Hi there everybody, thank you so much for joining us. We of course appreciate what a busy morning it is today, thank you for making it across London. We're going to begin this morning by giving you an overview of our first half performance, with Carol taking you through the numbers. I will then come back up and update you on the progress that we're making against our strategic plan. We'll close with a little more detail around our recent runway show and our plans for the festive season. After which, we will of course be pleased to take your questions. Turning to the first half, we made good strategic and operational progress in an external environment that remained challenging in several of our key markets.
Against this backdrop, with broader changes in consumer behavior shaping the future of our sector, our focus has remained on keeping near-term trading in balance with actions to secure the long-term health of our brand and business in order to deliver future value for our shareholders. We've begun to implement the growth and productivity agenda that we shared with you in May and continue to take further deliberate steps to elevate the brand, including in our wholesale business and our ongoing transformation in Japan. As such, we're in a period of transition as we ready ourselves for the future, this is reflected in our performance for the half, which Carol will now take you through. Over to Carol.
Thank you, Christopher. I will now talk through our financial performance for the first half. Our revenue was down 4% underlying and up 5% at reported FX. Adjusted PBT was down 24% underlying and down 4% at reported FX. Adjusted EPS was down 6% on a reported basis. Our net cash position remains strong, we have declared a 3% increase in the interim dividend to GBP 0.105. Now to run through the detail. Revenue was GBP 1.2 billion, down 4% underlying, up 5% including an FX benefit of GBP 99 million. Growth in retail was offset by declines in wholesale and licensing. Our adjusted operating profit was GBP 145 million, down 24% underlying and down 5% reported, including an FX benefit of GBP 29 million. Looking at retail wholesale, profits were down 19% underlying and up 3% at reported FX.
Revenue was down by 3% underlying, with growth in retail offset by a decline in wholesale. Retail revenues grew 2% underlying, with improved comparable sales in the second quarter, up 2% following a 3% decline in the first quarter. In Q2, Mainland China was up double digit, excluding the impact of the elevation of the store portfolio in Beijing. We saw a slight improvement in Hong Kong and the Americas, the U.K. was very strong, up over 30%, boosted by strong tourist inflows. As you know, we keep our pricing under regular review, as a result, we will now be increasing U.K. prices in the coming days. Digital again outperformed and grew in all regions. Wholesale revenue was down 14% underlying, reflecting cautious ordering from our customers, coupled with our own actions to elevate the brand positioning in both fashion and beauty.
Moving to gross margin, which was down 40 basis points to 68.3%. This included a 70 basis point positive impact from FX. Gross margin for the apparel and accessories business was unchanged on an underlying basis, with positive channel and regional mix offsetting adverse product mix as fashion outperformed replenishment. For beauty, the margin was negatively impacted by strategic actions we took in the half. Operating expenses were GBP 649 million, with a GBP 45 million adverse impact from exchange rates. On an underlying basis, operating expenses were down 1% year-over-year. This underlying improvement reflects ongoing tight cost control across all discretionary costs and positive results from rent renegotiations, some net benefit from timing impacts, and initial savings of GBP 6 million associated with our cost efficiency program, with around GBP 20 million still planned for the full year.
These offset underlying cost pressures and investments in our growth initiatives. Turning to licensing, revenue was down GBP 13 million year-over-year, principally due to the planned expiry of the license in Japan. With lower operating costs, profit was down GBP 11 million on a reported basis, including a GBP 1 million exchange rate benefit. For the full year, total licensing revenue is still planned to be down by about GBP 20 million at constant FX. Moving down the income statement, the adjusting items of GBP 44 million compares to an income of GBP 2 million last year. This charge consists of four items. Firstly, a charge of GBP 26 million relating to the beauty intangible. As a result of actions we took in the half to improve the category's positioning, our expectations for beauty revenues through to December 2017 are now lower than previously planned.
Therefore, in addition to the regular amortization charge of GBP 7.5 million, an additional GBP 18.6 has been recognized, bringing forward the planned amortization to December 2017. The second item is a restructuring charge of GBP 13 million associated with our cost and efficiency program, and we expect the charge for the full year to be around GBP 20 million. Thirdly, a charge of GBP 1 million for movements in the China put option calculation up to the 1st of August, when we exercised our call option and acquired the remaining 15% of our business in China. Finally, a charge of GBP 4 million recognizing movements in future payments relating to the purchase of the non-controlling interest in Burberry Middle East.
Moving to tax, the effective tax rate for the year is now estimated to be around 25%, 1% higher than originally guided due to a change in the transfer pricing methodology of an overseas tax authority. Our business remains highly cash generative with GBP 182 million inflow from operations. Depreciation was GBP 69 million. With sales below our original expectations, inventory was up 10% on an underlying basis, but we are comfortable with both the quality and the aging. This chart shows the major cash outflows in the first half. Tax was GBP 65 million, capital expenditure of GBP 43 million, with over half in retail balanced across new stores and refurbishments. Due to timing shifts, we now expect a capital expenditure of around GBP 130 million for the full year, about GBP 20 million lower than our previous guidance.
In addition, a payment of GBP 69 million for the purchase of non-controlling interests in China and Burberry Middle East for GBP 54 million and GBP 15 million respectively. The final dividend was GBP 119 million, and share buybacks were GBP 32 million. We finished the half with GBP 529 million of cash, and once you adjust for our leases, this is equivalent to about GBP 600 million of net debt, up around GBP 50 million on last September. We have declared a 3% increase in the interim dividend to GBP 0.105 a share. In terms of the share buyback, we will commence the next GBP 50 million once we have completed the initial GBP 100 million, which we started in July. The slide in your pack gives annual guidance for the balance of the year, and on an underlying basis, there is no change today in our expectations for full-year adjusted PBT.
We remain very focused on both driving the business through this all-important second half and on executing the initiatives underpinning our growth and productivity agenda. I'll now hand back to Christopher, who will talk you through the specific progress we have made on these initiatives in the half and on our plans for the future.
Thanks so much, Carol. As Carol just said, I'm now going to turn to the plans that we shared with you in May and the good early progress we're making with their implementation. As you will have seen from today's statement, we have distilled these plans into five key strategies that will be how we talk about the business going forward. Product focus, productive space, e-commerce leadership, operational excellence, and finally, inspired people. A new strategy covering our culture and the changes to our ways of working that will be a critical enabler for all of our plans in the future. Since May, we've been focused on developing the detailed plans underpinning each of these strategies, which we are now beginning to execute. As a reminder, these strategies are being informed by a number of external factors.
A more subdued luxury growth environment, the shaping force of digital technology, rapid changes in consumer behavior, and significant demographic shifts, including the increasing importance of cities and the maturing of millennials. I'll now share some of the details of these plans and importantly, some initial results from each area. Because while we are still early in this process, we are making good progress in laying the foundations for future outperformance. All of which gives us confidence we will achieve our significant growth and productivity ambitions, which we're currently on track to deliver. Turning to the five strategies, I'll begin with our plan to move towards greater product focus by simplifying our offer, reducing our assortment, and allowing innovation and newness to come through more strongly than before. As with all our areas of strategic focus, we expect the benefits of actions here to build over time.
I am pleased to say progress over the past six months has been significant. Let me give you a couple of examples. First, the strong performance of bags as we start to reorganize this category around a new pillar and shape strategy. We saw mid-single-digit growth from this category in the half, with an acceleration to double-digit growth through the second quarter. This included standout results from existing styles that we're focused on building for the future, notably the Banner bag, as well as newer introductions, including the Rucksack, the Buckle family, and most recently, the Runway Bridle . This is already our third best-selling style globally following its introduction in the September collection a couple of months ago. The exceptional performance of these styles is an early indication of the benefits we believe will flow from our new approach in both new and existing styles.
For example, we're introducing more novelty through fabrications and personalization. We're elevating price points where appropriate, reflecting enhanced design and construction, and already being reflected in higher AURs. Finally, we've introduced a more elevated approach to selling and visual merchandising in our stores. With phased plans now in place in several other key categories, we expect not only to build further on this early success in bags, but also to replicate it in other areas over time. We will update you on these in due course. The second area of progress I'd highlight in product is that we are reducing our assortment in line with our targets with a further 15%-20% reduction for our November market, building on a similar reduction we made in May.
This, together with our move to one label, fully implemented across our retail network this month, will greatly improve our customers' experience while significantly decreasing internal complexity. Reducing our assortments is also helping to give greater visibility to the fashion and newness in our collections, which is a major area of focus, with fashion, again, outperforming replenishment in the half. Within this, we saw strong results at both ends of our pricing architecture, in line with the opportunity that we highlighted to you in May, including the outperformance of runway apparel and accessories at the top end, and strong results from new products at the opening price points in our core categories. Under our product focus strategy, I'd highlight that we're getting on with simplifying how we work and ensuring true accountability for the results.
Actions here include the evolution of our merchandising process and the introduction of end-to-end category management with new roles, responsibilities, and ways of working starting to be put in place for this November market downstairs. Just before I move on from product, I'd like to say a few words on our beauty business, given the impact of our reported numbers. As you know, since buying back beauty in April 2013, we've been focused on rebuilding it around key fragrance pillars, including Brit, My Burberry, and Mr. Burberry, as well as growing our more nascent makeup business. As the success of our recent fragrance launches has shown, this strategy is working to drive market share gains and elevate perception of the brand in this category globally.
This has been supported by ongoing improvements to distribution, not least here in the U.K., and an integrated approach to fashion and beauty marketing, with the results that the business today is much better aligned with our overall brand positioning in key markets. We do still have a lot further to go to unlock its full potential. Back in July, we said that we would review this category, building on the work that we did in our fashion business. As a result, we are now accelerating the elevation of our fragrance business, including through upcoming launches within our key pillars and further elevating their distribution while significantly reducing activity on older lines, most notably in the secondary channel. This will ensure an overall focus on sustainable, profitable growth underpinned by our full commitment to the future success of this category.
Turning now to our second strategy for the future, productive space. This is all about taking the footprint that we've established in recent years and realizing significant opportunity that we have to make it much more productive, including by better targeting the local customer in key cities. The initial focus here is our multi-year Retail Excellence Program, but other areas will follow over time, most notably the further evolution of our wholesale business globally, including in the U.S., where we are working closely with our partners to elevate our presence consistent with our luxury brand positioning, single label strategy, and overall objectives for the region. Our Retail Excellence Program is a truly global cross-functional effort covering product, service, client engagement, and operations. We're already seeing results across all of these areas as we sharpen our focus on driving the business in a lower traffic environment.
Actions in the half have included increased investment in training, the expansion of our CVM Program and Burberry Private Clients team, and an emphasis on creating more compelling content for events and appointments, with particular success from those linked to the design and craftsmanship of our products. All of this has helped to drive an overall uplift in conversion across our key markets, as well as improved average transaction values in Mainline and improved customer retention with a double-digit increase in spend from returning top customers. We expect the benefits to build as other Retail Excellence initiatives go live in the second half. Within product, as I mentioned, this will include the full rollout of our one label strategy this month. We're particularly excited about this, given the very positive feedback from customers and partners to its staged introduction over recent months.
This month, we'll also see the full deployment of our new store profiling model at our November market, which as I said, we're just setting up in our showrooms downstairs. This means we'll be taking a more scientific approach to merchandising, ensuring assortments are better tailored to the specific needs and preferences of customers in different locations. In service and client engagement, we will roll out a new customer feedback tool based on net promoter scores for the first time. Following 6 months of planning and a successful pilot, this will provide invaluable insights for our retail teams and will allow us to become much more responsive in how we manage our customers' experiences. Early results suggest this will be a particular benefit as we seek to drive loyalty and stronger relationships with local customers, both key aspects of our overall Retail Excellence Program.
Finally, in operations, we're prioritizing how we support our wider omni-channel plans. Building on the 7% increase in online stock availability that we've achieved through the initial rollout of single pool of inventory. We're also laying the foundations for shipping e-commerce orders directly from our stores. These are just a couple of examples of progress from a program that is genuinely galvanizing our whole organization to think and work differently in order to put our customers first. As we said in May, we expect half of our growth through to 2019 to come from improving mainline retail productivity. Its significance and potential for our business should not be underestimated. Turning now to our third strategy, E-commerce Leadership.
Our focus here is on translating the strong digital capabilities that we've established into greater sales growth across our own and partner platforms, as well as developing a deeper relationship with our existing digital audiences, while of course, attracting new customers to the brand. As we said in May, we believe Burberry is uniquely positioned to lead the sector in this, its fastest-growing channel. From digital customer acquisition and retention, to developing omni-channel journeys, we are using skills we believed in and developed early on, and which today are core to our DNA. We have a detailed set of initiatives planned to achieve our e-commerce ambitions, and we are investing behind all of these, from people, to capabilities, to technology to ensure that we stay ahead. We made good progress in the half just gone, as digital once again outperformed and grew in all of our regions.
Traffic to our website increased year-on-year, and conversion improved across platforms. Mobile accelerated to more than 50% of our mix, reflecting sustained investment. We began to realize the benefits of our investment in the significant commercial opportunity we see in Asia with our newly configured site driving a strong sales uplift in China. I'd also highlight the strong growth we saw in sales on third-party platforms, which now represent a significant proportion of e-commerce retail revenues. A number of initiatives delivered or developed in the half will underpin further progress in our E-commerce Leadership strategy going forward. First, our new website, which launched on desktop in September, now a much better representation of our brand and a greatly improved customer experience.
Very much a living platform, we will continue to improve and evolve the site over time and look forward to its mobile launch in the coming months. Second, we are just finalizing a new customer app which will create a more personalized shopping experience, connecting our customers more effectively to our stores and associates, delivering seamless mobile commerce and a platform for interactive storytelling. This app will launch in the coming weeks. Third and finally, we are continuing to build relationships and drive innovation with partners in the digital space, such as our collaboration with Barneys and WeChat for the September show. This partnership approach will be critical to building reach, brand consistency, and keeping pace with customer expectations for the future.
Our fourth strategy, operational excellence, covers the majority of the plans for greater efficiencies that we shared with you in May, with a focus on systems, processes, and balancing cost reductions with investment. We're making progress across all of our areas here, not least in respect of cost efficiency. With our plans on track to deliver around GBP 20 million of savings this year and at least GBP 100 million annualized by 2019, supported by actions in the half, including supplier renegotiations, where we saw double-digit reductions in the cost of numerous large contracts. Improved marketing efficiency with investments in digital marketing capability, allowing us to reduce the cost of each view of our content by 20%. The cost benefits flowing from changes to our ways of working. Beyond this program, we're keeping a tight control on all other operating expenses, as you'd expect.
This includes the renegotiation of lease agreements, most notably in Hong Kong, and continued rigorous control of other areas of discretionary spend. All of which resulted in meaningful savings in the half and underlines our confidence in our planned full-year savings. In addition to these cost efficiency measures, we're taking action to simplify the most critical processes across our organization and to introduce new technology solutions to support improvement in how we operate. For example, in procurement, we're implementing a technology called Ariba, which will halve the effort involved in processing our supplier payments. In product development, we will roll out a new system to simplify how we manage the product life cycle between design, merchandising, planning, and supply chain. We're taking steps to optimize our management of stock with the single pool of inventory improvements that I mentioned earlier.
Finally, we have established a new transformation management office reporting to John Smith today and then to Julie Brown after she arrives in January, to partner with the business to ensure the delivery of all of our strategic priorities. Together, these actions position us to realize benefits that will build over time as we embed greater efficiency into the processes that form the backbone of how we do our business. Overall, I'm pleased with the progress in our operational excellence strategy. We've made a good start, but with lots more still to do. These changes to how we operate will be complemented by an evolution of our ways of working, which form a critical part of our fifth and final strategy, inspired people.
Underpinning this is our commitment to reducing complexity in our organization, making us more agile and reducing duplication, as well as driving greater consistency globally, while also improving insight locally. All of which will allow us to get design and creativity to the customer much more effectively and serve their needs so much better. As we said in May, this is partly structural, and we've already begun to make a lot of changes in the half. For example, we've started to implement category management, as I mentioned earlier, and we're simplifying our shared services globally, including introducing more common processes in areas like finance and HR. Beyond this structural evolution, we're ensuring everyone is adding maximum value to the product and the customer in their role to support our overall ambition. This, of course, includes the changes that I'm making myself to my own role here at Burberry.
I'm excited about the partnership I'm going to have with Marco Gobbetti when he joins us as our CEO next year. It's true right through the organization, where actions range from streamlining how we make decisions and being clearer who is accountable for what, to bringing in additional skills to complement our brilliant existing teams. Because our talent will, as ever, be the key to our success. Meanwhile, alongside these changes to how we work, we're redoubling our efforts to nurture and build Burberry's unique culture for the future with an enhanced emphasis on our values and responsibility agenda. We'll be talking to you more about this in due course. In summary, we're making good progress on the strategic plans we shared with you in May, with some early results already feeding through to performance and more to follow.
Consistent with our commitment to outperform sector growth, accelerating over time. With that, before closing with some insight into our September show and upcoming festive plans, I'd like to share a short video with a couple of highlights from the first half of this year.
Christopher's idea of having a complete show, both men and women, that is available to buy, I think right after the show, I thought was totally brilliant.
Just before we close this morning's presentations and move to questions, I'd like to reflect briefly on two incredibly important moments. Our show in September, some highlights of which you just saw in the video, and the festive season that we have ahead of us. This is partly because how we've approached these brings to life so much of the strategic agenda that I've just been talking about. It's also because they embody the spirit of our brand, and that remains our most precious asset and most important priority. It felt like an appropriate note to end on today. September's show was a milestone moment for Burberry. As a brand, we stand for a pioneering spirit, born from invention, exploration, and adventure. 160 years later, our brand and our culture still reflect the curious mind and innovative outlook of our founder, Thomas Burberry.
I believe it's for that reason that we're at our best when testing boundaries, pushing established practices, and challenging norms, while always remaining true to where we come from. For me, that's what made our September show so significant. It demonstrated our agility, making the see-now-buy-now concept a reality in just eight months from announcement to the show. It validated our commitment to bold and flawless execution, making every item in the collection available immediately afterwards online and with representation in every one of our stores globally. It showed our passion for product and our commitment to creativity and to our roots, from the collection itself, to the week-long craftsmanship installations at the venue, and of course, to the digital collaborations that connected global audiences with the excitement of our show.
Above all, it reinforced our belief that the needs of the customer must always be our priority above all else. Ultimately, I believe this change was the right thing to do as customer behaviors evolve. It's a significant moment for our brand, positioning us at the forefront of an industry-changing paradigm. We're proud of that achievement and excited about what it means for the future, particularly because the September show exceeded our expectations across all measures. We've seen a great response to the collection from the press, from our partners, and most importantly, from our customers, with particularly strong sales in areas of strategic focus, including outerwear, with military cavalry jackets becoming a seasonal trend, and bags with a Runway Bridle , as I've already mentioned, already our third best-selling style globally.
We've also seen a strong reaction to the more commercial pieces inspired by the runway collection and made available shortly after. All part of our commitment to greater newness and innovation across categories and price points. We also saw record reach across PR and social media and over 15 million views of our show on our owned and partner platforms. As always, this was driven in part by new and innovative ways to engage consumers with the experience, including through partnerships with Facebook Live and Messenger, Snapchat, WeChat, YouTube. Our spend was more efficient than ever, consistent with our broader commitments here. Finally, more than 20,000 people visited our venue, Maker's House, in just one week. This showcased the collection alongside some of the work of some of the U.K.'s finest craft people through a series of installations and events.
Inspired by this success, we're currently looking at how we can extend elements of this experience into our own retail on an ongoing basis. All of which is continuing to build our brand momentum, as shown by our strong unaided awareness versus peers, with Burberry in the top five luxury brands across all of our key markets. We now intend to leverage this momentum as we enter the all-important festive season. As many of you will already have seen, I hope, we launched our festive campaign last week, inspired by the life of Thomas Burberry. Ending a year that's been all about positioning ourselves for the future, it felt natural to us to do something linked strongly to our past.
As I said, our heritage and the spirit of our remarkable founder remain our inspiration today. We wanted to celebrate that as we embark on this, our next chapter. Alongside this celebration of our past, our festive plans highlight our renewed commitment to product and to the customer experience, all linking back to our central theme. Let me give you a couple of examples. In product, we have made gifts a more significant proportion of our overall assortment and introduced our widest selection of monogrammable items to date. This commitment to personalization extends beyond product themselves into all of our communication with customers. For example, our top customers globally will receive a customized book of gifts that features their own monogram on the products throughout the book. We're launching further real-time personalization innovations across email, banner advertising, and digital out-of-home sites globally.
We're also planning an ambitious and immersive program of events, all linked to hero products and their craftsmanship stories, and closely aligned with our overall theme. We're bringing the story to life with partners too, including following up on the success of our 2014 Printemps partnership in Paris with a festive takeover of Harrods here in London, which launched just last week. This collaboration, over a year in the making, includes exclusive products, a dedicated pop-up store, and the iconic Christmas windows all along the whole of Knightsbridge, all of which are touch responsive, enabling visitors to interact directly with the sound, the lighting, and the mood of each scene in each window. Across all of this activity, we have our richest and most creative content ever, ensuring the customer sees one coherent Burberry message wherever they are.
Just a few reasons why we're feeling well prepared for the coming weeks. With that, I'd like to end by sharing the campaign film, that I hope you've all seen, the Tale of Thomas Burberry. This is the most ambitious piece of filmmaking we've done as a brand, commensurate with its importance to us as an idea. We're proud to have worked with some incredible creative talent to bring that idea to life. Oscar-winning director, Asif Kapadia, Oscar-nominated screenwriter, Matt Charman, and an amazing cast featuring Domhnall Gleeson, Dominic West, Sienna Miller, and Lily James. The result is a film inspired by the pioneering discoveries of our founder, and which reimagines some of the key events that have shaped our history and our values, which are as relevant to us today as they ever were, and which sit right at the heart of the enduring magic of our brand.
I hope you enjoy it. We will look forward to taking your questions afterwards the film.
Your father can imagine a whole world in his head.
What have you got there, Burberry? I made it. No one sees the world like my Tom.
The storm clouds were moving across your eyes. I could hear the war drums pounding from inside your mind.
I intend to lead a group of men to the Antarctic. I'm looking for someone to supply the entire expedition with protective clothing. What is this? It's what you've been looking for. People come to me with their dreams. Betty Dawson is going to attempt the impossible. She plans to break the world record and fly London to Cape Town in 48 hours. I help bring them to life. Miss Dawson.
What of our own dreams? This is how life smells.
Just to bring you up to date on the news in Europe, Great Britain is now at war. British mechanized troops rattle across the frontier into Belgium.
Your father can imagine a whole world in his head.
We should make sight of her any minute now in Khartoum, where she'll touch down just long enough to refuel on her way to Cape Town. London to Cape Town non-stop in 48 hours.
See you later. Your father can imagine a whole world in his head.
Okay, I think we're ready for questions. Closest first. I'll take these now.
Thanks, Ed. John Guy from MainFirst. Three questions, please.
After that, it's going to sound quite boring. Maybe we'll start with costs. Pretty good job in terms of costs down 100 basis points on a constant currency basis. Where do you see costs moving over the course of the next couple of years? We're still up as a percentage of sales, in the mid-50s. How much more is there to go? I appreciate that you've given us some updates around the FY 2019 plans, just wanted to get a greater sense of where you could maybe take a little bit more out. In terms of the pricing architecture, the Banner bag you highlighted at GBP 995 seems to be a strong price point and driving significant volume. Yet within scarves, we see some of your prices are higher than that of Loro Piana. There still seems to be an inconsistency around some of the product areas.
Maybe you could give us a couple of points, Christopher, in terms of how you see, I guess, narrowing or effectively maximizing or optimizing the price mix architecture across different categories. Finally, I don't know, scotch the rumors. Did you talk with Coach at all? Is there anything in that? It seems to go on and on. I guess you're probably not going to comment, but I might as well ask it anyway. Thanks.
Shall we start with the last one first? There's no comment to the speculation and rumors. As you just said, they keep on coming. We've never commented on those rumors, nothing more to share today. Sorry. Over to you, Carol, to the cost system.
Yeah. In terms of cost, John, as you say, in this half, we've done a really good job. On an underlying basis, costs are actually down 1% year-on-year. We had guided to mid-to-single digit cost pressures going into this year. What we've done as we've gone through the half, as Christopher just spoke about, is we've really dynamically managed all discretionary costs. No different than what we did last year. As we went into this year, clearly the markets are still challenging. We've been very thoughtful about discretionary spend, and we've been able to offset some of that underlying cost inflation by just really being very thoughtful about how we're spending costs. We're not necessarily replacing people as soon as they leave, deferring costs into the second half.
A great job in terms of discretionary spend, and importantly also alongside that, in delivering the first GBP 6 million out of our GBP 20 million target for this year on what I would call the more strategic cost savings. As we look forward for the balance of the year, I would imagine the other thing to mention again, Christopher referenced it, was the good job we've done in Asia on rent renegotiations, which has also helped offset some of that cost pressure. Flipping to the full year, I would imagine that the underlying cost pressure now is probably more like low-to-mid-single digit. We will expect to bank some of those savings we've made in the first half.
We may not get the same run rate in the second half, we will deliver the GBP 20 million worth of cost savings in the full year. Just thinking about the future, as we said, we're committed to delivering at least GBP 100 million by 2018-2019, we'll update you on that progress as we go. Good initial early progress, I think setting up the TMO gives us the confidence that we'll be on track to do that, if not better.
Your second question on pricing architecture, I'm going to hand over to Donald to give a little bit more detail. Just to put a bit of context around it, we did talk in May about looking at both ends of our pricing architecture. That's absolutely a part of our strategy, not only across different categories but also within. You mentioned the Banner bag. Even in the Banner bag, we've got a stretch from an opening price point all the way through to the most expensive, beautiful alligator Bridle bag. Looking then at the other extreme, you'll see in festive, for example, as we're going into that season, that we've got the broadest range of opening price points that we've ever had. We talked about adding fashion, innovation, newness, that's been a very big part of what we're doing downstairs.
Also now linking things back to the shows, which is again is something that we've never done before. Any color?
Yeah. What I would just add is I think there's a natural question that will come up about our general pricing architecture. We are moving within the next week or so to move prices. As we've spoken about before, as a group, we typically move pricing twice a year, October, November, May, June. Those are our two times that we address that based on our seasonal shift. That pricing you'll see come into effect across a broad range of categories for the U.K. Your specific example and tying back to what Christopher was saying around scarves, that's a perfect example of a place where we are absolutely confident in the pricing of our core cashmere. That is our heritage. The opportunity does exist to develop creative, innovative product at the opening price point, that's what you'll begin to see as we move forward.
By the way, have you seen our beautiful scarves? Do you want to take the next one? Okay.
Hi. Good morning. I'm Helen Brand from UBS. Three questions from me. Christopher, one for you first. Just how do you envisage the President role evolving for you and your relationship with Marco? In terms of your day-to-day role, how do you see that changing? Secondly, maybe a question for Carol. Just in terms of that beauty hit to the gross margin in H1, was that a low double-digit millions impact on the gross margin? Can you confirm that? Is that done now, or should we expect more in H2 in terms of the write-offs? You've resized the U.K. market. Is there more to do elsewhere? Finally, just to follow up really on this, the pricing distribution. Impressive performance in handbags in the second quarter, up double digit. Can you split that out between the volume and the AUR in terms of the handbags?
Obviously talking about that price range from the entry level to the high end, in terms of the price distribution of your handbag architecture, are you now happy with that relative to your competition, or is there more to do on the handbag side?
Okay. The first question, me, my role, Marco. First of all, I can't wait for Marco to join at some point next year. Marco and I will dovetail into each other very well. We both have very specific areas of responsibilities within our roles. I, as you'd expect, will be covering all of design, all of the creative aspects, everything to do with the brand of the company. Marco, again, as you'd expect, will be overseeing all of the commercial aspects of the company. We will have joint responsibility for the strategic approach to our business, to our global business, and we will also be working together and have joint responsibility on our culture and the people side of our business. Again, as you can imagine, Marco and I have gotten to know each other very well over the months.
I'm just very much looking forward to him coming in and to having a real partner.
Just to follow up, have we got any sort of final confirmation of his start date yet?
Nothing's changed to what we said, whenever it was in July. It's at some point next year. We will tell you the second we have a proper date.
Thank you.
And-
Gross margin.
Gross margin. Yeah. Beauty gross margin, as you said, the impact in the half on gross margin on a constant basis was purely to do with beauty. Fashion margins were flat. Beauty was about just over GBP 10 million. As you calculated, a combination of incremental stock provisions and a little bit to do with product mix in the half. We expect that to go back to more normalized margins in H2. This really reflects the review that we've done of the business and very much looking to reduce that secondary distribution as we move forward. Just a little bit more stock provisioning on the older lines. The pillar fragrances that we have launched continue to do incredibly well, and we're gaining market share in those.
Your question about what does it look like going forward, I would expect to see nice growth in those pillar fragrances, which is exactly what we intended to do when we bought the license back. Well positioned now, alongside the rest of our categories. Over time, I would expect to see the secondary distribution pull right back, and we'll be managing that closely over the coming couple of years. Yeah. Thank you, Donald.
As it relates to the pricing conversation on bags, it's very consistent with what I said earlier. The way that I see it, as we look into the year ahead, knowing the introductions that we'll be having, it's focusing on the upper end and on the opening. I would say that our sweet spot, I think we feel we have covered quite nicely. We're going to be pushing to the upper end in the first half of next year and in the second half of next year, pushing to opening price point aligned with festive. I think I would suggest that the AUR might grow ever so slightly. Again, that's just an estimate at this point because it's all in the mix.
In terms of the Q2 number in the volume, the AUR and that double-digit growth was in any volume?
It was a combination of both AUR and volumes. Great.
Hi, it's Julian Easthope from Barclays. First of all, I think, Carol, this is your last presentation. First of all, I'd like to say a big thank you for your help, not least your annual trips over to Canary Wharf to see our sales room, which I think is definitely above and beyond the realms of everything you should have done. I guess the first question I have is with regards to wholesale. I think every year for the last few, there's been a sort of cleansing of the wholesale operation. Just if you take a sort of long-term theoretical view, if you started with a complete blank sheet of paper, how big would your wholesale business actually be? Is that where you expect to get to, say, in a five-year time horizon? The second question actually comes back to Carol.
It's a really dull question, I know, but you've probably taken a look now at the lease adjustments from the new reporting standards that come into place. Is it below five times? Because I think you've got quite a few leases that are below five years. I'd just be interested to know what you think you'll actually have to bring back on balance sheet. Thank you.
Shall I frame the first one in that? Just to frame the first one in terms of wholesale. We have been talking for several years about cleaning up wholesale. We still have much to do. I think it's important to just go back and look at the single label strategy that we've just introduced. That was designed as a wholesale strategy. I think we talked in May about the flip of our business over the past years from a predominantly wholesale to a retail. We do have a lot of work there to do. It continues to be a work in progress. We talked also about the beauty wholesale. We have got a lot of work to do there. It's something that we're taking some short-term gains. We're being probably more aggressive at the moment than we may have been in the past.
I think specifically talking about beauty. We know that the opportunity is there to make sure that we've got a strong qualitative and sustainable business with our wholesale partners.
Yeah. I think as we look forward, Julian, I think the other thing to call out is around third-party digital, because I think that's another way in which we will grow our wholesale revenue. I think to Christopher's point, it will be about continuing to elevate the brand. I think wholesale is a part of the business. We want to be in it, but we want to be in it in a brand appropriate way. Therefore, I think you will see going forward more cleaning up, but absolutely growth in those key accounts like some of the third-party digital wholesale players, pillar fragrances in beauty, and some of the other areas in EMEIA and travel retail is another one I'd probably call out. Your techie question on lease accounting. My team are very busy working through the first stages of lease accounting.
It's a hugely complex model. We'll update you when we've got visibility on that because there's a lot of work going on at the moment in terms of what that might look like.
Hey, Annabel. Oh, sorry.
Hello? Hello. Annabel from Redburn. Just two questions. The first is that I know your bags grew mid-single digit in the half, but your accessories number is obviously negative. I was just wondering what sort of may be not performing as well, and is there a cross-selling opportunity to maybe smaller leather goods now that your bags seem to be performing better? The second question is on inventory, one for Carol. Your inventory days seem to be up even though you're doing all of this in back-end processes. Can you just comment on maybe why, and what's the opportunity there maybe to pull that number down?
Just in terms of accessories, bags were up double digit in the last quarter just gone. That is purely to do with all the work and the focus that we've put on this pillar and style strategy. It is a multifunctional approach, and also a global approach. It starts with product, but also goes through to the supply chain, the way we merchandise, our selling techniques, the training that we've got in stores, the visual merchandising. We are at the beginning. I just want to temper that a little bit. We talked about these strategies in May. We've started implementing it. We've become very rapid in certain areas and started to see results. We also talked about the small leather goods and the opportunities there, which is one of our focuses as well. More to come there as we start to look at other categories.
Just in terms of inventory levels, we're about up 10% year-on-year at the half. Pretty much where we were at the year-end. I anticipate that coming down as we get towards the end of this financial year. I think I've been talking about that during the period. It really reflects the buys that we did a couple of seasons ago before we saw the overall luxury market slow down. It'll take us just a little bit of while to get through that. We did significantly pull back on the buys in the May market, which is why I'm confident that over time we'll get back to more normalized levels. Important to say, both the aging and the quality of that inventory is good, so there's a lot of replenishment in there. We're not worried about the inventory levels, but I would expect it to come down.
Medium-term opportunity, I think, as we continue to develop our operational processes, I think there will be an opportunity to do even better. Over the last few years, I think we've demonstrated great progress. This has been a little bit of a blip, reflecting really what's going on in the wider macro. I think there's quite a lot more to go for as we become a lot more dynamic in how we manage inventory globally.
Have you got
Luca
Thank you very much. Luca Solca from Exane BNP Paribas. You talk about digital, and you clearly have a leadership in that area. I was wondering about direct to consumer and how much of your sales actually go to consumers that you know by name and you can potentially address individually, and how do you see CRM growing in the business going forward? On a second point, improbable things seem to be happening more and more frequently.
What do you mean, Luca? Do you have any examples?
I think we have a big example this morning. I was wondering how you think and potentially anticipate Brexit risk in the ongoing negotiations that you will have between the U.K. and the European Union, beyond currency, I mean, and if you are taking any action on that. On beauty, are we right to expect that although there's a very significantly better alignment with the rest of the strategy in the company from a financial viewpoint, this will continue to be dilutive in both operating profit and return on invested capital for a while? Thank you.
Do you want to comment on that?
Yeah. Thanks, Luca. Come on. I'll just deal with the digital question first. As you know, Luca, and thanks for saying it, we do see digital as a differentiator, and we've been calling out for a while now that of our growth in the future, we expect about a third to come from everything that we do digitally. It's not just about burberry.com, although that is, of course, the centerpiece of any digital strategy for any company. It is also about what we do on third parties, an area we've been embracing for a very long time, and I think we said in May that we saw maybe two-thirds of the overall growth coming from digital, coming from our relationships with third parties, which we built a lot during the half.
Traffic is up, conversion is up on both channels. Of course, we're investing in omni-channel through things like store stock lookup, being able to ship directly from stores, single pool of inventory, and all those things. In terms of being able to address customers directly, we've got about 12 million people on our CRM database at the moment. We've had a program of capturing new data for new customers for quite a while. We have about an 85% success rate of any new customers coming in store. 85% of them are likely to go into the database. They give us permission. Once we've got that data, we then use it in all sorts of ways. We can use it in a macro way to look at traveling patterns, behavior shifts, trends and so on, what's happening to the Chinese customer and things like that.
We can do it on a micro basis, either by in-store, allowing sales associates who have the data on their iPads to be able to have a meaningful conversation with a customer based on actual purchases that customer has made in the past. Once the sales associate has identified a customer and type the name in onto the iPad, all previous purchases with a picture of what they bought and when they bought them come up, and so you can have a meaningful conversation around, "That rather beautiful jacket you're wearing, Luca.
Would you like to have the latest trousers just come in off the runway?" We can also use it in a micro way to target customers on the CRM database to stratify it and send out emails and other forms of communication specifically tailored to the likely shopping habits of that individual customer, because we've got the data.
Just to add, that we're launching an app that we just mentioned there in a couple of months, that will give us a whole load of more data on our customers. It's a very personalized app. It links directly to our stores, store associates, the storytelling of the brand. It's a very personalized experience, which will allow us to have a much more intimate relationship with our customers. You just asked about beauty. Carol's going to go into some of the detail, but just to give a little bit of context there. We bought back the license in April 2013. We had a very strong approach to creating a pillar strategy, to align it much more closely with where we were going with the rest of the fashion business.
We did take, when we took over that license, a distribution, a very broad distribution, that was not the right one for where we were going with the brand. We feel very proud of the pillars that we have created. We know that there's huge potential there. We know that there's huge opportunity. We feel very confident that it's the right thing for our brand. Now we're looking at how to make sure that we create a strong, sustainable, and profitable business that is positioned in the right way to the rest of the business. Carol.
In terms of impact on margins going forward, as Christopher said, we're taking a hit this year. We will then, I believe, get back to margins that won't be substantially different from the overall retail wholesale margin for the group. It may take a little bit of time to build because we will be continuing very robustly in terms of the amount of distribution that we'll let into those secondary channels. I'm confident in the longer term, it should not be particularly dilutive to gross margin or return on invested capital. In terms of Brexit, I don't know whether you're talking specifically about actions we might be taking to try and mitigate the impacts when they come. Clearly, we've got teams across the company, across finance, supply chain, HR, understanding all the areas of the business where we may be impacted.
I think it's still too early to say what those impacts will be. We will look to mitigate incremental customs costs where we can. That said, we're a British brand, and so I don't see it fundamentally affecting the way in which we operate here in the U.K. We'll look where we can to mitigate, if appropriate.
Melanie. Have we got Melanie?
Yes. Can you hear me?
Yeah.
It's Melanie Flouquet at JPMorgan. I have a number of questions, actually. The first one is a little bit dull. It's regarding Forex. I think the impact on gross margin is certainly smaller than I would have anticipated. I'm not too sure whether we're getting the hedging on sourcing wrong, but could you help us understand what's going to be the Forex impact next year, assuming spot rate? That's the first question because clearly, there is an impact or delayed impact on sourcing. The second question is on the handbag strategy from a distribution standpoint. I was wondering whether there is a shift there, whether this had over-indexed to retail and is shifting to wholesale. Therefore, we have a bit of an impact there, potentially this year in the acceleration. My third question is on management.
I was wondering whether you could share with us what was it exactly that attracted you to your new CEO? You mentioned a hiring from a transformation manager. I was wondering whether you could help us understand what he's working on, what are, in other words, the one or two projects that could be transformational in luxury and at Burberry, in your view, in the next five years. Again, thank you very much, Carol.
Okay. I'll take the FX one first. Early days, Melanie. Clearly, we have hedged effectively the first season of next year at the moment. As always, we find it easier to come back and actually update you on the overall impact when we know what rates are going to be. Clearly, on procurement, given the way rates have moved, there will be some pressure from a procurement point of view. It will really depend where rates go over the course of this year and into next year from a translation point of view. I think the easiest thing to do is to update you on that specifically. Clearly, on procurement per se, there will be some impact, and we've only hedged through the first half of next year at the moment. Christopher, do you want to speak about Marco?
Perfect. About Marco, he has a broad experience. I'm sure some of you may know him. He's had a very strong luxury experience. He's very commercially minded. He understands retail incredibly well, but he also understands how to get a creativity, design, and brand messages across a global retail network. He also has the right values for our company, in terms of understanding about heritage, but also about contemporizing heritage, and has a very strong understanding of the whole end-to-end process from design all the way through to supply chain, to shipping and getting it into our stores. Then also just on a very human level, we connected on a very personal level. I think when you spend time with someone and very quickly you can start to finish each other's sentences because you see things in a similar way, you know when something feels right.
That was an important part of that. The next thing was the transformation office. Just to clarify, the transformation office is really working with the business, to ensure that we execute and implement all of the five strategies that we've just talked about. It's not about the big transformational things that may happen. It's really ensuring that we're on track, both in terms of critical paths, budgets, and expectations and what we've committed to. As I said, John is leading that. John, did you have anything more you want to talk about?
No.
No. Okay. In terms of the bags distribution, obviously we're looking at the distribution constantly of all of our products within the category management, the 360 of looking at our bags. We know that we've got a huge opportunity there. We've talked already about pricing. That will influence distribution. We will of course, want, and be seeking out with our partners, bigger corners as we further develop it. Again, we're early on in this work. It's something that we know the opportunity and the potential there is for us to grow that market. The initial signs that we've started have been going incredibly well as well. That's both in our own stores but also wholesale and third party.
We've got time for one more.
Okay. We've got time for one more, apparently. Hey there. Evening.
Thanks. It's Rogerio Fujimori from RBC. With regards to the improvement in bags in Q2, was it driven by the Chinese customer base, or you also saw an improvement with the local customers in key cities in Europe and U.S.? Second question perhaps related to that, how do you feel about the Chinese cluster as for the second half? The third is about outwear. It was a bit softer than usual in the first half. What kind of actions you're taking to reignite growth back in the second half, especially in women's? Thanks.
Bags, yes, of course it was also the Chinese, but it was also our local customers and very much as you said, linked, for example, here in the U.K., we're enjoying, which is lovely, a foreign exchange positive for us, which is bringing in tourists, many of them Chinese consumers. Important to say here in the U.K. as well, as well as the increase in tourism, we saw also an increase in our local customer as well. Obviously, in China, the business remains strong and the performance remains strong. Here, particularly in the U.K., we've had very strong Chinese consumers. In terms of outwear that you just mentioned, it has been a little bit subdued in the last half, but nothing that we're unduly concerned about. We're just coming into our key selling period for outwear. We've got lots of initiatives, both marketing and product.
We expect to see that gaining strength again, but like I said, a little bit subdued, but nothing that we're overly worried about at this point. Great. That is the end. Just again, to thank everybody for joining us. We were surprised by the turnout. I think we were all a little surprised when we put the news on at 3:00 A.M. this morning. Thank you for being with us today, to allow us to kind of share more detail around the strategies. We will see you all again in May. I do just want to take this opportunity as a few of you have, to say a huge thanks to Carol. She is a magnificent partner to every single one of us in this room, both inside the company and outside. Thank you, Carol.