Good morning, ladies and gentlemen, welcome to the Burberry first quarter trading update analyst investor conference call. My name is Chach, I'll be the Coordinator for today's conference. Throughout the call, your lines will be on listen only. However, at the end of the update, you will have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad, you'll be connected to an operator. I'll now hand you over to your host, Julie Brown, Chief Operating and Financial Officer, to begin today's conference. Thank you.
Thank you, good morning, welcome to Burberry's first quarter trading update conference call. Before I begin, I would like to say how delighted I am to be working with Marco Gobbetti now that he has taken up the role of CEO. Marco comes to Burberry with a wealth of luxury industry experience, I'm excited to be working alongside him and Christopher as we position Burberry for a great future. I will make some brief comments on this morning's announcement, there are some slides to accompany the call available on the IR section of the website. I'll cover 3 main areas. First, an overview of our retail sales growth by region. Second, our progress against our 5 key pillars. Finally, the outlook. With me this morning is Charlotte Cowley, our Head of Investor Relations, we'll be happy to take your questions later on.
Second, our Q1 retail revenue performance. Underlying revenue was up 3% at constant exchange rates and up 13% at reported exchange rates to GBP 478 million. Comparable sales were up 4%, driven by volume. Mainline footfall remained challenging, this was offset by improvements in conversion. Timing of store footprint changes meant that our net space was down year-over-year, which reduced revenues by one percentage point. Turning to retail comp performance by region. First, Asia was up a mid-single digit percentage, improved from Q4, driven by mainland China, which delivered mid-teens comparable sales growth as Chinese consumer confidence continued to rebound. Hong Kong, where we are pleased footfall trends have improved, with growth in the numbers of traveling Chinese customers entering the market. Our third largest market in Asia, Korea, declined again as we continue to be impacted by the macro environment.
Second, comparable store sales in EMEA grew at a high single-digit percentage. The U.K. continued to lead the growth, albeit the sales trend decelerated towards the end of the quarter as we anniversaried the significant depreciation in sterling in June 2016. Similarly, across continental Europe, spending from traveling luxury customers softened, with particular weakness in Italy. In the Middle East, it remained a challenging environment, principally due to the macro situation. Finally, by region, the Americas declined by a low single-digit percentage. The strong US dollar again negatively impacted both local and tourist spending in the U.S. Conversion continued to improve due to a very successful Burberry Private Clients program, which partially offset the decline in footfall. By product, in mainline stores, fashion again outperformed replenishment as we see in an industry increasingly driven by innovation.
By category, accessories again outperformed, led by bags, which were up by a mid-teens% in the quarter. Customers responded positively to our new DK88 bag, which was our number 4 bestselling shape in the quarter. We continue to have great success with our new Tropical Gabardine trench coat. Looking ahead, we have a strong product pipeline with smaller DK88 bags and a wider color range, as well as new innovations in soft outerwear and leather building in the second half. I would like to update you on the progress against our five key pillars. First, under product. With the industry being driven by fashion and newness, we are focused further on increasing the visibility of this in our product. We reduced our number of SKUs in the main market by over 10% on top of the 15%-20% reduction last year.
Not only has this allowed more prominence to the fashion components within our collection, but it has also improved the consistency of product globally, enabled our stores to buy deeper, improving overall stock availability. We are also pleased that the transition of beauty to a strategic partnership with Coty is progressing as planned and still expected to complete in October. Secondly, under productive space. Conversion improved in all regions, and spending from our top customers again grew, reflecting our investment in Burberry Private Clients, an expansion in Customer Value Management program, and increasing the numbers of appointments year-over-year. We introduced a new POS system in the U.K., which benefits our traveling customers through point-of-sale processing of VAT refunds. The rollout of this system will continue across EMEA through the year. Thirdly, under e-commerce, we are benefiting from our early entry into digital at 3 levels.
First, our digital presence increased our marketing reach and engagement with the Burberry brand. Second, we were one of the first luxury brands to build a global e-commerce platform. Third, by leveraging the wealth of data collected in recent years, we have significant analytical and customer intelligence to inform marketing decisions, enable us to deliver a more focused and targeted campaign. For example, the Burberry app has now launched in five countries, and the technology allows enhanced interactions with our consumers and improved brand experience. Benefiting from data, we are able to deliver a more personalized storytelling experience. With over 70% of our retail sales now influenced by digital, we will continue to invest and develop our omni-channel proposition. In this quarter, our direct-to-consumer e-commerce business continued to grow. Mobile again took share, now accounting for 40% of direct-to-consumer revenues, up from 30% last year.
We again saw benefits of enhancing our localized China site, with sales more than doubling compared to the prior year. Fourthly, under operational excellence, we are on track to deliver GBP 50 million of cumulative cost savings this year, as previously guided. The establishment of Burberry Business Services in Leeds is progressing on schedule and will begin to be operational from October. We implemented a new product lifecycle management tool at the end of June that will enable commercial and operational benefits through the more timely development of products, increased automation, and enhanced vendor and supplier collaboration. Finally, under inspired people, we launched an ambitious new five-year responsibility strategy, Creating Tomorrow's Heritage, including the establishment of the Burberry Material Futures Research Group at the Royal College of Art.
We continue to strengthen the leadership team with new hires in the quarter in strategy and in Americas, as well as adding expertise in technology and product matters, as discussed with you previously. Just to update you on our share repurchase program, we have completed the remaining GBP 50 million of our initial GBP 150 million buyback program, and we will shortly commence the GBP 300 million that we have committed to execute by the end of March 2018. Turning to guidance. There is no change to our outlook for retail space or licensing revenue compared to May. However, we now expect total underlying wholesale revenue in the first half of full year 2018 to be broadly flat, reflecting less business disruption in beauty than we previously anticipated. In the second half of the year, however, we expect wholesale to be negative.
This reflects the transition of beauty to a licensed business model. We also expect wholesale, excluding beauty, to decline at constant exchange rates due to ongoing brand control. On adjusted PBT, our guidance for full year 2018 at constant currency is maintained. However, taking the 30th of June exchange rates, we now expect currency to be a GBP 25 million headwind, a touch less negative than the GBP 30 million headwind based on exchange rates on the 28th of April. Finally, in terms of outlook, while we are pleased with our performance this quarter, it is our smallest quarter, and the comparatives get more challenging from the current quarter onwards. In particular, as we analyze the exceptional growth rates seen in the U.K. last year following Brexit and sterling devaluation.
In conclusion, in an industry increasingly driven by fashion, we are encouraged that our newest product is resonating well with customers. Our senior management team is now in place, with Marco taking the position of CEO earlier this month, and new talent recruited to complement our existing teams. We have much more work to do as we continue to focus on our brand, our product, and the execution of our plans to capitalize on the opportunities ahead. With that, Charlotte and I would now be very happy to take your questions. Thank you.
Thank you, Julie. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star two. You will be advised when to ask your question. Our first question is from Elena Mariani from Morgan Stanley. Go ahead.
Hi. Good morning, all. A few questions from me, please. Firstly, on your regional trends, how would you explain your deceleration in continental Europe? Do you feel it was related to Chinese customers purchasing less? Which differences did you see across countries? You mentioned Italy being more difficult, but how about France and other countries? Overall, on a global basis, how did Chinese spending compare with your previous quarter, please? Secondly, on the U.K., what exactly have you observed in the last couple of weeks? What is a more normalized level of LFL that we should expect from this country going forward, given the very challenging comp base? Can you remind us of the tourist versus local purchase split in this country, please?
Finally, on your wholesale guidance, if I'm correct, it is unusual for you to give guidance on H2 early on in the year. Could you give us some more color around it? Is this reflecting a different view on wholesale distribution from the new CEO, perhaps? Could you broadly quantify this decline? Are we talking about a low single-digit decline or a more meaningful one? Thank you.
Okay, thank you very much. I'll just take those questions in order. In terms of Continental Europe, the biggest factor in Continental Europe was certainly Italy. Here we anticipate, we haven't seen other people's results yet, but we do anticipate that there is some competition there coming from some of the brands where Italy is the home market. There is a sort of a factor there. The second thing is with regard to France. We did see a strong rebound in France in the fourth quarter of the previous year. Probably because it was annualizing the terrorist attacks in France in the previous year to that, we did see a rebound in France. That has become more subdued in our first quarter, effectively, which we believe is a macro trend. In terms of China, I can come back to Chinese spend.
I'll come to Chinese spend globally and then reflect on the distribution. In terms of Chinese spend globally, we saw a very similar trend in the first quarter to that which we saw in the second half of the previous year. Very similar. We're confident about Chinese in terms of consumption levels. It continues to be positive, and we've seen a continuation of the trends, and it was broadly Q1 was the same as second half last year. In terms of China and where the Chinese are spending, we've seen strength in mainland China. It's been more pronounced than it has been regarding tourists, both in the U.K. and in continental Europe. Moving on then to the question about the U.K. and the last couple of weeks in the U.K. Probably important to split the U.K. between the tourists and the locals.
In terms of the tourists, what we saw is in the last couple of weeks of the quarter, because we were up against some very, very stiff competition, comps, I should say, because of the sterling depreciation, the U.K. decelerated relating to tourist expenditure because of those growth rates being very high in the previous period. In terms of locals, the local population in the U.K. remained very strong, and in fact, increased during the course of the quarter towards the end. The local U.K. is very strong. The tourists, because of the comps, have weakened or decelerated at the end of the period. Finally, moving on to wholesale. As far as wholesale is concerned, we don't normally guide on the second half. Because essentially, we've got line of sight at the moment around about 70% of our order book. It closes in September.
Because we've had an improvement in the first half relating to beauty, we wanted people to be aware that we will continue to do brand control activities. As we highlighted really with our full year results, we'll continue to do brand control activities in the second half, particularly in the U.S., and therefore, we do expect to see a decline in wholesale in the second half. You mentioned, is this to do with Marco joining the business? The answer to that question is no. This was something that we were embarking on, as you know, over a number of years, and you definitely saw us doing it in full year 2017, and we'll continue to do that in the second half of full year 2018.
Thank you. Just a couple of follow-ups. Is it possible to quantify this decline? Are we talking about low single-digit decline, high single digits, if possible? Secondly, I didn't really understand the point about Italy and the complication from some local brands. Did you mention the fact that some local brands were stronger than other brands? Thank you.
Just to explain that. The wholesale second half decline we would expect it to offset the upgrade that we've had in the first half. We've had an improvement in the first half, and basically, we're saying we're expecting half two to broadly offset that. Wholesale for the year, we would expect to remain broadly consistent. Just coming back on Italy. What I was referring to really is some of the leading international brands where Italy is their home market. We do expect them to be stronger, although we've got no results at this stage. It's just really what we're expecting to happen. It's a very diverse market, as you know, Italy. Really nothing further to say on that.
Thank you very much. Very clear.
Thank you.
Our next question is from Thomas Chauvet from Citi. Thomas, please go ahead.
Good morning Julie, Charlotte. I've got three questions, please. The first one on the improvements in LFL. Is it fair to think that it's been just driven really by the success of seasonal fashion innovation product rather than replenishment? I understand product newness is key to drive footfall and conversion, as you said, but I'm sure you don't want your higher margin classic heritage trench coats and scarves business to disappear. How did these categories perform in the quarter? Are they still negative overall? Secondly, I had a question on the outlet business. How much of your retail sales were generated in outlets in the first quarter? More broadly, where do they stand now? How did it grow versus your full price stores? My guess it's probably outperforming strongly. I understand your view of outlets. It's a natural clearance channel.
Nevertheless, it's growing nicely, I think, at the industry level. The store count of your outlets is also increasing, so it'd be great to get some numbers and for you to, as Marco Gobbetti is joining, to give us a view on the outlet strategy. Finally, on currencies and pricing, with the dollar and Asian currencies having generally weakened versus the GBP and EUR in the last three months or so, I was wondering whether you had any opportunity to pass on price increase in the U.S. and Asia later this year. Thank you.
Okay. Thank you. Thank you very much. I'll take the like for like and the outlet and Marco. I think store counts, Charlotte can take, and then I'll come back on the currency and the price. In terms of one of the improvements in the like for like, we are very focused on retail excellence and productive space. We saw a good improvement in conversion and retention improve through the quarter. The other highlight is we've seen strength in accessories. The bags component has done very well, again, in the teens growth. We're also seeing strength in fashion and newness. We're really pleased about that. As you mentioned, we continue to have pressure on replenishment and heritage, and this is because really the market is being driven increasingly by fashion and newness.
I think the other thing we're pleased about, we've got some new hires in the business, and whilst it's very early days, we are increasing the talent in the business through a new chief merchandising officer. We've got Claudia Plant joining us from NET-A-PORTER, et cetera. It's early days, but we're starting to see an impact from some of the new talent mixing in with some of our existing talent. Overall, we're pleased with the comp, but probably important to say as well that this is a small quarter, and of the four quarters we were up against, the easiest comparator base with this set of results. I want to be completely open and honest about that. In terms of outlets, nothing particularly to say in terms of the growth versus the main line.
Clearly, our strategy is very much focused on the main line and improving productivity of space. Marco is joining the business as the new CEO, and clearly we'll look at the channel distribution across all the channels and how we use them. I think the main focus really is to ensure that the wholesale channel is complementary to the brand. The image that the wholesale channel, in particular in the United States presents, is consistent with our retail presence. That's really our biggest focus when it comes to channel utilization. Maybe Charlotte can take the stores, and then I'll come back on currency.
Just in terms of the store numbers and the space, Thomas. Actually we closed one out this quarter. As you know, the plan, as Julie said, is predicated on focusing on improving the productivity of the mainline stores. Net reduction in number of outlets across the piece. Then in terms of the space piece, it really is just phasing. There'll be no change to our expectation in terms of space being pretty much unchanged by the end of the year.
Mainline stores, I believe they're outperforming. Is it something you can comment on and elaborate really on what is driving the LFL between outlets and full price stores? It feels at industry level that the consumer is more and more reluctant to pay at full price, be it in the wholesale channel or even in retail or even online. Is the outlet outperforming meaningfully mainline stores in Q1?
Thomas, we never talk about the difference between the performance of the outlet and the mainline. You've seen our comments that we're pleased that conversion is improving in our mainline stores. Retention is improving in terms of our customers returning and repeat spending for us in mainline stores. That's clearly where we're looking to grow the business.
Okay.
Just coming back on the currency. As you mentioned, the EUR at the 30th of June was down to 115 to GBP, and the CNY was down to 880. We continue to review this, as you know, Thomas, against our global pricing architecture on an ongoing basis. We made some serious changes to prices last year. We've got the indices now. We index all the major countries against the GBP price, and we're broadly in line with where we want to be. There may be some adjustments later in the year, but it's going to be nothing of the order of magnitude that we saw in 2016-2017. Nothing really to report on that.
Okay. Thank you very much.
Thank you.
Our next question is from Helen Brand, from UBS. Helen, please go ahead.
Hi. Good morning. Just three questions from me. I guess first of all, from Marco's perspective, what's his first priorities now he's taken over the CEO role for the next few months? Are there any early views from him on the Asian business that perhaps you can share with us? Secondly, the online business clearly has been growing pretty fast in Asia, helped by the website relaunch in mainland China. Can you give us more color on the growth rates in EMEA and the Americas? Do you have any plans to perhaps start disclosing this number given how channels are shifting in the industry at the moment? Finally, in the release you talked about newness in H2, which I think will be targeted across the trench, scarves, and leather.
Can you give us any more detail around what we should expect in terms of newness in the second half and how that can drive comp? Thank you.
Okay. Thanks very much, Helen. I'll take the question about Marco, Charlotte's going to take the question about more color on the growth in Europe and Americas, I'll take the newness in fashion point. I know that I've spent quite a bit of time with Marco. I think he really feels that we've got great people with real energy and a commitment to change, we both had exactly the same impression joining Burberry New. There is something incredibly special about the Burberry culture and people's energy and commitment to change. In terms of the areas that he's identified, I think we're all very focused on the newness and fashion, we expect that to move more and more into our commercial product offering.
His focus very much in Asia has been on ensuring the stores are appropriately merchandised and laid out so that the customers can see the new products and have a true luxury experience. We'll also continue to be very focused on retail excellence, ensuring that our staff have the appropriate training and also that we offer a consistently high level of service globally, even more so now that our consumer is so well-informed. Likewise, we're also continuing on the agenda of simplification. Simplification of the ways of working and simplification of the organization overall. In summary, Marco spent a lot of time with the Asian teams. He's been a very active member of our senior leadership team, been involved in the decisions in that forum.
I know our Asian team have been very energized by working with him, his particular focus has been productivity, merchandising, the store concept and the store layout. With that, I'll hand to Charlotte on the-
Excuse me. May I just follow up just quickly? You didn't mention the U.S. there in terms of priorities. Is that something that Marco's going to be looking at going forward? Just in terms of that U.S., how is he thinking about the right distribution footprint for Burberry in the U.S.?
Yes. I didn't mention the U.S. because he hasn't been able to go to the U.S. until he was becoming the CEO. I have to say that on his first day as the CEO, Marco went to the U.S. I think that probably tells you how important he sees that market. He's already visited our New York, our department stores, and our offices in New York. We see the U.S. as being really important. We expect a continuation of some of the things we've talked about with you already in May, in terms of ensuring we see wholesalers important to us. It's a very, very good opportunity to introduce a luxury consumer to the Burberry brand because they can see multiple brands in a department store.
At the same time, with the heavy discounting that's occurring in the U.S., we're very focused on ensuring that the inventory levels that go into the U.S. wholesalers, the sell in and the sell out matches. We put a lot of emphasis on the data that we're collecting from our wholesalers to ensure that that is the case. We're also very keen to ensure that our brand is presented in a way that's consistent with the retail channel. I think Marco will continue. He'll spend more time in the U.S., I'm sure, and in Europe, which are the two regions he hasn't been able to spend time in to date. Then we will further the strategy on that basis. Charlotte, over to you for the second one.
Yeah. On digital, I think we're unlikely to strip it out as a number on its own. Very much seeing that continued focus on omni-channel. As you know, the stat we've been sharing with you is about 70% of our retail sales are influenced by digital, but clearly, it's a much lower percentage of direct revenue. Pleased that the direct consumer business is growing, and you can certainly see the shift in terms of mobile now actually being a true channel there rather than just being used for research. People are now shopping on mobile. Seeing us continue to invest in that channel. On regional performance, the Americas certainly is impacted as Julie's been articulating in terms of the standalone store business in physical retail as much as digital.
Just coming back on the final part of the question related to newness. The focus, which will come up in the autumn, is continuing to roll out the bag range with extending the DK88 range. We'll go into the market with a smaller bag. The DK88 at the moment is quite a large bag. We'll move into smaller bags and also a much wider color range, and innovation around colors. The second major area relates to soft, which is predominantly scarves. Outerwear is also going to be a focus and continuing to build the leather franchise from the second half. Yeah, we've got a lot of innovation coming your way. The wholesalers in looking at the May market, we're very excited about it, and we'll continue to roll those out in November and possibly a little bit earlier than that. A lot of excitement around the showroom.
The showroom was fantastic. Speaking personally, having seen it was fantastic.
Great. Thank you very much.
Thanks, Helen.
Our next question is from John Guy from MainFirst Bank. John, please go ahead.
Thanks very much, Julie. Good morning, Charlotte. A couple of questions, please. First of all, just with regards to the LFL, can you split out the volume and value components from the LFL? I'm sort of assuming that the bulk of the growth has come from volume over value, but just if you could provide the details, that would be great. Julie, your comments around taking effectively more control over the wholesale distribution. You highlighted the U.S., where there's probably more work to be done. Could you also comment on Europe? I appreciate that the Asia business is more highly skewed towards retail, but if there's anything within the wholesale channel there that needs to be looked at as well, appreciate any sort of further comments there to start with. Thanks.
Okay. Thank you very much. In terms of like-for-like, the growth was all coming through volume. There was a small negative on price, predominantly relating to the price reductions we took largely in Asia, that we took in full year 2017. We don't give the specific split of price and volume, but basically, we had a small negative on price and overall very good increase in volume in the like-for-like comp of 4%. As you know, space was minus one, taking the underlying growth rate down to three. In terms of wholesale distribution, the focus is very much on ensuring our brand. Obviously, our brand is our biggest asset, and ensuring the brand is presented in a uniform way across the world. No matter where it is in the world, where we see that not occurring, we would take action.
In terms of by region, the big focus predominantly is on the U.S., because this is where we've seen how the discounting and the presentation of some of those brands in the department stores, where they will put them on racks at the top of elevators with discount signs over the top of them. We don't want to be tied up in some of that activity. It's really been predominantly controlling where we are with U.S. department stores to ensure it's presented fairly and appropriately to the retail arm.
Julie, maybe just on that, if wholesale in the U.S. is, what, roughly just over 30% of the other businesses, do we expect this to halve over the course of the next three years? Can you sort of quantify the size of the rationalization within the U.S. wholesale that's likely to happen?
Yeah. The split in the U.S. at the moment is 70/30. You did ask the question as well about Asia, where it is 90/10 in favor of retail. In terms of the U.S., we haven't put a specific number on it. It really does depend on the interactions and the level of consistency in terms of where the wholesaler wants to take the business. We haven't put a specific number on it yet, but we're clearly working with our partners to ensure the brand is presented properly. Wholesale, as I mentioned on the call, wholesale is still a really important part of our business. Still a really great entry point for the luxury consumer, and we've got some great wholesale relationships. I think it's just going to depend how that all develops alongside the U.S. macro situation.
That's great. Many thanks.
Thanks, John.
Our next question is from Luca Solca from Exane BNP Paribas. Luca, please go ahead.
Thank you very much indeed. I have a specific question on the design partnership that you had with Gosha Rubchinskiy. I wonder how satisfied you are, and if you envisage more of that in the future to support newness and innovation. Thank you.
Okay. Thank you. Thank you very much, Luca. We were delighted. It is something that Christopher had been admiring his work for quite a while, and I think we were delighted to be offered the opportunity to be able to do that. It is really all about, I think, using some of the traditional heritage Burberry check, but using it in a very innovative. It's basically about reinvention of some of our core icons. We've been really pleased with how that collaboration has worked. In terms of, we really like partnering with people, with brands and companies that we admire, and we've also done that with other digital initiatives, for instance, with Apple, Snapchat and Twitter. It's a really exciting time for design and creativity to allow these partnerships to build and to foster authentic relationships. We expect this collaboration with Gosha to be a one-off.
The next real new collection will be coming in London Fashion Week with our September show.
Understood. Thank you very much indeed.
Thank you.
Our next question is from Erwan Rambourg from HSBC. Erwan, please go ahead.
Hi. Thank you very much for taking my questions. I was wondering if you could mention Korea, because obviously Korea has been through a lot, notably in terms of travel bans from China, but I believe that's been lifted. I'm just wondering if you're seeing a bit of a pickup in Korea. I have another question on Asia relative to the Hong Kong situation, because things seems to be stabilizing for the sector and for yourselves there. I'm just wondering if that has positive margin implications relative to possibly rents coming down now after three and a half years of a tough situation. Hopefully the landlords are becoming a bit more reasonable.
Thirdly, sorry to belabor the point that Thomas Chauvet was making, but obviously I'm probably under the influence being based in New York now and having been to Woodbury Common recently and to your 57th Street full price location. What do you think is the appropriate footprint in terms of outlets versus full price? You're higher than the continental European brands in terms of footprint. Obviously, you're much lower than the value for many American brands. What's the appropriate level to be at? I think Charlotte mentioned that you had closed an outlet recently. Where was that, and what's the plan for the upcoming quarters? Thank you.
Okay. I'll start off with Korea and Asia, Charlotte can talk about the footprint and the outlets. In terms of Korea, we actually had exactly the same result in Korea in the first quarter as we had in the fourth quarter of last year. Although the ban has been lifted, what we still see is basically macro sentiment in Korea is still causing depression in sales. We had the decline, really moderate decline, started in the third quarter, moved to be more serious in the fourth, and it's really continued into the first. We haven't seen an improvement as yet, but I think we should see it going in the right direction. In our business in Korea, it is 95% domestic, so it's largely sentiment that we believe is affecting this.
Right.
Moving to Hong Kong, the question you raised about Hong Kong. Hong Kong has definitely shown an improvement. We had quite serious negative results at the beginning of 2016, 2017 financial year relating to Hong Kong, and we've seen a definite improvement in the first quarter. It's now just very marginally negative, broadly flat, we would say, with Hong Kong. There are two factors within there. One is relating to price, because we did reduce Asian prices. We've got a price headwind that we're currently encountering in the Hong Kong business. But we are seeing generally changes in footfall, which has improved, and conversion has been on an improving trend generally over the course of the last 12 months. We're more optimistic about Hong Kong in terms of overall. In terms of the rents, we're not expecting any significant changes in rents.
We had some very positive negotiations during the course of 2016. No significant changes in rents now anticipated, and that's all been built into our PBT guidance. No change to margins with regard to that. With that, I'll hand to Charlotte to talk about footprint.
In terms of footprint, I think I've seen some assumptions in terms of outlet percentage of the business, I think that are higher than we see. That's the first point. Second point, the one that closed was in Italy in the quarter, and I would expect maybe one or two other closures as we go through the year.
The appropriate footprint eventually, do you think if you have 20 or 22 locations in the U.S. and continental European peers have anywhere between 6 and 13-14, do you think you should go to that level eventually?
I think I'd refer back to you know we've made the comments that the plan for the business is to improve the productivity of the mainline stores, therefore improve your full price sell-through in those mainline stores. Outlet is used as clearance. If you improve your productivity with mainline stores, you've got less product that needs to go through the outlet channel, you should see it reduced, but I don't have a firm number to put on it today.
Excellent. Thank you. Thanks a lot.
Thanks, Erwan.
We have a question from Warwick Okines from Deutsche Bank. Warwick, please go ahead.
Yeah, good morning. I am on three, actually. Firstly, why do you think the consumer is so demanding for newness in fashion right now? Why, in particular, do you think that is not translating into stronger apparel performances for you? Secondly, are the comps actually getting much tougher? You referred to that twice, Julie, but Q1 2016 was actually the last of the really strong mid-single-digit growth rates. On anything beyond just looking one year, the comps actually do not get any tougher. Thirdly, what changed in May and June that explains your guidance change in beauty in the first half? Just explain that less disruption that you are seeing. Thank you.
Okay. Sure. In terms of newness in fashion and the consumer demand, as to why it has not really impacted apparel as yet. I think what is happening generally is the majority of luxury customers now have established a wardrobe that they are comfortable with, so they tend to have a full range of clothing. What they are looking for is something that really brightens that up, provides some sort of spark and inspiration to them. They are really looking for something that feels fresh, looks new, and in particular, we see this trend with the millennials. We see it in our own results in terms of the growth rates that we see between fashion and replenishment. We have also seen it with particular examples within our range. Within our range, for instance, of trench coats, what we are finding is that the growth rates in Heritage have slowed considerably.
Where we're finding very strong growth is something like Tropical Gabardine. In particular, the Horton style is doing extremely well. The lighter weight fabric, it's got a sheen on it, if you've seen it, Warwick, and also the design. The design is very fresh. I think that gives you an indication about what people are looking for going forward. In terms of coming through into the results with apparel, what we've definitely seen is that the leather goods segment is performing better than the apparel segment generally. There could be a whole series of reasons for this. One is probably linked with discounting in the U.S., which is more so in apparel. Generally, what we found also with the luxury data from the Bain studies is that whereas the market was flat in full year 2016, apparel actually declined by -4%.
Generally, I think apparel is more adversely affected by market trends. In terms of the comps getting more difficult, question you raised about that. We were really referring to the growth rates that we posted in comps last year. We had to the quarter June 2016, -3%. The September, December, March quarters were positive in the 2% and 3% range. It was -3% +2% +3% +2%. We're really just flagging that we were up against the weakest comp of the four quarters, is really what we're flagging.
My point, Julie, to that, sorry about talking about two-year stack comps, is that those numbers were the reason why you were -3% in Q1 last year was because it was up against the only good quarter from the prior year.
Because we were +9%.
Six.
Plus six.
Six, I think. Yeah.
Yeah. Plus six. It is a feature, but I think generally when we look at the trends, for instance if we take China as an example, because we've got a large part of our business with the Chinese consumer, we have seen considerable weakening in China in the first half of full year 2017, similarly in Hong Kong, and they're becoming stronger. That's really why we're just referring to the trend as to why the comps are going to start to become more challenging. It's also fair to say that Q1 this year is obviously a small quarter. Last year, Q2 was boosted by Brexit and sterling devaluation. I'm keen to answer the final question you had as well, which was relating to beauty and the change in the guidance. As you know, we've entered this partnership with Coty.
As part of that, following the announcement that we did at the beginning of April, we've been dealing with all the major distributors of our beauty business. At the stage when we gave the guidance at the beginning of May, there was no way of really knowing fully how each of them would react. Some of them could decide to just sell down the product that they have. Some could basically take the license with Coty and continue to order the stock. We didn't know exactly where it would land. We expected some level of disruption. When you're going through a change of this order of magnitude, we expected some level of disruption, and we really haven't had it at this stage. Basically that's why we changed the guidance from beauty being slightly negative to being flat.
If I understand that correctly, that means that you've had more success with major distributors continuing the relationship than you had expected.
Yes. Yes, we have.
Brilliant. All right. Thank you very much.
Yeah. Thank you. Are there any more questions? Operator, are there any more questions?
The next question is from Mario Ortelli from Bernstein. Mario, please go ahead.
Good morning. In the press release, you are right that footfall remain challenging. Have you seen any difference from region to region and geography to geography? The second question is about customers. It seems that you're increasing your conversion very well. Your top customer are driving the growth. What about sourcing new customer? It seems that your focus on extract value from the existing clientele is working very well, probably the footfall is declining. You are not so focused in sourcing new customer. Am I right or wrong, and what are you doing to address this point? The last question is about markdowns. If we take the first quarter total sales, the incidence, the share of markdowns revenues is higher or lower than in the previous year. Thank you.
Okay. Thanks, Mario. If I take footfall and also customers, Charlotte can maybe take the markdown question. Yes. In terms of footfall across the geographies, clearly the market where we have the greatest challenge with footfall, which I think is a macro factor, is really around the U.S. Here we are still negative in the U.S. regarding footfall, but it improved in the first quarter compared with the second half of last year. We have seen some signs of improvement there. It is obviously a trend in the U.S., and I think on a macro scale, this is clearly what's led to the wholesalers engaging in discounting to get the footfall up in the department stores. Overall, we see an improvement in the U.S.
As you mentioned, conversion is the thing that is driving the sales well, and this is really all to do with our focus on productive space and retail excellence. We're finding that the conversion stats are very strong with our top customers, and you're right in the sense that customer retention is positive, but new customers is where we need to do more. You asked the question about what we're doing to address this, and what we're doing to address this is basically very much a focus on fashion and newness in the range. Very much a focus on product and product innovation. Secondly, we are very focused on SKU rationalization so that newness and fashion can show through in our stores. Thirdly, all around improving store layout to enable that fashion and newness to show through.
Finally, really to capitalize on that, it is all about attracting the traffic through the product and then converting that successfully to a sale with existing and new customers. We are doing a lot to address this point. Charlotte, would you like to take the markdown question?
On markdown, there is no real change in terms of duration or depth of markdown this season compared to others. As Julie's saying, we have been pleased to see that performance from the fashion portion of the business, which, of course, is the chunk that ends up going into the markdown period. Actually we had less inventory going into markdown this year than we had last year. It is the full-price business that has been driving these numbers rather than markdown.
Can I have an idea of what the share of your total retail revenues in first quarter is driven by markdowns?
No.
Thank you.
Our next question is from Julian Easthope from Barclays. Julian, please go ahead.
Yeah, many thanks, and good morning. I've just got a quick question about culture. As you've rightly pointed out, Burberry has a very specific culture about it. Over the last year, you've introduced a whole new strategy, then changed half of the operations board and the senior management team. Also had GBP 100 million cost savings that's resulted in quite a lot of redundancies. I just wondered, just in terms of what the mood is like now at Burberry, but also how the new board is gelling or the new operations board is gelling, and if you could give some sort of initiatives of what the new team's actually brought with all their vast experience from outside the group. Thanks.
Okay. Okay, great. I think Burberry has undoubtedly got a unique culture. When I first joined, Christopher referred to it as a sort of Burberry family, and everybody firmly believes in the brand and the success of the brand and what we're here to do. We have brought a lot of new people in. I think we've also got a strong internal team, and the idea is that we complement the strong internal team with people with particular areas of expertise. Examples of that would be Judy Collinson, who's joined from Dior. She's now the Chief Merchandising Officer. Sabrina Bonesi, who's also joined from Dior. She's the new Design Director for leather goods and shoes. We've also got Claudia Plant having joined from NET-A-PORTER, one of the co-founders of NET-A-PORTER, all around the brand experience.
That's in addition to recent hires that we've had in relation to our new U.S. president, Gian Luca. We've also had a new CIO join from Unilever. I think in terms of what's happened to the culture as a consequence of this, I feel that people are very energized. I think my own team is a great example of this. I've got sort of 50% new people and 50% longstanding Burberry employees, and they've gelled incredibly well, and there's a real feeling of energy because of new ideas, but also appreciating the heritage and what's great about Burberry. Combining the two, you get an amazing combination.
In terms of what some of the new people have brought, I think most of the people we're talking about have only been here a few months so far, but Judy was already making her mark on the May market in terms of the way the product was displayed, in terms of the engagement with wholesalers. Also recently we've held a retail conference with retail leaders across the world. Again, the energy and passion for the brand and the belief in what we do is really, really exciting.
Thank you. Thank you very much.
Okay. Thank you.
Our next question is from Rogério Fujimori from RBC. Rogério, please go ahead.
Hi, thanks. I have two quick questions. Was the growth for your millennial customer base higher than group average in Q1, and how this compares to second half last year? If any qualitative comment would be useful just to understand how Burberry's performing with younger consumers. My second question is on women's. Could you talk about trends relative to -2 underlying seen in the second half of last year? Was there any improvement, given the success of Tropical Gabardine? In Americas, your LFL was down low single digit, and the U.S. is the most important market. Would it be fair to assume that sell-out in U.S. wholesale is also down low single digit? Thank you.
Thank you very much. In terms of consumer groups, we don't actually split it out publicly. Clearly, we measure it internally, one of our key metrics to look at consumer groups. We don't give that information externally. In terms of women's. We still had some challenge in the women's range broadly in the first quarter. This is largely relating to outerwear. Women's Tropical Gabardine has done really well. We've sold out in many markets, and some styles in particular, like the Horton style, have done incredibly well. Overall, in women's apparel, it still continues to be somewhat of a challenge, which is very much why we're focused on the newness and fashion elements. It's also why we're excited about the new ranges that are going out in terms of soft leather and outerwear that will be launched in the autumn through to November.
I am thinking though, having seen the new range in the May market, that will start to hit the stores in November. I think there will be considerable excitement about that.
Okay.
I think you had also a question on Americas and low single digit in Americas. Yes, obviously, our biggest market is Asia. Asia, we've seen a strengthening of the Asian result over the course of last quarter to this quarter. We're now in mid-single digit range in Asia. In Americas, we saw an improvement between the fourth quarter and the first quarter in Americas, and we saw a slight improvement in footfall. We saw, again, ongoing continuous improvement in conversion in Americas. I think the thing in Americas is to, first of all, ensure the new product goes out there, and the focus is on newness and fashion and innovation. Secondly, the work we're doing on the wholesale channel is very important here in ensuring the brand is consistently positioned.
Thirdly, continuing the focus on Burberry Private Clients, where the average retail value of a Burberry Private Client is twice that of a normal Burberry sales associate. We want to continue to really ensure focus on productive space. Okay. I think those were all your questions, Rogerio.
Thank you.
Thank you.
Our next question is from Mélanie Flouquet from JP Morgan. Melanie, please go ahead.
Yes, good morning. Thank you for taking my question. I have three actually. The first one is regarding the growth by consumer base. In the last quarter, you were kind enough to give us growth by LFL by nationality. I was wondering whether you could clarify a bit what happened to each nationality or the Chinese, the American, and European that you did last time. Notably on the Chinese consumer, you mentioned that it was the same as H2, which was, I believe, mid-single digit. It had actually accelerated in Q4. It was my understanding to high single digits. Have we actually decelerated back? Would that be right? I just want to make sure I have the right numbers.
If we could get an idea of the American consumer base since the tourist is actually stronger than local, and the same for the Europeans once you strip out the tourists in Europe. The second question is on the sequential trend within the quarter. I'm sure you don't want to comment month by month, but you're calling out a deceleration in the U.K. late in the quarter. I was wondering whether you could actually let us know whether this has been compensated by an acceleration elsewhere, or whether the peak rate was actually slower overall in the sequence. My third question is on the Forex impact of GBP 25 million negative that you are guiding to for this year. How much do you expect in H1 and in H2, please? Thank you.
Okay. Thank you very much, Mélanie. Just taking those in order. In terms of the customer base, in terms of China, we saw a similar trend in Q1 to the second half, but we have seen an acceleration in Q4. Overall, our second half performance last year was a low single digit that transferred into a high single digit in Q4. Now we're seeing basically the average of those two quarters, a mid-single digit growth percentage in the Chinese globally. Probably important to say here that we've seen considerable strength in mainland China. Where they're shopping has also changed. We've had mid-teens growth in China as a country in the mainland. It's been offset by reduced tourist flows in continental Europe and in the U.K. That's the Chinese. In terms of Americans.
Americans for the full year last year were flat. We saw a slight downturn in Q4 2017, and we've seen similarly a slight downturn also in Q1 2018. Broadly flat last year, but a slight worsening trend for Americans globally in Q4. The other one to call out is the Brits. The Brits have been doing incredibly well. We've seen an acceleration of growth quarter by quarter through the British. It was slightly negative at the beginning of Q1 2017. Went into positives, went into double digits, so the teens by the end of Q4 2017, and into now higher than that, even higher than that. We've seen an ongoing acceleration in the British. Just turning to the second question, because it's kind of linked with that.
I just want to turn my attention to the UK performance and the split that you mentioned around the sequential trend. I'll split the UK between tourists and domestics. With regard to tourists, they're about 55% overall of the UK business. We did see a deceleration in tourists towards the end of the period, the growth rate started to come down. This is largely because we were annualizing Brexit, we were annualizing some very, very tough comps because of sterling being depreciated. Obviously, it was very attractive for people to shop in the UK. We saw an influx of tourists in the prior year, hence, we've got really tough comps. We have seen this deceleration, which we expect to see that also in the second quarter.
The UK domestic market, which is about 45% of our UK market overall, has shown incredible growth and continues to show incredible growth. In fact, the trend of improving just continued all the way through this first quarter, all the way to the end. We're really happy about the overall sequential trend of UK domestics. If I just turn my attention to foreign exchange. As far as foreign exchange is concerned, we've got -25 million for the full year. Splitting that out, we expect to have positive 12 million in the first half, largely as a result of sterling weakening in June 2016, we expect to have negative foreign exchange impact in the second half in the order of -37 million. That's the split of the number.
That's very helpful. Thank you. Just to confirm, globally, sequentially, did you see a deceleration also in June, or was this only UK and compensated by other markets accelerating?
No, we haven't gone into the specifics of that. One of the reasons we, just to explain, we can't really unpick it completely is because during the May, June period, we also run the sales period. Separating out completely foreign currency, Brexit, and markdown period is very difficult to do. Just to put that into context.
You're able to identify whether June decelerated overall compared Well, it did in the U.K., but did it globally?
No. We very rarely go into sort of dissecting things month by month through a quarter.
Sure.
Given the extra color on the U.K.
Okay. Thank you very much.
Thank you.
We have no further questions, I'll hand back to Julie to conclude today's conference.
Okay. Thank you very much for attending this morning. Just in summary, we're pleased with our performance in the quarter in a time of significant change for Burberry and the luxury industry in general. We have got more work to do. We're building on the foundations that we have in place. Marco and I look forward to speaking to you at the interim results, which will be on the 10th of November. Thank you very much.
This presentation has now ended.