Laure Bismuth from HSBC. I have two questions, please. On your plan of 80 store refurbishment plan for this year, is there any particular phasing for the next three quarters? Regarding the store openings, so you opened nine stores in Q1, three in China. Can you remind me what is the plan for this year, please, in terms of overall openings and also store openings in China? Thank you.
Okay. In terms of the phasing of the stores, we would anticipate the second half to have a higher degree of store refurbishment, which is in our plan at the moment. We've done now 23 to date, and we'd expect to pick up in the second half, largely as the teams have gone through the planning stage, and they can move more towards execution. We're still on track with delivering 80 by the end of the year. In terms of the store openings this year, the plan going forward, we don't guide specifically on the number of stores, but what we said is that obviously space for the full year contribution to retail sales will be broadly stable, with minus one in the first half and plus one in the second half.
Thank you.
The next question is from the line of Melanie Supe with JP Morgan. Please go ahead.
Yes, good morning. Thank you for taking my questions. First one is, I was wondering whether you can help us understand a bit better the markdowns impact. The fact that you are aiming to reduce the markdowns activity, and have already done so in quarter one, I believe a little bit. Maybe you can share with us, I don't know whether you can, the directionally, what sort of percentage into total were the markdowns and where you aim to get it over the course of the next year and two years in your business. That would be my first question. Sorry. The second is on handbags. When did you expect that the pressure on the former collection stops and we start seeing the most recent reference positive momentum filtering into your numbers?
I know you said it was a longer journey, but when is that inflection point in your mind? My third question is on European local consumers. If I understand well, the U.K. was particularly strong, helped by tourism inflows. The European consumer appears to still be pretty weak in this turn around. What are you aiming to do to revitalize this market in particular? I appreciate America as well, maybe takes longer because there are some image issues that are stronger in the U.S., but I was interested in the European market. My last question is, sorry, can you share with us how big Hong Kong is for you in percentage terms, and what was actually the performance in this quarter? Thank you.
Yeah, sure. Okay. First of all, in terms of the markdown impact. To start with, our strategy has been really clear about removing non-luxury distribution from our network, and this has been focused initially on wholesale with some outlet closures. Simultaneously, our objective is to drive full price mainline and digital growth, and therefore, we expect over the years of the strategy to have a reduced element of markdown. Last year, we were obviously going through a creative transition, and in the third quarter in particular, we were managing those inventory levels accordingly. This year, what we're trying to do is be as open and transparent as possible and assist with the guidance around the comp over the quarters.
Because the main sale period in our industry is occurring in the third quarter predominantly, we're really flagging to you that we'll have reduced levels of inventory going into markdown in Q3. Just for the purposes of modeling, we're anticipating that the Q3 comp in aggregate will probably be lower than Q1 due to this factor. Over the next 1-2 years, we'd expect this sort of trend to continue with more focus on mainline and digital full price. If we move out to the question about the handbags and the collection becoming positive. We've always said that in terms of leather, we are building out the architecture. We're using much more solid leather shapes as opposed to canvas type materials, and we definitely focus on the value being perceptible to the consumer, hence one of the pressures on the growth margin.
We have got the headwind from some of the older style bags and some of the previous collections, and we'd anticipate that remaining a headwind probably during the course of this year, but expect to see some signs of improvement in the next financial year. Clearly, we'll keep you updated on the progress. In terms of the tourism flow in Europe and how we intend to revitalize Europe. In terms of our brand and the image of our brand, when we did the brand work a couple of years ago now, our brand was the strongest in Asia. As you mentioned, Melanie, we had a weaker positioning in the U.S. wholesale presence in non-luxury. What we've seen is the traction, the first traction is coming through Asia. We've also seen an improvement in European performance. You mentioned about Europe.
In terms of Europe overall, last year we were low single digit. We've had a slight improvement in this quarter, and we've had a more marked improvement coming through in the U.K., partly impacted by tourists. The revitalization of Europe is very much part of the revitalization of the Burberry brand holistically. The use of social media, the use of influencers, the collections, the B Series, the Monogram collection recently, are all designed to reignite heat around the Burberry brand. That has been successful. As you know, we've seen a double-digit increase in the levels of engagement around this. Europe is very much part of that activation campaign. The store refurbishment program runs globally with a focus also on Europe. We do expect to gain traction, although I think inherently it is a more difficult market than, say, Asia at the moment.
In terms of Hong Kong, Hong Kong is 6% of our sales, the performances in Hong Kong have generally been somewhat mixed, largely because we have tourist flows going through Hong Kong, we've recently had the impact of the protests that we mentioned in answer to John's question earlier. We have had some store closures relating to those protests, as we mentioned, five days in total. Yeah, Hong Kong is, I think reasonable. I would say it's reasonable, but it's still slightly in decline in this quarter.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press the star followed by the one on your telephone. The next question is from the line of Rogerio Fujimori with RBC Capital Markets. Please go ahead. Sir, your line is currently open.
Oh, hello. Hi, good morning, Julie Annabel.
Hi.
Hi. Three quick questions, please. Could you talk about the ASP trend in Q1 with the greater availability of Riccardo's new collections? My second question is on e-commerce. I appreciate not disclosed, but if you could give a qualitative idea of how online retail growth in Q1 2020 compared to online growth in Q1 2019 or Q4 2018. If you could talk about the performance of burberry.cn would be helpful. My third question is just if you could talk a little bit about what do you see in terms of U.S. luxury market trends in the June quarter versus the March quarter. Thank you.
Yeah, sure. First of all, in terms of the ASP trends, we've seen Q1 driven largely by mix, product mix, and certain categories have done extremely well. As we mentioned, apparel across men's and women's, and a little volume. It's come from those sources. No major changes to like-for-like prices, but obviously there has been a change to the product range which has affected the mix performance. In terms of e-commerce, the performance in digital has been led by China, and we've seen strong double-digit growth through targeted innovation, such as social gifting on WeChat that we did. We launched WeChat mini program on Chinese Valentine's Day as one example of what we've done. We've continued the success in generating inspiration through the B Series, and the Monogram program was very successful in terms of exclusive product being available on Instagram and on WeChat.
As you probably know, we received a prestigious Webby Award in April 2019 for the best social content within fashion and beauty. Recent innovation also on the Chinese platform was the use of Douyin, where we had a Monogram challenge. Again, that was reaching 1 billion views from users generating their own content. I think we've been really successful in that space. In China, the digital performance has been very strong equally across burberry.com and our third-party providers. Both have been performing extremely well. In terms of the U.S. luxury trends, we have certainly seen a softness in tourist flows into the U.S., and particularly when we look at airline flight bookings, et cetera, from the Chinese, we've seen a weakening of tourist flows from the Chinese.
It's largely a domestic market, and we actually saw when we look at U.S. alone, not Americas, we actually saw an improvement from Q4 to Q1. We were slightly negative in Q4, and we delivered a low single-digit growth in Q1. We are starting to see an improved traction in the U.S. market.
Thank you.
Thank you.