Ladies and gentlemen, welcome to the Burberry Q1 trading update call. My name is Emma, I will be the operator for your call this morning. You can do so by pressing star followed by one on your telephone keypad. I will now hand you over to Julie Brown at Burberry to begin. Please go ahead.
Good morning, welcome to Burberry's full year 2019 first quarter trading conference call, which has accompanying slides that are available on the IR section of our website. In today's presentation, I will briefly run through a review of our retail sales growth in Q1, I will highlight some key operational progress we've made, finally, we'll turn to the outlook for the remainder of the year. With me this morning is Charlotte Cowley, our Head of Investor Relations, we'll be happy to take your questions at the end. Turning to the first slide and starting with the retail performance in the first quarter. Underlying retail revenue was up 3% at constant exchange rates. Comparable sales grew 3%, with strength in Asia-Pac and Americas partially offset by EMEIA. Space was marginally negative during the period.
We continued our strategic investments in key markets with six openings, including the relocation and expansion of our flagship store in Dubai. This, in part, offset the headwind from seven store closures, including an additional two outlets. For the full year, we continue to expect space to impact retail sales by -1%. We also had an impact from the move to the retail calendar and the adoption of IFRS 15. In aggregate, the two equated to a 0.3% negative impact on retail growth. Finally, currency was negative in the quarter as guided with sales of GBP 479 million, were unchanged year-on-year at reported exchange rates. Turning to comparable regional revenue performance on slide two. Asia Pacific grew by a mid-single digit percentage, broadly consistent with the second half last year.
Mainland China grew, we saw a marked shift in Chinese spending towards other Asian countries as Chinese tourists took advantage of favorable exchange rates. This benefited Hong Kong, Korea, and Japan, which all saw good growth across both domestic and tourist clients. EMEIA declined by a low single-digit percentage, as mentioned, negative tourist spending weighed on the performance of both the U.K. and continental Europe. The Middle East remained challenging as concerns around the macro environment continued. The Americas delivered high single-digit percentage growth. This ongoing improved momentum that we've started to see in the final quarter of last year is encouraging. Footfall has continued its positive trend, we saw good growth from local customers. Turning to strategy on slide three. I wanted to share some progress that we have made across the business.
As we continue through our transition phase, we are building a strong platform for re-energizing our brand and the execution of our plans remains firmly on track. We've talked to you before about the evolving luxury customer base for the whole industry, and we continue to see evidence of this within our own business. Customers are demanding creativity and innovation across product and communication and expecting the highest level of customer service in stores and online. Customers are demanding creativity and innovation across product and communication and expecting the highest level of customer service in stores and online. In response to this, in the quarter, we've excited clients with pop-up stores that celebrate the newest handbags around the globe across Beijing, Dubai, New York, and Seoul.
We've seen early success for our full-look merchandising initiative in our new collections, which have shown higher link selling and outfitting rates than the total business. In our retail stores, we have rolled out a new digital customer service tool, R World, to help our sales associates enhance their engagement and connection with customers frequently and successfully. In the quarter, we saw the revenue driven by appointments up double digits year-over-year. Turning to communication. We are encouraged by the early results. Under the creative direction of Riccardo Tisci, our recent collaboration with Beyoncé achieved the highest ever Instagram story views with 1.1 million. We introduced new creative content across burberry.com and social media channels to support the Heritage Trench refresh program and new leather goods launches, while also ensuring we produce more frequent content with clear, concise messaging.
This has contributed to an improvement in our Instagram engagement rate, up 25% from Q4 to Q1. Our digital business continued to excel in all regions, with growth led by Asia-Pac. Mobile has now become the largest digital channel in our business. We continue to enhance our omni-channel proposition with a successful go live in the U.S. and mainland China. The acquisition of a business from one of our long-standing leather partners in Italy is proceeding as planned. In addition to skills and expertise, this acquisition will give us greater control over quality, cost, delivery, and sustainability in this key strategic category. Under inspired people, a key initiative this quarter was our offsite, bringing together our top 250 global leaders. The event focused on immersing teams in our strategic vision and the critical role they will play in delivery.
We believe our managers are now better equipped to motivate and engage their teams to execute successfully. Turning to outlook on the next slide. As we look ahead to the remainder of the year, you will see us move further towards a fluid, flexible and creatively led delivery cycle as we strive to continuously engage consumers with fresh and sometimes unexpected drops of product, content, and communication. Riccardo is working on a limited edition capsule as part of his debut collection for Burberry, and this will be available in a series of instant drops from September. We've announced a collaboration with the legendary British designer Vivienne Westwood, which will celebrate the iconic design elements from both houses and will launch in a select number of Burberry stores in December. Riccardo's runway collection in September will be in store from February 2019.
From May 2019, the first delivery of fall 2019, designed by Riccardo, will start to deliver to stores. In terms of the full year 2019 financial guidance, there is no change to our guidance for the broadly stable sale. We still expect a -1% impact from space as we evolve the store network. For wholesale, the low single-digit % full-year decline is anticipated to be more pronounced in the second half. We remain on track to deliver GBP 100 million of cumulative cost savings in full year 2019. As usual, we have updated our currency guidance, the situation has improved due to the weakening of sterling. In terms of revenue, the top-line impact is now expected to be marginally positive for the full year.
In terms of operating profit, we now expect foreign exchange to be a GBP 25 million headwind in full year 2019, compared with our previous indications of GBP 40 million at 30th of April spot rates and GBP 30 million to GBP 35 million at early May rates. In terms of phasing, the currency effect on profit is weighted towards the first half of the year, with a GBP 20 million headwind expected in half one and GBP 5 million headwind in half two. This means, on a reported basis, we expect half one operating profit and margin to be lower than the prior year. Finally, we have now commenced a share buyback of GBP 150 million in line with our capital allocation framework. In conclusion, whilst we're still early in our execution, we are pleased with the progress we have made in the quarter.
We look forward to sharing Riccardo's debut collection in September, a key milestone for our brand transformation. While we know it will take time to achieve our long-term ambitions, we are delivering on all our strategic milestones and feel confident about the future. With that, Charlotte and I are happy to take any questions.
Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your telephone keypad. Please ensure that your phone is unmuted locally. To confirm, that's star followed by one to ask a question. First question comes from the line of Edouard Aubin with Morgan Stanley. Please go ahead. Mr. Aubin, your line is open. Please go ahead.
Yeah, sorry. Good morning. One quick question on retail and one on wholesale. You're basically implicitly guiding for retail, for lack of roughly 2% to 3% for the year. If we look at the sequencing, in Q2, you're facing your toughest comp of the year on a two- and three-year cumulative basis. Should we expect a more or less flattish like-for-like in Q2? If you can just give us a quick indication of the exit rate of Q1 and the beginning of Q2. On the wholesale, you reiterated, Julie, your guidance for a low single-digit decline. Can you just provide us a quick update on the work in cleaning up the distribution channel in the wholesale and particularly in the U.S., please?
Yeah, sure. Clearly, in terms of retail, we've provided all the elements of guidance that we can give. We don't, obviously, give guidance by quarter. What we, as you pointed out, the Q2 in the prior year was our strongest comp because we delivered 4% in the prior year Q1 and 5% in Q2. We are up against the strongest comp, but we wouldn't obviously give quarterly guidance on retail numbers. In terms of wholesale, we are progressing very well with the negotiations with wholesalers, both in the U.S. and in EMEA. We've guided a low single-digit decline for the full year. However, it's definitely going to be more pronounced in the second part of the year just because of the phasing of the contracts and the buy through the May and November markets. The discussions with them are going extremely well.
We've had very good engagement with the wholesalers. As you know, our ambition is to ensure the brand is appropriately positioned in those department stores. This will take some time to resolve completely, but the early signs are very positive. We've actually had improvement in the luxury accounts, both in the U.S. and in EMEA, which has been very positive.
Okay, perfect. Thank you.
Thank you.
Next question comes from the line of Helen Brand with UBS. Please go ahead.
Hi. Good morning, everyone. A few questions from me. Firstly, can you just give a little bit more detail on the new strategy around more frequent product drops? How often should we expect these, and do you plan to step up the number of collaborations through next year? Secondly, on the quarter specifically, can you give us the breakdown on ASP versus volume? Finally, as a follow-up from this, could you just confirm any pricing actions you've taken since the start of the calendar year by region? Do you plan to follow the 5% price cut in China taken by some of your peers? Thanks.
Okay, sure. If I take the first two, and Charlotte can take the pricing one in terms of-
Yep
changes or pricing actions. Yeah. As we reported yesterday, Riccardo is now working on a limited edition capsule as part of his debut collection for Burberry, and this will be available in a series of instant drops, in September. As you've also seen, we also see collaborations as a way of working going forward. We just recently announced what we see as a very exciting collaboration with an iconic British designer, Vivienne Westwood, and this will be in our stores from December. It is a new way, really, of conversing with customers across product communication and the experience.
This will result now in Burberry delivering frequent drops of fresh product, really to engage our consumers throughout the year and, to be honest, to surprise them also throughout the year. What we will be doing is we will be announcing further details in advance of the Burberry show, which is obviously going to take place on the 17th of September. It is just a new way of engaging with consumers. Taking your second question, Helen, about the quarter, ASP and volume. The quarter benefited from a combination of both. We have had an improvement in volume, and again, we have had an improvement in traffic. Also we have had a marginal benefit coming through AUR, which again, is part of the strategy. The region which has probably shown this to the greatest degree is Americas, where we have seen a considerable uptick in performance in Americas.
That has seen the benefit of traffic. It has also seen the benefit of conversion, and an improvement in AUR. We are very pleased with the early signs that we are seeing at this stage. Again, we would emphasize that these things take time. Implementing the strategy will take some time. To Charlotte on prices.
Yeah. On pricing, we made a few small tweaks to pricing globally, but nothing significant in terms of changing big like-for-like price in particular. We will clearly watch and see how things develop. As a company with a big business in China, it is pleasing to see a policy that should benefit China's consumers, but nothing to update you on today, Helen.
Great. Thanks very much.
The next question comes from the line of Louise Singlehurst with Goldman Sachs. Please go ahead.
Hi. Good morning, Julie. Good morning, Charlotte. Just in terms of Asia Pac, we're obviously all trying to follow all the news and see what's going on in that market. I know, to Edouard's point, you're not going to probably give us the exit rate, but can you just tell us anything that you spotted, particularly mainland China versus Hong Kong? I know you touched on it briefly in the commentary. Secondly, just following up on the collaborations. When we see these launches, are we going to expect a mix of more local as well as global, or do you plan to launch small quantities but on a global basis and talk about the distribution there? Then just finally, if you could just confirm that you're happy with consensus EBIT. I see on your website very helpfully at GBP 441 million for this year. Thank you.
Okay, Louise. Thank you very much for the question. In relation to the trend in the quarter, first of all, if we look at the Chinese, there was absolutely no change really in the Chinese as a nationality trend through the quarter. Some people have been flagging, did it change in the final month? No. In the case of Burberry, there was no change in the trend. Probably important to say when we look at mainland China, that we did shorten our markdown period by approximately a week, but it still had no impact on the overall trend. I know the market is somewhat concerned about this as a general industry point, but we're picking up absolutely nothing in our numbers.
We're aware of the macro environment. We obviously look at that data, our own numbers are not suggesting any change as we work our way through those months. In terms of the other countries within Asia, we definitely had an impact. When we look at Chinese and we look at mainland China, we definitely had an impact through tourists or the Chinese moving out of mainland China into other countries in Asia. We saw an uptick in Hong Kong, we saw an uptick in Korea, and we saw an uptick in Japan. All of those three countries were benefited. Having said that, we also had domestic growth in all of those three countries as well as the traveling Chinese. Turning to your second question about the collaborations. It is part of our model going forward. Riccardo is really excited about the collaboration with Vivienne Westwood.
It will be part of our model going forward to engage in collaborations, to engage the consumer. In terms of the distribution of those collaborations, it's going to vary considerably, I think. In the case of Vivienne, it will be select stores. The idea of doing this is to be innovative, is to be creative. Therefore, it's not a mathematical model at all. It's all about creativity. We will disclose these as and when we're ready. We want to surprise people as well.
Just in terms of the consensus, yeah, you're right. The adjusted EBIT was GBP 441 this morning. From what we can see, a lot of people had already updated, sort of almost run their own FX model. The FX in that was at about the 25 that we've guided to today.
That's very clear. Thank you.
Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star followed by one. Next question comes from line of Thomas Chauvet with Citi. Please go ahead.
Good morning, Julie and Charlotte. Three questions, please. The first one on your upcoming spring-summer 2019 collection, then the subsequent autumn-winter. How quickly do you think you'll be able to roll out the collection in all your points of sales and remove, at the same time, the old collection? Two quick ones on the limited edition products and the collaboration. Firstly, are you, as a result of this strategy, expecting a gradual increase in ASP in seasonal product, as opposed perhaps to carry-over items where you seem to suggest there'll be limited pricing from here? Once the collections are in store, are you expecting a gradual change in the proportion of carry-over versus seasonal items? Can you perhaps remind us on Christopher Bailey's last collection, what was the share of seasonal versus evergreen products? Thank you.
Okay. Sure. Certainly. In terms of the transition to spring-summer of 2019, the main collection relating to that, we'd expect it to be starting to go into the store around the May period. I think it's also just important to say that the model that we're adopting is changing to have greater frequency and more innovation rather than very large-scale deliveries at certain dates. There is a change in the way that we're operating this. In terms of what we've commented on before, though, is we would expect Riccardo's collections and work to be really making a big impact on our stores from May next year. That was going to be the big sort of transition period. During this time, even now, actually, as we talked about in the year-end results, we're obviously transitioning from one designer to another.
We look in fact weekly, monthly, at the selling rate of all of those items so that we can judge any necessary provisions. Of course, you saw us take those provisions at the end of last year. Nothing to update you on that. It's something that we will work through. It's included in our guidance, and obviously it's management managing the business. In terms of the limited capsules and the collaborations and the overall impact on ASP. As part of our strategy, as you know, we've looked at every single product category that we operate in. We've looked at how we compare with peers. The important thing for us is to deliver perceptible value to our consumers. In some cases, we will see improvements in ASP. We've mentioned a few of those in terms of the leather range, because we're elevating the leather goods range.
Also we talked about when we did the strategy, the polo shirts, and that's taking effect. There will be some element of ASP improvement, and we're seeing signs of that already coming through in the quarter, but it obviously will become more pronounced as we go through the different seasons. I think just in terms of the final question was around the season in-store versus others. We're obviously not going to comment really any more on the sort of fashion versus replan element because. What we would say, though, is the fashion component of our business is performing a lot more strongly than the old replan model. Going forward, we're not really thinking about it in this way anymore. It's all about moving towards fashion, innovation, creatively led business.
Thank you very much.
Thank you.
Next question comes from line of Rogerio Fujimori with RBC Capital Markets. Please go ahead.
Oh, hi. Hi, Julie. Hi, Charlotte.
Hi.
I think I have some questions on handbags. I think you've flagged that the Belt Bag had a promising start. I was just wondering if you could talk about how the overall category perform, also including how some of the most important order lines are performing. How bags are performing versus the rest of accessories. Finally, I think I articulated that AUR in bags is expected to increase over time with greater penetration in the EUR 1,000-EUR 2,000 segments. What was the progress on the AUR front in bags in the quarter? Thank you.
Okay, certainly. If I take the bags generally in terms of how we're doing with specific ranges, Charlotte can probably pick up on the AUR point. In terms of bags, we're very encouraged by the new bags that we've launched. In the period, the new ones that are coming in, Belt Bag, obviously we launched in the previous quarter, and the D-Ring has been recently launched. Both of these are showing strong momentum. The Belt Bag is now the number 4 bag in the quarter, we've seen very strong performance in terms of that. In the full price category, it's even higher than that. We've also had a very good launch in the D-Ring, although obviously it's early days.
The most important thing with regard to the bag range, it's all about building out the bag architecture, which will take a number of seasons for us to be able to do that. An encouraging start, these things do take some degree of time. You asked about the rest of accessories. Accessories performed reasonably well this quarter. The reason you don't see the results coming through in the bag range overall so far is the growth rate is starting to slow. Basically, good news with the new bags, some of the older styles starting to slow in the bag range, it's all about building out the bag architecture.
Just in terms of the pricing, those three bags that we have seen launched, the Belt Bag, the Bucket Bag, and the D-Ring, they are all north of GBP 1,200 in terms of pricing. The medium Belt Bag is at GBP 1,590, the Bucket Bag is at GBP 1,350, and the D-Ring is at GBP 1,290. While I have not got an absolute sort of AUR of bags, you can see that those newer bags are at that higher price point.
Thank you. Just a quick follow-up on trench coats. Have trench coats outperformed the other categories in the quarter?
Yes. We have seen a good response. In particular, we have seen a very good response with Tropical Gabardine, which has been very popular in Asia. Obviously linked to that, we have also had success in the Car Coat. The Heritage Trench relaunch that we embarked on at the beginning of this quarter, we have only launched it so far in 80 stores, but we have had good initial signs from that. We are actually developing now new colorways in response to the response we have had in certain parts of the range. In particular, women's, and in particular, the honey color has been extremely popular. We will have a lot more to say about that, I think, when we come to the half year results, when we will have rolled it out further.
Thank you.
Okay. Thank you.
Next question comes from the line of Melanie Flouquet with JP Morgan. Please go ahead.
Yes, good morning. Thank you for taking my questions. My first question is regarding the Chinese consumer base in total. Can you confirm what sort of growth rate it had compared to the mid-single digit of the previous quarters? Can you comment on what would have driven any changes? My second question is on the average selling price that you mentioned is up. If leather goods as a category in total isn't outperforming nor the replenishment Heritage Trench, how is the average selling price going up? What is driving the average selling price up, please? Sorry, my third quick question is on the Heritage Trench. When would you expect this to have a positive impact on your like-for-like? What is the sort of ramp up that we should expect on this? My very last question is on the polo shirts.
There were indications that you might want to somewhat reduce your exposure to polo shirts moving forward, and I suspect that's part of the wholesale pressure. Can you help us understand how far you are, and what sort of timing we should expect from this, and the weight of that category? Thank you.
Okay. I think I'll share these with Charlotte. I'll take the Chinese consumer one, and then maybe Charlotte can take ASP and heritage, and I can come back on the polo.
Okay. Yep.
Do it that way. Just in terms of the Chinese consumer, what we've seen with the Chinese consumer globally is that in Q4, starting off in terms of the history. Q3, it was relatively flat last year. Q4, we had a mid-single digit growth. Q1, we've had a low single digit growth overall in the Chinese consumer. What we found is that they have been shopping more in Asia. In mainland China, less so. It was a low single digit positive. There's been more shopping in Asia. In particular, we've had a benefit coming through in Hong Kong, Japan, and Korea. When you compare us with competitors, we have lower penetration levels, as you know, Melanie, in both Japan and Korea at this stage. Korea, just in terms of the distribution of domestic versus retail versus wholesale business is impacting this.
Generally speaking, no change to the overall trend that we've seen in the months in the quarter. January, February, March, it was a fairly consistent trend overall. I think that addresses the Chinese consumer. If we move into the ASP increase in leather goods, et cetera.
Actually, when we look, we're seeing consumers generally trade up within categories, Melanie. That's the biggest driver of why the AUR has been going up. In the piece, rather than thinking about individual categories weighing up or down, it's actually within categories, consumers are trading up through the price points. We're still relatively early in the rollout in terms of phasing it through into that 80 or so stores we're in at the moment. I'd encourage you not to really overthink it. It is a refresh. As Julie said, one of the most popular styles is the very classic, I think it's the Kensington Honey, for women. I wouldn't overthink the modeling perspective of that. Clearly, we'll have a much better view when we're able to talk to you in November, because we should be much further through this rollout by then.
Then polo shirts.
Yeah.
We did do a relaunch of the core polo. Obviously, it's a higher level material and product. The entry price is now at the GBP 180 level versus the GBP 145 that we talked about previously. We've seen an improvement in that. In terms of the new polo shirt performance since the delivery, since we launched it in May, we've seen very good traction. The new Hartford core polo has been performing extremely well, with an improved rate of sale like-for-like options compared with the old Oxford version. That's, I think, good news. What I would draw your attention to, though, in terms of changing the product mix, is really impacting the product in wholesale is a really important part of our strategy.
Our wholesalers would tend to take certain parts of our range, and it wasn't representing our full range, the full Burberry offering, in wholesale in the same way as retail. The important thing with regard to the range is to encourage the wholesalers to take the Burberry offering so that we're representing our product equally in both the retail and wholesale networks.
Can I have just a quick follow-up? Sorry. On China, on the mainland Chinese. I understand that your geographic dynamics didn't help you very much for Korea and Japan, where you don't have a big exposure to Chinese tourists. That was already the case in the last quarter. What changed? What created the deceleration, or was it just Chinese New Year helped them hit single digits, and this is just a renormalization?
Yeah, I think it was all to do with currency, and it was all to do with the fact that in mainland China, we reduced the sale period by a week.
Okay.
This has had an impact in mainland China, probably ourselves compared with some of the competitors.
Okay. That's clear. Thank you very much.
Yeah.
Next question comes from the line of Warwick Okines with Deutsche Bank. Please go ahead.
Morning, everyone. Two quick questions, actually. Firstly, another one on Asia, I'm afraid. In your commentary, Julie, you said that Q1 Asia pac trends were broadly in line with the second half. Does that mean the growth rate was a little slower than in Q4? Secondly, on operating profits and your comments for the first half, could you give some comment on the first half gross margins? I know you don't like to comment too much about them. I'm just wondering whether because of the currency impact at the cost of goods line, maybe the gross margin impact will be bigger than the operating margin impact. Happy to help there. Thanks.
Right. Okay. Your question on the Asian sorry, just to clarify, was it Asia or was it Chinese?
Yeah, Asia pac region.
Asia pac region.
The growth in Q1 was a little slower than in Q4.
In terms of Asia as a retail role, there was actually very little difference. It was practically the same number. In both Q4 and Q1 2019, we basically had the same growth rate. Very, very similar. In terms of the gross margin, as you know, currency is a headwind, and we will have impacts on the gross margin and the operating margin in terms of currency. As I think we've mentioned, the impact on the margin in the first half is going to be more pronounced. We're obviously not giving absolute pinpoint guidance on the overall impact. It was going to be more negative in the first half, both gross and operating.
You can't say whether you think the.
Just take a look at that. Yeah. Yeah. It's not going to be materially different, but we don't want to give pinpoint-accurate numbers on it.
Sure. Okay. That's very helpful.
Okay.
Thanks very much.
Okay. Thank you.
Next question comes from the line of Charmaine Yap with Redburn. Please go ahead.
Hi, good morning. I have two questions, please. The first one will be on Farfetch. Can you please give a little bit of a comment in terms of what has surprised you, given it is outperforming your expectations? The second one, just on SKUs, did you need to do any reduction in this quarter, or do you plan to do any more, or is that part of the exercise now broadly done? Thank you.
Yes. Okay. In terms of Farfetch, it is still a small part of our business, but we are delighted with the early uptick in Farfetch. We've been really encouraging. We've now got exposure to 150 countries, whereas Burberry previously was exposed through burberry.com to about 44. The early signs versus our own plan, which obviously we wouldn't be able to disclose, very, very positive. Farfetch also collect data in terms of the partners they work for, and that's also come out very, very well for Burberry. In terms of the SKUs, we've had a major change in the SKUs since we moved from three labels to one. Just to give you a little bit of data on that, we've actually had a 35% reduction in SKUs since we've moved from the three labels, and this has obviously been over the course of a number of years.
We're continuing to put pressure on options. The idea is that we're able, by having actually fewer options and I guess less complexity, the innovation in our stores shows more clearly. That's been the major drive that we've had, to be able to show the innovation more clearly in our stores. Okay.
Okay. Thank you.
Thank you. Okay.
This concludes our question and answer session. I would like to turn the conference back over to Julie Brown for any closing remarks.
Thank you very much for joining us today. We look forward to updating you at the interim results on the 8th of November, and I wish you all a marvelous and well-deserved summer. Thank you very much.
Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.