Good morning, ladies and gentlemen, welcome to the Burberry first quarter trading update analyst and investor call. My name is Zoe, and I'll be your operator for today's conference. Throughout the conference, the lines will be on listen only. However, at the end of the update, you'll have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad and you'll be connected to an operator. I will now hand you over to your host, Carol Fairweather, to begin today's conference. Thank you.
Thank you. Good morning and welcome to Burberry's first quarter trading update conference call. You will have seen the announcements made earlier this week about the changes to our senior management team. As usual, today's call will be focused on the first quarter trading. With me this morning is Fay Dodds from our investor relations team. I will make a few brief comments on this morning's announcement, we will be happy to take your questions. In what remains a challenging external environment, underlying retail revenue in the first quarter was unchanged at constant exchange rates and up 4% at reported rates. Comparable sales were down 3%, with all three regions posting low single-digit comp declines. First, within Asia, Mainland China saw comparable sales for the quarter unchanged year-on-year.
Our performance is currently being impacted by the ongoing elevation of our store network in Beijing, which is our largest market within China. Excluding Beijing, comparable sales in China remained up by a mid-single digit percentage. Hong Kong continued to suffer significant double-digit footfall declines. Although the market did show some improvement compared to the fourth quarter. While comparable sales remained down by a double-digit percentage, this was better than the declines of over 20% we had seen for the previous three quarters. Excluding Hong Kong and Macau, comparable sales in the region were positive. Second in EMEA, which accounts for over one-third of the region's retail revenue, improved, particularly in the final weeks of the quarter, to deliver mid-single digit percentage growth.
Continental Europe, however, remained depressed, with continued double-digit declines in sales to the traveling luxury customer, particularly in France and Italy, offset in part by growth from domestic customers in all major markets. In the Americas, we continue to experience uneven demand from domestic customers, and spend from traveling luxury customers, which represent over 15% of the market, remained down by a double-digit percentage. Meanwhile, digital continued to outperform and grew strongly in all regions, and mobile represents approaching 60% of traffic to the site and delivers the majority of the growth. As regards product, in mainline stores, fashion, which tends to have a lower gross margin, outperformed replenishment with a positive customer response to innovation and newness. Turning now to guidance. There is no change for retail space or licensing revenue from what we said in May.
Our outlook for revenue in both fashion and beauty, particularly in the U.S., is now more cautious for both the first and second halves of the year. We now expect wholesale revenue to be down over 10% in the first half. This reflects significantly tighter inventory control by our U.S. customers and cautious ordering in the other regions, and the elevation of beauty distribution in certain key markets. Having completed the review of growth drivers for our fashion business that we spoke about in May, we are now carrying out the same exercise for beauty. Finally, as regards guidance, let me just update you on FX.
Using the rates as of 30th of June, the recent depreciation of GBP means that the expected benefit for financial year 2017 is now about GBP 90 million to retail wholesale profit when compared to last year's rates, which is about GBP 40 million more than when we spoke in May. Let me now just update you on our initiatives to deliver enhanced revenue growth and improved efficiency, which are well underway. Starting with the initiatives to drive revenue growth, which are grouped under three headings. First, under product. In order to deliver greater visibility for fashion and newness, we have reduced the number of SKUs for main market by about 15%. In marketing, you will have seen that the main campaign is now more product-focused and features The Patchwork bag.
Secondly, under retail excellence, we have increased investment in training with regional conferences planned for our store management teams over the summer, focusing on customer cultivation. As we look to elevate our service, our growing team of Burberry private client sales associates, whose productivity is significantly above the average, delivered an increased number of personal appointments in the quarter. Third, under e-commerce, the relaunch of burberry.com with improved content and functionality is scheduled to be launched in the autumn as planned, and the customer app facilitating mobile checkout in particular is also on schedule. Turning to process, our plans to improve efficiency through changes in our ways of working are well underway. As a result, we remain confident in delivering the financial goals for this year and through 2019, as we outlined in May.
Finally, I should just let you know that we will shortly be starting the previously announced share buyback program of up to GBP 150 million. In conclusion, at this early stage in the year, we continue to operate in a challenging external environment where underlying cost pressures persist. Against this background, we have remained focused on managing the business day-to-day, while implementing the initiatives announced in May to deliver enhanced revenue growth through focusing on key products, retail productivity, and e-commerce, and improved efficiency through changes to our ways of working. With that, Fay and I would now be happy to take your questions.
Ladies and gentlemen, if you'd 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 one again. Our first question comes from the line of Helen Brand from HSBC. Helen, please go ahead.
Hi. Good morning.
Morning, Helen.
I've got three questions, if I may. Firstly, you said that you're happy with the consensus PBT of GBP 413 million. Would it be fair to assume that this reflects low single digits like for like for the year? Is there anything that you're seeing currently that suggests that like for like can't return to positive trends in Q2, particularly given the 10 percentage point easier comp base. Secondly, just on wholesale, you've guided that down over 10% now in H1. What's the main delta there between the U.S. and beauty within that? Can you talk to your early indications for H2 here? Also the split between the sort of core wholesale business and beauty as well. Finally, I appreciate it's a Q1 trading call, but you've obviously outlined the plan to increase sales densities more in line with the peers.
Can you just talk to, with the management changes, will the new CEO be spearheading this retail excellence process when he comes in, and what previous experience he has here in his many years in the industry? Do you still think that you may need to strengthen headcount in retail further down the organization at all?
Okay. Helen, do you want to take the one on consensus, Faye, and then I'll take wholesale.
Yes. What we said this morning is that now that most of the analysts have actually included the FX benefit consensus is about GBP 413 million. We're not going to particularly comment on what that includes in terms of like for likes. It's very rare for us to do that.
Turning to our wholesale guidance. What we're saying now is that as we look forward to H1, we had guided, as we said, to around 10%. We're now saying that will be above -10%, both in fashion and in beauty, and they're probably around and about the same. What's happened, I think, is that we've seen that beauty wholesalers are also reacting to the external environment, and they're destocking, I think, not just for us, but for other fragrance brands. Importantly, our sell-out on our new products, so My Burberry and Mr. Burberry remains strong. It's the sell-in that's being impacted, now we're expecting beauty revenues to be down by something like around 10% across the year, and probably broadly split equally, sort of half on half, something like that. In terms of retail expertise, Faye.
Yes. Helen, as you know, we did a huge amount of work over the last six to nine months identifying the opportunities to improve retail productivity. That is well underway under Christopher's leadership with the existing team. I'm sure as Marco joined, he is a luxury retail person through and through, and he will be able to add to that program.
Okay, thanks very much. Just on that Q2 like for like, and that 10 percentage points easier comp base, just following up on that, is there anything you're seeing that doesn't suggest that shouldn't return to positive?
I think, Helen, we've all been caught out with the weak comp argument before. Remember we were doing that with Hong Kong. How things will get much better in Hong Kong because of the weak comps. This is an early stage of the year. I think the most important thing to note is that Christopher talked in his quote about things remaining very challenging.
Okay. Thank you very much.
Our next question comes from the line of Thomas Chauvet from Citi. Thomas, please go ahead.
Good morning, Carol, Faye. I have three question, please. The first one, I'd like to have a bit more color on your -3% LFL. Could you split perhaps ASP and volumes, perhaps outlets versus mainline stores? If we think of LFL by nationality, what is the slight improvements coming from in terms of customer clusters? Is it from the Chinese customer improving sequentially? That's my first question. Secondly, on FX and pricing. Obviously, the GBP, but also the EUR have moved quite a lot versus the USD recently. Have you taken or will you implement a price increase in both the U.K. and continental Europe to reduce the price gap with Asia and the U.S.? Are you happy with the gap as it has moved in recent weeks? Finally, still a FX related question.
If you're happy with consensus PBT of about GBP 415 or GBP 413, I believe this means you're not reinvesting any of the additional GBP 40 million FX benefit into the business. Is that a fair assumption? Thank you.
Okay, Thomas. In terms of the -3% like for like, the split between ASP and volume, ASP may be up just a tad, but it's volumes that are down. We don't ever split out the split between mainline and outlet, nothing specifically.
You used to.
Yeah, I don't think we have for a little while now.
Okay. Well, did outlet outperform mainline stores?
No.
Okay.
In terms of nationality, what we're saying is, you were asking, if we look by region, what we are saying is that the U.K., we saw return to positive growth. And remember, for us, about 50% tourist market, and even within domestic, we've probably got lots of expats too. If you talk about the Chinese in particular, we had said that we had seen growth from the Chinese slow overall as we went through quarters three and four last year, and that just slows a little bit more than it had in Q4. Other than that, by region, I don't think there's very much to call out specifically. All regions improved just a little bit. We've talked about Hong Kong improving to now not to be down over 20%, and China impacted by Beijing.
Other than that, I think, a little bit improvement. I would say we feel that that's the initiatives we spoke to about beginning to kick in, be it around product in the stores, be it around retail service, product marketing. In terms of FX and the impact on pricing, we've chatted before about the fact that we have a global pricing strategy. We don't tend to make knee-jerk reactions when FX rates move. Clearly, there has been a significant shift. We'll wait until that's settled and then make any price adjustments that may be appropriate. Always looking to see also what our peers are doing. Nothing new to call out in terms of pricing today. On your point on consensus and the FX impact, clearly there has been a GBP 40 million upgrade as of the June rates.
Remember, we manage the business day-to-day on an underlying basis. Therefore, whilst the FX moves affect reported profit, that doesn't necessarily change any investment decisions or anything else in terms of the way we're managing the business, which we always look to deliver growth on an underlying basis.
Very clear. Thank you.
Thank you, Thomas Chauvet.
Our next question comes from the line of Luca Solca from Exane. Luca, please go ahead.
Thank you very much. Luca Solca from Exane BNP Paribas. There have been major changes since we last spoke, and I wonder what Brexit could mean for Burberry. Are you considering or envisaging any changes to the organization or the way that you conduct your business to adjust to this scenario going forward? As a second question, continuing with the big changes coming on, I wasn't clear when the new CEO is going to join Burberry. I wonder if you could give us a bit more of a detail on that. Lastly, I was wondering whether you see any differences in sales trends when you look at your assortment and divide it by price point. Thank you.
Yep. Okay, Luca. In terms of Brexit, as you know, this wasn't the outcome necessarily that we would have been hoping for, but that said, we now need to move on. We're a global company, and in the short term, we don't see any other than the FX benefit which we've called out today. We don't see any discernible impact on our operations globally. I think it's far too early to call out what the longer-term impact may be, and as that becomes clearer, we will obviously respond to make sure that we continue to optimize and deliver on our strategies. I think it's still very early days, and we're just focusing on continuing to manage the business day-to-day and on those growth opportunities ahead of us. We'll keep you posted as we get more clarity along with everyone else on what this really means.
In terms of the CEO role. Yes. In terms of when Marco's able to join us, it'll be sometime in 2017, as we said in Monday's release. Just in terms of sales trends by product, the one thing we are calling out today is just that we saw fashion outperform replenishment in this quarter, which I think is important given we know how important newness and fashion is to the luxury consumer. That's probably the only thing. In terms of what that meant for AFG, again, nothing significant to call out.
All right. Thank you very much.
Thank you, Luca.
Our next question comes from the line of Louise Singlehurst from Morgan Stanley. Louise, please go ahead.
Hi, good morning to you all. Obviously, today's call as you rightly said, is focused on the Q1 updates, but I think after the big announcement, definitely a thank you to Carol. We'll no doubt be chatting to you later on this year, but hope a well-deserved break coming in 2017 for you.
Thank you, Louise.
In terms of the questions, I've got simple ones. U.K., obviously much better towards the end of the period, no surprises. Can you just give us a bit more color on there and if there's any scope to increase prices going forward given the currency? Secondly, on the U.S. travelers down double digits, did that change at all over the period? My last question on domestic U.S., obviously still tough, and we can see that reflected in the U.S. wholesale comments. Any change in the promotional environment that you've seen? Is there anything on the inventory position to highlight? Thank you.
In terms of the U.K., we did say improve towards the end of the quarter. As I said to Luca just now, I don't think we'll be changing prices in the immediate short term. We'll obviously keep that under review depending on where sterling settles. It has been moving day-to-day, as you've seen. In terms of what's underpinning that improved performance, we do believe it is the strategies that we've put in place beginning now to kick in. We particularly saw a pickup in domestics across EMEA. That's very much about the focus we have on our private clients, our CVM program, our improved retail disciplines, which I think is helping with conversion. Continued strength in digital.
Also, I think we've got traction in those key areas of product focus, be it around bags with The Rucksack, outerwear in terms of lightweight cashmere and lace, and entry price point products. I think it's a number of, but there's not one big call-out. I think it's a number of those initiatives now really beginning to kick in. In terms of U.S. travelers, Faye. Just to remind you that for us, the Americas is about 80% local, 20% tourist. We still saw tourists down double digit in the first quarter, very similar to the fourth quarter. In terms of the U.S. domestics, they were broadly unchanged year-over-year.
In terms of your question about promotional activity, the market as a whole remained quite promotional, but we actually ran a shorter, sharper sale in the U.S. I think you had a question on inventory. At March, we talked about it being 10% up, with a lot of the increase due to being either currencies in stock or replenishment, and we're pretty relaxed about our inventory position at the moment.
Great. That's very helpful. Thank you.
Next question comes from the line of Warwick Okines, who's from the Deutsche Bank, London. Warwick, please go ahead.
Hello. Good morning. Two questions, please. The first is on back to FX. You talked about the GBP 90 million benefit, presumably that's a bit of a mix between translation benefits and transaction costs. Could you maybe talk about whether there is a drag on COGS from the stronger euro this year or whether more of the negative impact from currency should come through into the next financial year? Secondly, can you just confirm that all your PRP is based at constant currency rather than reported? Thank you.
In terms of the FX benefit, as you say, the majority of that, Warwick, this year is coming from translation. There is part of it, there is an adverse on procurement, principally, on U.S. dollar, where just the way our hedging timing works, as we sit today, the U.S. portion of our sort of hedged procurement has been impacted versus the procurement rate for last year. By far the most significant majority is around translation. Remember for us, with a 40% sterling cost base, that means we're getting more of that benefit coming through. In terms of PRP, everything is done at constant exchange rates, nothing significant to call out there other than the one measure in the SIP, the long-term incentive plan, where the ROIC, the return on capital measure, is actually done at a reported rate.
Okay, thank you. Back on the procurement. It could be a sort of tens of millions drag from the dollar this year on COGS that's obviously being more than offset by-
I wouldn't say tens of millions. I would say around that sort of number, not tens of millions.
Okay, perfect. Thanks so much.
Sorry, just on FX, so everyone is clear, don't forget the rates that we put in the back of the announcement include three months of basically pre-Brexit rates and then nine months on the rates at the 30th of June.
Our next question comes from the line of Rogério Fujimori from RBC. Rogério, please go ahead.
Hi, everyone. Three quick questions. I was just wondering if Hong Kong down in the teens or so in Q4, how would the profitability in Hong Kong compares today with global average? Secondly, it's just a quick question on the shape of the quarter. Was June materially different to Q1 figures? You mentioned U.K., but I was just wondering about other regions or key markets. In the wholesale, has the travel retail in Asia component changed within this revised wholesale guidance? Thank you.
Hi, Rogério. In terms of Hong Kong, we did say it had got slightly better, albeit still down double digit. All of our stores there still remain very profitable and they still are some of the most profitable stores that we have. No change to what we have been saying previously. In terms of Q1 and trends, I don't think there's anything specific that we're calling out. We're saying all regions just did slightly better, no significant shifts. In terms of travel retail, again, nothing really. The biggest movements in our wholesale guidance is largely in relation to the U.S.
Thank you.
Our next question comes from the line of Daniele Gianera, who is from Macquarie. Apologies for the pronunciation. Dan, please go ahead.
No worries. Thank you. Good morning, all. Three questions from my side, please. The first one is on the SKUs. You talked about reduction. I just wanted to get a clarification here. Is it applying to all collection or it is just on the fashion-led items? The second one is on the wholesale. I was wondering if there is a self-inflicted impact as well, coming from the consolidation of the three labels into a single one. Also wondering how much of the GBP 90 million benefit to profit before tax from FX do you think is already crystallized and locked in for the year. Thank you very much.
Sorry. Dan, in terms of the SKUs, we are saying 15% and there will be more to come as we go through following years, but that is pretty much right across all of the collection, and will continue to reduce further as we go forward. In terms of wholesale, I said when I opened the call that absolutely no impact from the three label consolidation. The response from our wholesale partners in the has been very positive. What we are saying now is that we are just seeing, remember, H1 is not impacted at all by label consolidation, and that is where we are seeing it down over 10%. We are just saying we now see similar trends for H2, but we do not believe in any way that has been impacted by the consolidation. Then your last question, sorry, I did not quite catch what you were asking.
I think it was about how much of the GBP 90 million FX benefit has been banked in the first quarter.
Correct.
Clearly a lot of that is half 2 weighting.
Yes. Don't forget in the first quarter, the number we're calling out this morning is only the retail number, it is very much weighted towards the second half. Two reasons, one, because the quarter, as Faye said, has already been baked in. Secondly, given we are an H2-weighted business, a more significant portion of that will come in the second half.
Very clear. Thank you.
Ladies and gentlemen, please be reminded that if you would like to ask a question to press dial one on your telephone keypad now. Our next question comes from the line of Annabel Gleeson, who is from Redburn. Annabel, please go ahead.
Hi, Carol. Hi, Faye. Just two questions. First of all, you're obviously calling out that fashion outperformed replenishment. Firstly, is that because you promoted more? I know you said you didn't in the U.S., but sort of on a global basis. How should we think about the gross margin pressure? Your replenishment products are higher gross margin. The second question is, I know you just said that your wholesale partners have reacted positively to the label consolidation. Can you give us an update in terms of retail? When are you actually going to be starting to change those stores over? Maybe can you talk a bit about the trial stores and how they're performing?
In terms of fashion outperforming replenishment, it will have an impact on gross margin. Clearly will also drive, we believe, top-line outperformance. In terms of GBP millions, will be positive overall. I think it's just the reason it's outperformed in this quarter is because we talked about the fact that the stores looked a little, it was difficult to see the newness in the stores, and we very much changed the merchandising. We've reduced the SKUs. The way in which people are now, customers are able to come into the shop and see that newness in fashion, I think is resonating really well. In terms of wholesale, as I said, we do not believe there's any impact from the label consolidation. In terms of our own retail, that's beginning to roll out right now with full implementation in the autumn.
We talked to you last year about the trial stores. We're moving more away from those trial stores and just looking to absolutely roll it out globally. That's happening as we speak and will be fully implemented by the autumn.
What sort of percentage of stores have got that, the new way of merchandising, i.e., all the product categories together?
It's literally happening. It's a sort of work in progress, Annabel, because this is the season when we actually switch over.
Okay.
If you go into the stores now, you will begin to see it. As I said, it's really by the time we get to the autumn that it will be fully implemented. We're doing it globally. It's not on a test store basis anymore. It's just as the collection rolls out.
Perfect. Thank you.
Thank you.
There are currently no further questions.
Okay, thank you very much, and we look forward to speaking to you again on the eighteenth of October with our first half trading update. Thank you.