Good morning, everyone, and thank you for joining us for Burberry's interim results presentation. In terms of our agenda today, I will start with a brief introduction before turning to a review of the past 6 months. After this, you will hear from Julie, who will cover our financial results and guidance, and we will end with an update on our strategic priorities and outlook, followed by Q and A. In the first half of fiscal 'twenty one, we navigated through a challenging period as COVID-nineteen disrupted our momentum and impacted many areas of our business. Total revenue for the half was £878,000,000 down 31%.
And adjusted operating profit was £51,000,000 a decline of 75%. As you will remember, we started the year with strong momentum, delivering 11% growth in the 1st 4 weeks of January. This was disrupted by COVID, resulting in a 45% decline in Q1 comp. However, comp sales have since recovered to minus 6% in Q2, accelerating to low single digit declines in September and returning to growth in October. Throughout the period, regional performance has been highly polarized, and we have continually adapted our approach to capture opportunities as they arise, driving double digit growth in Americas as in Asia
in Q2.
Clearly, other regions continue to be challenged, including EMEA, where second lockdowns have recently come into place in many areas and some parts of Asia, impacted by a structural decline in tourism. COVID has created an uncharted situation with multiple store closures, health and safety considerations and a complete disruption to how we could market. At the same time, it also challenged us as a business to respond and adapt quickly and fueled innovation across many areas of the company. As a result, despite the extremely challenging environment over the last 6 months, we continue to make good progress on our strategy. And I would like to call out 4 areas in particular.
First, our product continued to resonate, driving outperformance of our full price channels. 2nd, we have started to see good traction in leather goods with momentum driven by our newly established shapes. 3rd, digital sales are up high double digits with no harm cost savings as we leveraged our strength in this area during the pandemic. And 4th, we continue to see strong brand traction, attracting a high share of new and younger customers over the period. Let me tell you a bit more about the progress we have made across some of our key strategic priorities.
Starting with total, we have seen positive performance in our latest collections, driven by new and young customers. In particular, the TD Sumner Monogram capsule was highly successful in attracting younger customers in the brand, critical for both growth and influence. Our most recent collection, Winter 20, launched in October and has been performing very well, particularly in our key strategic category, Ultraware, which is delivering good growth in the 1st 4 weeks since launch. We have also started to see good progress in level goods, which grew single digit in the Q2 and outperformed total retail. The next family architecture we established, Lola, TB, Topfit and Title, which you can see on the right hand side of the slide, now account for the majority of full price sales in women's specs.
In addition, we're seeing strong initial As a result, we have seen a significant increase in the weight of full price channel sales, which is up double digits. This is a testament to the excellent customer response we have seen to our product as well as a deliberate shift away from markdown activities, which we will continue to control in the coming months. These results have been supported by the multiple brand activations we have launched throughout COVID. For instance, for our recent SUMER monogram capsule, we leveraged our digital expertise to create our 1st computer generated campaign during lockdown. The capsule features self portrayed captured at home by Kendall Jenner and was complemented by creative collaborations.
We also highlighted the playful summer print with unexpected activations, such as hot air balloons in Inner Mongolia and our monogram inscription in Dubai Desert, which you can see here. We extended this period of innovation to our September show, which we made available for all to experience digitally on Twitch. By doing so, we became the 1st luxury brand to partner with the live streaming video platform. To date, with 118,000,000 views, our September show has become our most viewed show on record. As markets rebounded, we have been quick to drive recovery by localizing plants and shifting resources.
This has resulted in high exit rates and strong performance Americas and Asia. In Americas, we delivered comparable store sales growth of 21% in Q2 and stronger performance in the U. S, driven by momentum with new younger customers and food price sales. Similarly, in Asia, we delivered comparable store sales growth of 10%. Our localized plans in China and Korea supported strong growth in these regions and mitigated the performance of other Asian markets, including Japan.
In China, luxury demand has rebounded quickly, driven by a robust domestic economy and the repatriation of spend. Here, we have delivered double digit growth every month since June with a focus on 3 areas. 1st, dedicated content. The most recent example of which was our local trench campaign. This launched in September, featuring brand ambassadors, Zhu Dongyu and Song Weilong and drove our highest interaction rate ever on WeChat.
2nd, we engaged customers through new physical activations, including the launch of our social retail store and multiple pop ups. And finally, we placed an increased focus on digital. For example, through our first Super Brand Day with Tmall, which drove the highest single day sales to date and connected us with new customers in Fears 2 and 3 cities. Applying the learnings from China, we extended the localized model to Korea. Here, our strategy was to tap into regional consumer passion points by collaborating with local test makers such as Korean singer Yeri and native editorials such as GQ Korea to support key calendar moments.
We also drove engagement with consumers offline through pop up and elevated in store installations. In Americas, we have seen an increase in overall luxury demand, supported by a strong economic environment and a shift in luxury spend from experiences to goods. In this context, we have seen double digit growth in Q2, accelerated traction with young customers. We drove this by generating brand heat and visibility through the delivery of locally relevant content, including styling key cultural influencers such as Beyonce and Billie Eilish. We also collaborated with local content creators such as American artist and musician, Elisa Douglas, for our September show to appeal to young fashion forward consumers.
Given the importance of digital in today's environment, we have also leveraged our strength in this area during the pandemic, driving strong double digit increase in digital sales. In particular, Broadcom sales have almost doubled in Q2, indicating high customer intent to engage directly with our brand. Performance has been supported by a series of digital activations. 1st, we amplified our collections and capsules through immersive worlds on dotcom, a good example of which was our interactive online surf world, which drove high engagement from young consumers. 2nd, we supported key categories through new formats such as digital pop up and phone.com.
Finally, we boosted overall digital performance through exceptional visibility activations with 3rd party platforms to connect with new consumers. In this environment, access continues to depend on bridging online and offline worlds. Burberry has been a pioneer in this space. And in China, we recently opened our 1st social retail store in Shenzhen Bay in an exclusive partnership with Tencent. Since its launch in August, the store has outperformed our expectations, creating considerable brand heat and attracted a high share of new and young customers to the brand.
Importantly, the store cement our partnership with Tencent and demonstrates our commitment to Chinese consumers more broadly. In the spirit of Shenzhen, we have also used digital to mitigate the impact of reduced traffic and tourist spend on our wider store network. In this environment, we have been amplifying our appointment strategy, launching new formats such as at home and virtual appointments that deliver a luxury shopping experience and make our clients feel safe. This strategy has already proven to be a commercial success and has driven double digit growth in sales from appointments in Q2. Our recovery has been underpinned by strong cost and cash discipline, and we have taken swift mitigating actions to contain costs and protect our financial position.
In terms of liquidity, we diversified our borrowings into longer term financing with the issuance of our first EUR 300,000,000 sustainability bond in September. The liquidity provided by the bond has been supported by cost savings and we are on track to deliver €23,000,000 of OpEx reductions this year, ahead of our original guidance of EUR 15,000,000. We are also on track to achieve the annualized EUR 55,000,000 from the rationalization program under Q1 and plan to reinvest some of these into consumer facing activities. Finally, we continue to place a strong focus on our people and responsibility agendas, making good progress on our commitments. Our retail operations in Mainland China, Hong Kong SIR, Macau SIR, Malaysia, Singapore and Thailand are now carbon neutral in addition to our EMEA retail stores in the Americas region.
We further supported the decarbonization of our supply chain, helping our Italian suppliers in their transition to renewable energy. As part of our commitment to fostering a strong culture of inclusion and belonging, we introduced a global diversity and inclusion policy. We also strengthened our community support. This included becoming the 1st luxury company to join the Stonewall Diversity Champions program for the LGBTQ plus community. We expanded our creative arts scholarship and Burberry Inspire, the Burberry Foundations in School Arts and Culture Program.
And for the festive season, we have partnered with England footballer and youth advocate Marcus Rashford and organizations, including the international youth foundations to support the young people in the U. K. And around the world. Before handing to Julie, who will cover financial results and guidance, I would like to share with you a short video highlighting some of the examples from the half that I've just mentioned. Over to you, Julie.
Thank you, Marco, and good morning, ladies and gentlemen. As Marco outlined, half 1 was impacted by store closures due to the COVID pandemic. We started the financial year with 60% of our stores closed, with the majority reopening by June. This caused a significant recovery through the Q2. Looking at the results for the half and referring to year on year changes at constant exchange rates.
Total revenue was 878,000,000 pounds down 30%. Adjusted operating profit was 51,000,000 pounds a decline of 71%, impacted by significant operational gearing but partially offset by the actions we took to manage the cost base. Adjusted diluted earnings per share fell by 85% and was impacted by an elevated tax charge on depressed half on profits. We expect a tax rate on adjusted profit of around 30% for the full year. Free cash flow in the half was minus 40 €5,000,000 And as previously announced, no interim dividend has been declared, and we will review this at the full year results in May.
The next slide shows the progression between the quarters and the retail operations by region. As previously reported, Q1 comp fell 45%, but this recovered to minus 6% in Q2. The progression has continued with September being down low single digits, driven by a full price channel mix, with October returning to positive growth. We covered Q1 at the time of the results, so I will focus on Q2, taking each region in turn. DigiPac grew by 10% with a mixed performance in the region.
Mainland China accelerated during the period ahead of the June exit rate and enhanced by strong full price channel performance. Korea also showed a marked improvement. This was partially offset by Japan and the rest of Asia Pac that were impacted by a reduction in tourist spend. EMEA fell minus 39% in Q2. Also impacted by a significant reduction in traveling consumers, although our domestic business showed positive trends.
Continental Europe fell broadly in line with the regional average, but domestic spend increased in the mid-twenty percent range in the period. The Middle East fell mid single digits, but domestics up strongly. The UK was impacted with the absence of tourists having a major impact on London, although local spend grew. The Americas saw a 21% growth, benefiting from a strong performance in the U. S.
With September seeing further acceleration. This was driven by strong growth from new younger consumers. Overall, as Marco mentioned, digital showed strength throughout, with strong double digit growth globally and Americas with triple digit growth. In terms of guidance, our Q2 retail comp of minus 6% was ahead of expectations, largely due to the outperformance in Americas. Turning now to our total half one revenue performance, where group revenue fell 30% at CER and 31% reported.
In retail, half one comparable store sales fell 25%. Base was a 4% headwind that led to total retail sales falling 29%. This reflected the closure of 6 stores related to our rationalization program together with the timing of closures for refurbishment. We expect space to turn positive in half 2 with the full year being close to neutral. Wholesale declined minus 80 8% as we reduced inventory in the system to actively limit excess stock with 3rd parties.
All regions saw double digit sales declines, particularly Asia, due to the impact of duty free. Wholesale came in at the better end of our guidance range. Finally, licensing fell 24% due to the COVID-nineteen outbreak. Turning to product and looking at the retail wholesale performance overall. With all growth rates quoted at CER.
I'll talk to the trend in Q2 as Q1 was seriously impacted due to store closures. In apparel, women's had a more difficult period, falling 16%, largely due to outwear demand being subdued whilst people are working from home. The rest of women's ready to wear came in line with a group average comp of Q2 year on year. Addresses and knitwear performing well. Men's saw positive 2% growth in Q2, driven by jackets, jersey wear and trousers.
Children's and other had a strong quarter, rising 27%. Turning to accessories. Q2 declined 5%, largely due to scarf sales, partially offset by the strength in leather goods that increased by a low single digit percentage this quarter. We're now seeing the 1st year where the new collections have been the majority of the available range. As Marco said, it is a long term objective to increase our focus on leather goods, and we are pleased with the progress date to date with the new shape gaining traction.
The pocket bag is now our best selling design, with the Kiju bag and Lola also performing well. The new shapes account for over 60% of our women's pack range. We introduced the Olympia into store last month to complement the collection. We've also seen a strong performance in shoes, especially casual and active ranges. We've been selling the new product now for 18 months, and we're starting to see a high level carry forward into the following seasons, building longevity within our product range.
Turning to the income statement. There are a number of key areas to highlight. Gross margin increased by 60 basis points in half 1 and 2 basis points at CER. This was due to a number of factors that included improved regional and channel mix due to the higher proportion of Asian and full price channel revenues, together with reduced charges for inventory provisioning. Overall, adjusted operating profit fell 71% at CER and 75% at reported levels, and I will come to bridge this shortly.
We saw a net credit from adjusting items of €37,000,000 with the paid to cash item being €26,000,000 related to rent rebates in half 1. Other items within adjusted items were restructuring charges and favorable movements on stock provisions and store impairments. The adjusted profit tax rate was 51% caused by geographical mix and prior year adjustments on the depressed half on profits. Adjusted earnings per share fell 88% with reported EPS declining 66%. Coming on to the adjusted operating profit bridge of €203,000,000 last year to the €51,000,000 achieved this year.
Half 1 saw a £263,000,000 decline due to trading, partially offset by the small gross margin improvement and operating savings of over €100,000,000 This delivered a cost base 17% below last year. The OpEx reductions came from 2 main areas. People costs fell 41,000,000 euros and we incorporate the cost reduction programs we achieved as well as variable effects from commissions. Property cost savings include store closures and lower depreciation following last year's impairments and the non repetition of the Hong Kong impairments taken last year. In addition to this, we delivered a further €26,000,000 of rent reductions in half 1, which is shown below the line as an adjusting item as mentioned.
This led to adjusted operating profit of €59,000,000 at CER. To summarize the headlines, we are on track to deliver the cost saving and store rationalization programs. The original cost saving program has now delivered €136,000,000 of cumulative benefits with €148,000,000 plans by the end of the year ahead of previous guidance of €140,000,000 The program announced in July, focused on office based activities, is also delivering to plan with savings to be reinvested in customer facing activities. As Marco mentioned, we are focused on investing in the business. With business cases in China, Korea and digital delivering strong returns already in Q2.
And this bodes well for our efforts to redirect savings towards consumer facing areas of the business. Turning to cash. We generated a free cash outflow of €45,000,000 in the half into the tight control of cash to cushion the impact from trading. Within this, total depreciation and amortization fell by €31,000,000 or €24,000,000 from the lower right of use asset charge following last year's impairment. Working capital saw, as usual, seasonal outflow of €90,000,000 and this is broadly in line with the last 2 years that averaged over €100,000,000 Within working capital, growth inventories rose by just 4% at the half.
And we now expect inventory at the full year to be lower than the level in March 2020, demonstrating strong management of inventory through the pandemic. In terms of cash, after cash outflow in April, when the majority of our stores were closed, We saw cash flow stabilize in May, and we were cash positive from August onwards. Turning now to cash and capital allocation. Capital expenditure at €46,000,000 reflects prioritization of digital and store investments focused on Asia, including 9 major projects in China. In terms of dividend, as announced, we did not pay a final dividend in respect to full year 2020 due to the uncertainty arising from the pandemic, and we will review the dividend position at the full year as guided.
Overall, our cash net of overdrafts and borrowings fell just €45,000,000 in the 1st 6 months. And I am pleased to note that by October, it was in line with end of March level. Importantly, we took a number of measures to restructure our financing facilities. We repaid the revolving credit facility in June 2020 and secured a covenant waiver together with an extension to November 2022. For short term security, we borrowed €300,000,000 under the government backed CCFF team.
And we obtained a public credit rating and issued €300,000,000 sustainability bond, which I will refer to later. As a result, we have €1,100,000,000 of cash at the end of half 1, comprising €500,000,000 of our own funds and a further €600,000,000 from borrowings, with a further option of €300,000,000 under the revolver if required. Since 2017, our financial policy has been to maintain a strong balance sheet with solid investment grade credit rating metrics. We benchmarked our target leverage range and built in a further degree of conservatism and targeted the lower part of that range. This has placed us in a strong position throughout the pandemic.
Our target remains at the net debt to adjusted EBITDA ratio of 0.5 to 1x. And as of September 2020, we have leverage of 0.9x on a rolling 12 month basis, which brings us on to the bond that we issued in September to establish medium term financing and to support our commitment to sustainability. We secured an investment grade Baa2 stable outlook project rating from Moody, a significant achievement during the pandemic and with an uncertain macroeconomic backdrop. This establishes an important foundation providing Bearberry with the option of raising finance in the public debt markets. We chose to issue a sustainability bond to demonstrate and strengthen our ESG credentials, and we're proud to be the 1st soft luxury company to do so.
We have published our sustainability framework on the website as well as the 2nd party opinion from Sustainalytics. Our commitment is to use the proceeds from the bond to invest in 3 areas: green buildings with specific environmental certifications procurement of certified BCI cotton, raw materials and finished product and sustainable packaging. We will report our progress on the use of these proceeds in the annual report at the full year. As we approach the end of the Brexit transition period, I wanted to bring you up to date on the plans we have developed to mitigate the impact. We show the main areas in this slide.
Our international supply chain includes many product journeys across the UK EU border. Post transition brings operational challenges and potentially incremental duty costs absent a zero tariff under a free trade agreement. We have already put a number of mitigating steps in place. Secured authorized economic operating status in February 2020 to facilitate efficient cross border flows, And we've implemented a new trade compliance IT system to optimize product movement. Additionally, we have prepared for the border with a tactical relocation of inventory prior to the end of the year, processes and documentation prepared for the product journeys across the border, identification of backup carriers and alternative transportation routes and establishing new process for returns from digital customers in the EU.
And finally, we seek to maintain access to skilled workers, critical to our business from outside the UK. Now turning to the financial outlook for the full year. The current lockdowns across Europe have resulted in over 10% of our stores being closed and will impact trading for the duration. I will return to this shortly. With the brand resonating and attracting new and younger consumers, we've taken the decision to defer and reduce markdowns.
And this will be a revenue headwind in half 2, mainly falling in Q3, but will be in the long term interest of the brand. We expect contribution from space to be broadly flat for the full year as guided. We expect the tax rate on adjusted profit to be around 30% this year. Turning to currency. We now expect benefit to full year operating profit of €5,000,000 due to the 30th October spot due to the weakening of sterling.
What I would like to highlight is the impact store closures made on the business this year. This chart shows the monthly progression of store closures and comparable sales growth. There is a close correlation. And while we are confident of a good recovery and the underlying performance in open markets, we expect the recently announced a clear lockdown to impact trading in Q3. Given our progress to date, we remain confident in our recovery from Q4.
To conclude, we have strengthened our liquidity to ensure we are well financed, providing further disruption caused by the virus. We have focused CapEx on and rebounding economies, particularly Asia. Further efficiencies have been extracted from the initial cost reduction program that has increased to €148,000,000 cumulatively from €140,000,000 We have used this opportunity to further simplify our operations, reduce spend in office based areas and create a more agile business, reinvesting savings into consumer facing initiatives. I believe we are well positioned to drive growth into the long term as we emerge from the disruption caused by COVID-nineteen. I shall pass back to Marco, where he will take you through our longer term plans.
Thank you, Julie. Turning to outlook. The past few months have reinforced our strategy to anchor Burberry firmly in luxury as we have seen the industry polarize even further during the pandemic. Despite COVID, we have made strong strategic progress and will continue to strengthen our foundations in the next 12, 18 months with 2 considerations. First, as COVID has changed the macro and luxury industry, we will constantly adapt our business, investing in markets as they recover and focusing on local customers.
2nd, we will need to sustain the good momentum we have built in our brand and product. I believe we can successfully navigate this next intermediate sales and we'll be in a very strong position to accelerate and grow once luxury demand returns. As I outlined in May, in the COVID environment, we are focused on 6 teams that will be key to driving growth over the next 12, 18 months. In the next few pages, I will say more about each of these and the plans we have around them. The first key theme is around brand, which has become particularly important in the COVID environment, where consumers are seeking emotional connections with brands.
Here we will continue to sharpen our luxury brand message by focusing on content and storytelling that is grounded in our authentic brand story. A good example of this is the recent brand campaign we launched earlier this week. Deviating from a traditional holiday campaign, the focus is on the power not only of giving, but giving back and building a Burberry community tied to the philosophy brand and the altruism of our founder, Thomas Berger. The second key thing we set out back in May is to continue accelerating growth in China. We will do this by driving local relevance through locally originated content and campaigns, boosting product performance with high visibility, profits and collaborations and also focusing on repatriated customers, leaning on strong partnerships we have built in China.
Across regions, with travel restrictions still in place, we will continue to focus on actively recruiting local consumers. In terms of product, we will continue to grow our strategic categories, leather goods and outerwear. For leather goods, having built our women's architecture, we will continue to deliver newness and relevance through activations while we establish key shapes within the men's architecture. For outerwear, we will be desired for fabric innovation as well as capital set collaborations. Of course, COVID-nineteen will continue to impact in store traffic, and we will keep scaling new omni channel consumer journeys.
Innovating around new formats to reach consumers at home, like the virtual styling event in Americas you can see here. Finally, we know digital will remain very important for luxury customers, and we're focusing on 2 elements going forward. To drive traffic, we will supercharge inspiration online by making dotcom the first release point for bespoke exclusive and localized content and by building digital communities. In terms of product, we will increasingly personalize customer journeys on dotcom, curating online experiences to local preferences. These themes will be underpinned by focus on local execution as recovery time lines and domestic policies vary by market rigorous management of cash and cost as well as organizational agility and operational efficiency.
And we will continue to make progress against our social and environmental agendas as part of our commitment to having a positive impact on people and the planet. To conclude, I want to reiterate 2 messages. 1st, despite COVID, we have made very good strategic progress, driving outperformance in our full price channels, good traction in leather goods, strong digital performance and a high share of new and younger customers. This has driven rapid recovery and gives us a strong platform on which to be. 2nd, while we expect the trading environment to remain highly uncertain for some time, especially in key regions such as EMEA and some parts of South Asia Pacific, we have clear plans in place over the next 12, 18 months to drive performance and deliver inspiring products, exciting our customers.
In light of these foundations and the continued progress we have made on our strategic priorities, I believe we will be in an excellent position to accelerate our growth once we exit the COVID environment and luxury demand returns in full. Before turning to Q and A, for those of you who have not seen it yet, I wanted to share with you our new brand vision, which celebrates the pioneering and fearless spirit of young people overcoming adversity today.
Well, not too much of for you. All right, sure. Thank you.
Are you sure you won't take it away? It's about to pour it down. Fine, fine.
Good morning. I have three questions, please. The first one on local demand. You've managed to mitigate the traveling consumer disruption, thanks to those efforts on local clientele. What more do you need to do to build that steady local base in key markets?
Is it also adapting the store footprint, the merchandising mix, maybe different Asia from developed markets and local pricing strategy? Secondly, on your decision to reduce markdowns to elevate the brand, you have a much greater ready to wear business than some of your direct peers that have done similar strategy like Gucci or Prada. How does this work in practice with regards to your apparel business, so particularly with assets? And Julie, maybe on that point, how do you think this effort in H2 will support gross margin? And just finally on LCL, could you give some color on the swing from September down low single digit to positive, which markets have contributed, I guess, to China during Golden Week and probably Japan on the easy comp.
Any other geographies or what categories you want to highlight in October?
Okay. I think I will start. Good morning, everyone, and good morning, Thomas. Thanks for your questions. And maybe I will start from your question around local demand.
Local demand has been the focus working on local customers since the onset of COVID-nineteen. This is where the focus of our teams has been. We've been able to leverage our digital platform, and we have been able to really reach out to them and provide them, I think, a very good service in terms of styling, in terms of showing the offer, in terms of connecting and also in terms of transacting with them. And that has been a big advantage, I think. I think in terms of more to do, of course, I think there is more to do.
There are economies, as we know, probably in EMEA that could be impacted for a while in terms of lack of tourism. And therefore, we are we have been working there on preparing the teams, on really training the teams to build our database of clients. We have good database and we have good programs for them in support to leverage on. We provided them tools, as I said, to outreach. And we have developed within those tools.
We also have developed a lot of new formats and experiences for our customers to use. If in terms of store footprint, I don't think I think it's too early to look at any major change in store footprints. And in terms of merchandising, clearly, we are adopting and merchandising more and more in light of COVID knowing obviously that customers are traveling much less. So this has always been a focus of ours, but it's quite important now. It's very important now to have the right assortment and lack of assortment in those markets that are going to be very strongly like China, like Korea, like the U.
S. And so that has been also quite an agile work that we've seen as standard. In terms of markdown and the deliberate decision to reduce markdown, first of all, it comes from the fact that I think we managed fairly well the inventory. And I think we also have good plans for the next 6 months. So we feel that we're in a very good position.
But it's clearly a strategic objective of ours. Yes, we do have more elsewhere than our competitors. However, I think we have on one hand our outlet chain that we can leverage. And on the other hand, we feel now that we are building up our carry forward and our evergreen replenishment items. And therefore, we have more of a product range that is cumulative and therefore not subject to seasonality or to a shorter shelf life.
Maybe, Julie, you want to say a word about margin in terms of the count?
Yes, sure. So just in terms of the markdown, first of all, and then the second half gross margin, which is the 3rd part of your question, Thomas. In terms of the markdown impact, what we're doing is we're shortening the markdown period. We're having a shallower markdown in terms of volume, and we're also doing it later, which will particularly impact the U. S.
Market. So we would normally go into a markdown in the U. S. Ahead of Thanksgiving. But this year, we've decided to delay considerably into towards the end of December.
So we would expect an impact on our comparable store sales growth in the Q3, which across the U. S. And Asia and some countries also in EMEA that could be impacted, we'd expect around a high single digit percentage impact negatively on our Q3 comp. Just coming back to the question about the gross margin in the second half, clearly, we've got a number of moving parts, including the product mix, channel and geography. So we believe regional mix was expected to be favorable due to China, largely due to China and the growth in Asia.
The full price changes that we're making in terms of full price channel will also benefit the gross margin in the second half. But then the key uncertainty really is just around the overall revenue shape and the impact of the second wave and the lockdowns as we enter the winter months. And that's the big sort of uncertainty at the moment because clearly revenues determine efficiencies and fixed cost absorption as we go into the gross margin. But overall, once we're through this period, and hopefully, the vaccine that was announced by Pfizer on Tuesday will also take good effect next year. Overall, we're positive about the gross margin and the benefits of the foundational work that we've done over a number of years now.
And I'll just pick up on your third question, which was around the trend from September into October regionally. And yes, definitely, I think Chinese New Year was an important factor for the Chinese brand. But we have seen solid improvement trends across other geographies. We have seen Korea performing well, where Latin America still doing very well in October. So I think it's and in terms of product as well, I think we have seen in October strong performance again from outerwear, from leather goods.
So I think it's been a confirmation of the trend, fundamentally.
Thank you, Marco and Julien. Congrats on such progress.
Thank you, Thomas.
The next question comes from the line of Louise Singerhurst with Goldman Sachs. Please go ahead.
Hi, good morning, everyone. Thanks for taking my questions. Firstly, Marco, I wondered if you could just it's very interesting about the markdown activity and the reductions. Can you just talk about the timing of that? Is it a stronger underlying brand momentum that's giving you the confidence to accelerate that markdown activity reduction, which is obviously positive for the longer term?
And associated with that, are you thinking differently about converting a little bit more to retail longer term from the current 80%. Obviously, a lot of progress has been done that over the last 10 years. And then my last question just for Julie. I just wondered if you could talk about a bit more on the cost saving that we've seen coming through. There's always a little bit more that comes through.
So obviously, very hard work from yourself and the team. But how much more is there to come? And where does that additional kind of €8,000,000 come from that you've announced this morning?
So good morning. Thank you for the questions. I think in timing, I think we had already started to reduce the volume and the timing of markdown over the past couple of seasons. And I think now we're taking our focus step. We certainly see that the traction of the brand is stronger at this moment.
We are seeing our product ranges performing well. And I think as we always said, I think this is decision on Marshtone that is very important for the long term equity and interest of the brand. So in this COVID environment, even though we know that it's going to be a different headwind converting more to retail, I think we are already pretty much of converting more to retail, I think we are already pretty much a retail organization. I think we are over 80% for our overseas retail in terms of the digital also, we are moving we're progressing towards more of a concession model, therefore, somehow which is a form of direct retail for us. Therefore, I think that the direction is quite obvious for us.
Retail, it's clearly the business model for the company. So I think you will just see us more and more continuing in that direction. At the same time, we will keep a chart of wholesale. We believe that there is a very important function of wholesale. I've already explained it a number of times, so I won't go again into it.
But we think it's very healthy for the brand to be out there and to be in the right location, mixed with the right brands and attracting perhaps different customers. So we will continue with that with a small portion of wholesale. Julie, maybe over to you for the cost savings.
Thanks, Marco. Thanks, Louise, for the question. Nice to speak to you. Yes, so in terms of the cost saving, as you know, we're always looking for opportunities to save in areas that are really relating to office based activities and also procurement activities so that we can buy more efficiently to support the business further and reinvest in commercial areas. So we're pleased with where we've reached.
We've upgraded the normal, large program to €148,000,000 from what was €140,000,000 And the benefits have come through, €11,000,000 has come through in the first half. We're expecting that plan to deliver €12,000,000 now in the second half. So €23,000,000 coming through this year. In terms of the programs that we announced in the light of COVID, which was very much targeted towards office based functions, that is running on track, As you've seen from the people cost savings that are coming through in the business already from the bridge I shared, we're basically going to deliver €35,000,000 this year on that €155,000,000 annualized. No change to those numbers.
But obviously, we're focused in terms of that program on reinvesting it into the commercial front line, in particular, inspiring our consumers is where that money will go. And we've already been doing that, Marco and I and the executive team in the first half of this year and directed some of that spend towards digital, towards China and towards Korea. And we've already started to see a return. So very positive outlook on generating cost savings and reinvesting them.
The next question comes from Pierre Ricotta with Societe Generale. Please go ahead.
Good morning and thank you for taking my questions. First on balance sheet, you mentioned focused CapEx this year. Given the drop we've seen in H1, can you give us an idea of the kind of decline we should expect for the full year, 1st? And secondly, on working capital, I was wondering whether we could expect an inflow for TCAP for the full year cash flow statement. Secondly, on sales, could you give some comments on type of mix trends in of the 1H trend, separating the 2 if possible?
And I was wondering whether any price action would exclude it for the near future? As you know, we've seen some before the summer across the sector. And lastly, Julie, you mentioned Brexit. Can you confirm that after offsets a Brexit situation would lead to a few tens of 1,000,000 of hit at the 1,000,000 of pounds, of course, hit at the EBIT level? Thank you.
You very much, Thierry. So if I take the balance sheet and then hand over to Marco on sales price mix, and then I can come back on breakfast. So just in terms of the CapEx, we've been very focused at the beginning of the year when we hit the COVID pandemic. We sat down as an executive team and decided where we wanted to focus in terms of priorities as CapEx. So we laid things out in terms of priority 1, 2, depending on the business situation.
So just in terms of the areas of focus have been very much on digital, and we've continued with store refurbishments and new openings, primarily in Asia. In terms of the first half and the second half, we've decided not to provide specific guidance this time just because of the uncertainty of going into the winter months. But we'd expect CapEx to step up in the second half. It is expected to be lower than last year, but it will be definitely picking up in the second half because we have plans for store refurbishments going through. In terms of working capital, I think we've had really good control, I think, over the working capital.
In particular, I just refer to the inventory because the debtors and creditors are well controlled in terms of days sales outstanding and days payables. So in terms of the inventory, which is usually the big swing factor, going into this half year, we've managed the inventory well. We have if you look at the growth inventory level, we've just delivered an increase of 4% in the growth inventories by the first half, which I think is a good performance in view of the pandemic. And we're expecting the inventory by the end of the year to be lower than it was at the end of March last year. So I think a good overall performance, largely on the basis of managing the inflows coming into the inventory, but also, the strong sell through results that we're getting.
So I think that was it for working capital. I'll just touch on Brexit and then maybe hand to Marco if he wants to cover the price mix equation. So in terms of Brexit, we're obviously still hoping that we get a free trade agreement with a zero tariff. And that is our strong hope with the contract with the government. If we don't get that, we would be dealing with a low tens of 1,000,000 impact on a no deal or on a normal trade tariff, which for our business is around about the 12% mark, 10% to 12% mark.
So we're dealing with low tens of millions. But clearly, that's an annualized number. So there's much less impact on our final quarter. And we would look to take mitigating actions as far as we possibly could against that in the business. So maybe I'll hand over to Marco just if he wants to cover the price.
I can take this if we we haven't got Marco just there.
Sorry, I was on mute. In terms of the sales mix, I think we have seen a reconfirm of volume and price increase and AUR increase. I think clearly the strength of leather goods has driven an AUR increase. So I think it's a qualitative elevation of our product mix. In terms of going forward and price increases, as I said, in the past, I think that there are categories like, for example, leather goods, where it's part of our strategy to offer a very good price quality ratio to the customers, give them a very strong perception of value in the product that we are launching.
And I think we want to speak to that for a little while more. At the same time, I think that we are looking at price opportunities where they are. And so we keep it under control. We keep it under watch. So for the moment, I think it has been mostly linked to the volume of the key categories that the category comprise.
The next question comes from the line of Ashley Wallace with Berenberg. Please go ahead. Good morning.
I have 3 questions for me, please. First of all, just on the potential impact of the OpGen. I guess it's a bit more of a theoretical question on the industry as I understand visibility is low. But considering calendar Q4 and your Q3 is heavily reliant on holiday and good team and Christmas is canceled, wouldn't you expect the November plan to shift into December such that the net impact is maybe not as meaningful as in the prior lockdown? And can you maybe talk a little bit about how you've adjusted your holiday campaigns to affect this new situation?
My second question is just a follow-up on Thomas' question around the gross margin. Clearly, very strong half 1 result with some tailwinds and some headwinds. However, as we're moving to the second half, I can see a number of tailwinds on that gross margin, including the fact that you've got 110 basis points in your comparison base. You should have higher consumption as revenue improves. You guided clearly to lower markdown activity.
You continue to have higher rates in Asia and retail. And then finally, you should have a lower drag from the annualization of the Mercado product investment made last year. So I completely understand there's a lot of uncertainty in moving parts in gross margin. But what are the incremental headwinds in half 2 versus half 1? Because Julien is struggling to get it by any.
And then my last question is really just on Ricardo, who's a very important part of the brand turnaround story. Can you maybe talk about the commitment Ricardo has on seeing the turnaround play out? I guess the press over the summer was speculating about a potential departure. Can you maybe give a skilled view on that speculation or at the treatment of Ricardo
over the full recovery smoother?
Thank you. Okay. Thank you, Ashley. And Giulio, maybe I'll take the first and the third, and then I'll pass over to you. So in terms of the lockdown, clearly, we all hope, obviously, that the lockdown in a number of countries in Europe will be limited to the month of November and that we will be able to reopen our physical stores as of the beginning of December.
But at the same time, we have started 2 things. First of all, we have already, I think, shifted a little bit the timing of the launch of holiday because the whole calendar had shifted a little bit this year, starting with in the reason of the first lockdown. So everything has been shifted a bit. But now we are actually leveraging very much our remote selling over we've already started in the lockdown to start the season strongly. We have launched our holiday campaign now, and I think we're very, very pleased with that campaign.
It's a broad campaign. It really taps into our brand authenticity and is very much focused on digital and digital applications and communication on digital and advertising. So I think from that point of view, I think we want to compensate as much as we can in a lockdown that is over the next few weeks. Julie has already spoken about markdowns and for the shift of markdowns from Q3 and Q4. Taking it to Ricardo, I can also say that Ricardo is very committed, very happy.
Ricardo is staying with the brand. I think in my experience, there are all there have been rumors about designers moving from one brand to the other. They usually come up. When on the press, we have other brands that are clearly looking for designers. And so I'm not surprised in rumors.
And I won't be surprised if there were more talent is concentrated and focused on the number of grade designers. And so I think it's quite normal. But at the same time, I have to be clear, Ricardo is happy and staying and committed. So I'll go back over to you.
Thank you, Marco. Yes, so in terms of the gross margin, I think, I see you summarized the positives relating to the margin very well. We are expecting a regional favorable mix, largely due to China and Asia. And the focus on full price will also benefit the gross margin. As you mentioned, compared with the prior year, there could be movement on fixed cost absorption as we navigate the 2nd wave.
But as Marco explained, we're doing everything we possibly can to offset the impact on the stores being closed in Europe through use of the digital channel and reaching out to customers. In terms of the headwind that is likely to occur it's clearly we still got some over the lines of inventory prior seasons that we're holding in the outlets. And clearly, one of our objectives would be to finish with a clean inventory position. So in some ways, it could be a negative mix effect coming through the outlets. And that's the main one I think to draw to your attention.
We obviously do get fluctuations also caused by the product mix. It was relatively neutral in the first half of the year. So it may be neutral in the second half of the year, but obviously, we'll see how that develops. Leather does operate on a slightly lower margin. So as the latter grows, it could have a depressive effect on the second half of the margin.
Okay. Perfect. And maybe if you don't mind asking me if I can pull up on that just on the product. As you mentioned, your product does have a different margin. The trench I think, and I understand it is the highest margin product you have.
And you flagged weakness in women's outerwear over the Q3 period, so a period that was still where the season is warm. This is actually a consistent message we heard from Moncler, the lack of tourists in Europe that you can get demand for outerwear products, which is technically out of season with the loan calls, which you normally get from the tourists. So as you go into winter, do you expect to see a decent potential improvement in this product category now that it's a more relevant product for local demand as it matches the season in which we currently are in?
Yes, yes, we would. We would. It's definitely I think as Moncler have reported, it's definitely been an impact with the loss of the tourists in the summer that normally come over from Asia and buy the iconic drapery trench coat. So that has been somewhat depressed during the quarter. So yes, we would generally expect it to be a positive trend in outerwear going into the winter months, as you say, because of the test 6.
So I think the only thing with the product mix is really around leather and whether that has an impact.
I guess leather was already outperforming in top line as well.
Yes, it was, absolutely. So obviously, we've got ambitions.
Yes. Thank you very much,
The next question comes from the line of Sharmenia with Kepler. Please go ahead. Hi there, good morning. Thank you. I have three questions please.
In terms of leather goods and bags, the pocket is clearly performing very well, as you've mentioned, but they are more broadly in the lower price pockets, it will be GBP900 to GBP 1200. Do you still expect to enhance the offer in the upper price points? Or would you focus more in the lower price points where the brand has done really well over the years? That's the first question. The second one in terms of digital.
Com you mentioned almost a volatile thing, which implies 3rd party concessions probably grew less. Was there any specific changes made on dotcom to drive this? Do you expect the shift or maybe on
the maybe it was a case of a
base, do you expect function to continue to go ahead in the coming quarters? And the last question is I'm sorry, coming back to markdowns. Would you expect this impact to annualize by the second half? Or would you think that depending on how sales happen next year, there could be a little bit more to do in terms of reduction of pipeline levels?
Okay. Why don't I take the first two questions, Julien. So in terms of the leather goods, I think Pocket has been performing really well. But as I said in the presentation, I think what is good is that we built now we built an expectation of the offer. So we have a number of families that are performing really well.
Profit is 1. Lola is another one. TB is another. And the title bag has also been a successful family. We're also just launching, we just launched a few weeks ago, Olympia, which is the focus of our campaign.
And Olympia, FlyCo, TV, Visa and Exede acquisition at a higher price level than Pocket. Pocket is an enterprise, but this in a price that is around £1,000 £1,000. So it's not a really low enterprise. As I said, the focus I always said that the focus for us would have been in between roughly in between 1,000 and £2,200 and this is exactly what we are focusing. So we're actually very pleased that we are seeing traction across a number of families, not just on one item.
And I would remind that those 4 families only, so before the launch of Olyvia, they're already representing over 60% of our business. So I think at this moment, I have to say that it's clearly working out well according to the way that we planned it. Moving on to digital. No, I think we've had an over performance of our own channel also because clearly this has been the go through for our customers and our go through from our sales organization as well in order to somehow to fight our battle during COVID. So that has been actually quite fantastic tool for us.
In terms of third parties, I think we also had a good business with our third parties. We continue to invest in the relationships with them. As I said, for us, there is an activity there. A bit like we did with wholesale, we want to control more and more. So in and we're investing in partnership with Farfetch, with TIMOL, with other companies as well.
So I think you should expect this to continue. And because I think obviously digital for us is an area of growth across our accounts and practical question. Julien?
Yes. Thank you, Marco. Yes, so just in terms of lockdown, we're expecting the most pronounced impact to be on the 3rd quarter, largely coming from Asia, where we're tightening the market and reducing volumes, but also Americas, where we're undertaking a significant delay. So in terms of there will be, obviously, a more neutralized impact on the whole of the second half versus the third quarter. And then going into next year, we will continue and we have been working on this, as you know, when we talked about it at Q3 last year.
We've been working on reducing the markdown. It's the direction we want to go in as a brand in the interest of the long term health of the brand. So what we plan to do next year is probably in the first half when we undertake the markdown, we will also undertake a reduction, a total reduction I suspect then in the mainline as well. But we'll obviously keep the situation under review and update you as part of our year end results.
Okay. Thank you.
Thank you.
Thank you.
I think we can take one more question, possibly 2 at the most, depending on the time. But I think if we go to the next person.
Next question comes from the line of Rogerio Fujimori with MainFirst. Please go ahead.
Hi, Marco. Hi, Giulio Fujimori from MainFirst CECL. Two questions. How should we think about the impact of the mix shift to retail and online on your EBIT margin? I think you flagged that it's obviously gross margin accretive, but I was just wondering if it's also EBIT margin accretive in a given geography, say, Americas?
And could you just let us know how much Mainland China accounted as a percentage of your global retail sales in H1 and as a percentage of the total Chinese cluster sales in the half?
Okay. So I can take the EBIT margin
and
possibly, Martin, I can decide how to take the second one. So in terms of the first one, the EBIT margin. So yes, we have a positive effect on the gross margin when the retail wholesale balance shifts towards retail. However, at the EBIT margin, we have the opposite effect because the wholesale business carries very low central overheads for running that business relative to retail. So therefore, there is EBIT margin pressure as we go through as we've gone through this first half because of the wholesale mix.
And just in terms of a second part of the question in relation to China. So in terms of just looking at the figures in terms of half 1. I mean, what we will just talk about is the China Mainland performance. So China, actually, we saw a 40% growth in Q2. This was really coming from a very high percentage of new consumers, younger consumers attracted to the brand and therefore very encouraging.
And again, similar trend to the position in America, we saw very good full price channel mix in terms of that number. It was higher than the overall comp of 40%. I think in terms of China in Q2 sales or half one Chinese sales, we can get back to you in a second.
Okay. And with respect to the first question, the shift to online from physical, is it also EBIT margin neutral, accretive, dilutive? Thank you.
Yes. So digital enjoys good margins. So we obviously, in digital, we have the commission going to the 3rd party, if it's a commission arrangement. And then the cost of running digital is relatively low compared with running retail stores. So digital does have a positive impact on the EBIT margin, yes.
Thank you.
Okay. Thank you. I think we can probably take the final question, and then we'll start at 11
The last question for today comes from Luca Fotak from Bernstein.
Yes. Good morning. Thank you very much for taking my questions. I was wondering about the nationality trends and if you could expand a bit more on how you've seen demand for the brand evolve as overseas demand has repatriated. In at first sight, Burberry seems to be doing much better than most of the peers in the U.
S. And seems to be a bit behind in Asia. So I was just wondering whether you could elaborate a bit more on your sales growth by nationality looking at the European domestic consumers, Chinese and American consumers primarily? A second question deals with your ability to reduce costs. You produced an incredible progress on SG and A.
I wonder if you're planning to execute similar cost efficiencies on cost of goods sold? And how this could potentially impact your pricing position or your margin position going forward? And how you see this development from a strategic viewpoint? Finally, a point that is probably a minor point in the broader frame of the Brexit, But how do you see the change in duty free spend that the British government has proposed? And is that a done deal?
Or are you still seeing the opportunity that they could demand these proposals one way or the other? Thank you very much.
Okay. Would you like me to take to start, Marco, and trip
in? Sure.
Yes. Okay. So just in terms of the first part, in terms of nationality, we've seen certainly positive trends in terms of American consumption, local American consumption. We've also seen positive trends with domestics in Continental Europe. British have been more subdued, and we've had some pressure in other parts of the world.
We're not going to go into the Chinese cluster as such. But what we will say is focus on Mainland China growth at Q2 up 40% and very positive trends we're seeing in full price in China. In terms of the cost efficiency point and the sort of pricing and margin position, we are as we're developing the product line and as we're developing carry forwards and replenishment lines, there is an opportunity for cost efficiencies. And our team are working very hard on delivering that. As you know, we have invested in quality, particularly in the leather range.
We've invested in quality through the work we've been doing with Vekromanifectura and also the quality of the leather that we've been purchasing. And we have not put the prices up commensurately at this stage just because we wanted to develop this category. And I think you will still I mean, Mark and I want to add a comment to this. We will still be very focused on improving the quality of the product as we go through the next year 12 months. Arpi, do you want to add a comment?
And then I'll come back on the VAT.
Yes. I think that definitely, I think that we will have efficiencies going forward. Because as you said, particularly in Lebourg, I think we have a number of factors. I think we have number 1, I think we're scaling volumes now. And that will bring obviously operational industrial efficiency.
And so we'll definitely have an opportunity there. And as I said before, I think that at some point in time, we will have also some price opportunity because I think that the value of the product that we offer today is really high at the level of pricing we have. So that's going to be another I think it's another opportunity in that area. Just one word again on nationality, on local trend. Local trends have been strong.
Basically, in the majority of the markets, as Julie said, maybe British customers have been a little bit lower side. But when we look at America, we look at China, we look at Korea, we look at Japan, which is America that has been impacted by lack of tourism. Domestic growth has been quite remarkable for us in Japan. So I think we're seeing a pickup. We're seeing traction in total customers, I would say, across geographies, and that is very encouraging.
As I said, it just speaks to the fact that the foundations that we have built over the past few seasons, they are starting to pay off. And as Julie said many times, we are attracting younger customers today. So we're attracting a lot of young fashion customers into the brand. They're not just buying fashion because they're buying a lot of classic and innovative products as well. And the majority of this is done through full price sales.
So I think altogether, I think is a good picture. Julie, you want to take the VAT?
I'll take the VAT. I'll just come back as well on the specific question about China in the first half. So Mainland China retail as a percentage of our total retail in the first half was around 35%. Just coming back on the question that was raised earlier. So in terms of VAT, clearly, at this stage, we've not reflected the proposed changes to VAT free shopping in our forecast.
And in particular, the impact it could have on store impairments because it will move potentially move the business outside the U. K. So what we're seeing from the proposed changes at the moment is, I think it will definitely have an impact on U. K. Retail and tourism.
It will be a muted impact on ourselves in terms of U. K. Retail in the Q4, but clearly will have an impact in the long term. We expect customers from overseas will change their buying behavior. For example, buying products in the EU VAT free, they'll buy them probably in other countries in Europe rather than come to the UK and take on the shop and ship rules because our customers tend to want to take the product with them, most luxury customers do.
So obviously, at this point in time, our localization strategy is really key. We're very focused on the local consumers, Marco said, and leveraging our digital technology to aid our sales associates outreach. And we are working with the government in terms of the proposal to change the VAT scheme. We don't want to lose the business in the UK.
K. If I may add a small question on the U. S. How big a boost did you get from turning some of the wholesale business into retail in that region? And is that a material effect on organic growth that you experienced there?
I can start to quantify honestly and then you reach a bit, start to quantify if that is a booster or if that is what provides the booster that we have seen in our performance. We have completed our wholesale reorganization. I think we have a very good network of stores now and the right size, in the right locations with the right partners. And our partners have seen also strong demand for the product. So they have continued to drive throughout this period.
I think these are changes and moves that will pay in the long term. But I would say, okay, it's hard to quantify if this is providing an effect. I think the other thing to say is that digital is very important in the U. S, is a significant part of our business in the U. S.
And clearly, the leveraging of digital, both from the consumer and from our organization. We've been quite tied for it, it has certainly helped, but it helped what is what we have today, which is a strong demand across the
country. So I think we'll do it shortly. Marco, over to you.
Yes. No, I just want to thank everyone. Thanks everyone for participating and for the questions. And I think we will see you in May. Thank you.
Thank you very much.
Bye, everyone.
Thank you. Bye bye, everyone.