Good morning, ladies and gentlemen, and welcome to the Burberry Q1 Trading Investor Update Conference Call. My name is Raji and I'll be your 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.
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 Q1 trading update conference call. With me this morning is Faye Dodds from our Investor Relations team. I will make a few brief comments on this morning's announcement and then we will be happy to take your questions. In the Q1, retail revenue grew 8% underlying or 10% at reported rates.
We are pleased with this performance in what remained a challenging external environment. We remain focused on the consistent execution of our key strategies and initiatives underpinned by our continued planned investment in stores, in digital, in customer service and in marketing. Comparable sales growth was 6% for the quarter. By region, there was double digit comp growth in EMEA, led by France, Italy and Spain, supported by sales to the traveling luxury customer. The Americas delivered high single digit comp growth with traffic recovering from the soft start in the 1st few weeks of the year, which we referenced at the time of our preliminary results.
Asia Pacific, however, experienced a low single digit comp decline and I would call out a further deterioration in footfall in Hong Kong for the quarter, which led to comp sales being down double digit in the quarter. With Hong Kong remaining a challenging market for the luxury sector, we continued to focus on the things we could control, driving conversion, targeting local customers with specific marketing and of course taking a tough line on costs. It is worth noting that excluding Hong Kong and Macau, comp growth in Asia Pacific was up low single digit. We delivered a low single digit comp growth in Mainland China and saw exceptional growth in Japan, albeit off a small base. For the Chinese customer globally, we continue to see growth in all markets apart from Hong Kong, although at a slower pace than in Q4.
Globally, we continue to execute against our 6 key strategies. Let me just highlight 3 of these today. 1st, under Inspire with the brand, we continue to target the core luxury customer, both at home and when traveling, focusing our retail investment in flagship markets, including this quarter, relocations in the Mall of Emirates in Dubai and Westfield's White City in London. And innovation in digital marketing continued, extending our use of newer social media platforms such as Periscope and Snapchat at events from LA to the men's runway show generating record customer engagement. 2nd, under realized product potential.
We saw double digit growth from our British made heritage trench coats and cash miss scarf and ongoing strength from ponchos an emerging key category for us. The strength of these products resulted in average selling price once again being the most significant driver of comp growth in the quarter. And looking ahead to the second half, we have continued to innovate the design and merchandising of these 3 core products, which are center stage in our new autumn winter advertising campaign. We also expanded our Regent Street store with the opening of an exclusive space dedicated to gifting as we continue to explore the opportunities for growth in this area. And third, on the unlock market opportunity.
Let me just touch on the U. S. And Japan. In the U. S, we continue to elevate our brand positioning.
The flagship event in Los Angeles reinforced our British heritage and reached a record global audience. And in New York, we opened a new store in Brookfield Place in this quarter. And this month, we reopened our expanded store in Spring Street, SoHo. In Japan, we are now very much in the transition phase. Let me remind you that following the expiry of the license at the end of June, licensed product will be phased out of the mainline channel by the end of September as we look to build distribution of our global collection.
In the past couple of weeks, we've assumed the direct operation of 10 small childrenswear concessions and our other store plans for the year remain on track, with the Shinjuku store opening in the autumn and a further 5 or so concessions planned for the second half. And you may also see that we've now launched our iconic My Burberry fragrance in Japan with Shiseido, our new distributor in this market. Turning now to guidance. There is no change for retail space, wholesale or licensing revenue to that that we gave you in May. To help you with your models, we have as usual updated the effect of FX using the rates as of 8th July.
This leads to an expected benefit for financial year 2016 of about £20,000,000 to retail wholesale profit compared to last year's rates, which is about £10,000,000 more than when we spoke in May. However, we currently expect the £10,000,000 benefit to be offset by a more adverse geographic mix, particularly from the sales shortfall in the higher margin market of Hong Kong. So in conclusion, as Christopher said this morning, we are pleased with our performance in the quarter. And while mindful of external challenges, we remain confident in our long term strategy to build the Burberry brand and business globally with exciting plans for the year ahead. So with that, we'd now be pleased to take your questions.
Thank We have a question speaking from the line of Thomas Chauvet from Citi. Please go ahead.
Good morning, Thomas Chauvet, Citigroup. Three questions all on Asia please. The first one Mainland China, you used to argue there was a lot of self help in the business and you clearly outperformed peers in the past few years. At low single digit LFL, that's probably no longer the case. Can you comment on what's been happening there in the past 3 quarters or so?
And whether you have any visibility on whether the development of gray markets in Europe is perhaps hitting your Mainland Chinese business? Secondly, on your comment that Asia ex Greater China was positive. So I guess, should we assume that you've not seen particular slowdown in Korea from the MERS syndrome among both your domestic and Judithria business? I think LFL were up mid single digit in Q4 in Korea. And finally, on Japan, what were the LFL in the quarter compared to the 30% LFL last year?
And with regards to the exit of the license business, can you indicate whether you've seen any issues in the past few weeks as you unwind the business? And any additional information we should be aware of to model FY 2016 2017? Thank you.
Okay. Thanks, Thomas. So in terms of China, in terms of we posted for this quarter a low single digit comp growth compared to mid single digit for the second half of last year. Important to note that we are still seeing growth from the Chinese because it's not just about what's happening in China, globally in all markets other than in Hong Kong. And in China, we continue to elevate the brand to the journey that we've been on, particularly regarding the store portfolio.
And again, we will be closing more of those legacy stores this year as we continue to elevate the brand, making sure we've got the right advantages. Digital is a huge piece of the business potential business in China in terms of both engagement with the Chinese luxury consumer. And indeed, we relaunched the mobile site last year. We see that traffic in China to that site is very high. So we're still very focused on the Chinese market, both when they're at home and when they're traveling to optimize the opportunity, be it in terms of product or in terms of channel or in terms of stores themselves.
In terms of Asia Pacific as a whole, yes, low single digit excluding Hong Kong within that, as I said. China was low single digit. Korea didn't have a particularly strong quarter. We were marginally negative. And as you referenced, I think particularly in June, we're impacted potentially by MiR's.
What we did see though was that there was a strong growth in our digital business in Korea, again, albeit on a small base. So great to have that business there. So when they weren't happy to go out to the stores, they were shopping online. And then the other highlights in Asia Pacific I would call out is really Japan, which is your last question where we saw a gain albeit of a small base, but very, very strong like for like higher than the 30% we referenced previously. And markets like Australia also remain very strong for us.
Okay. Just maybe a follow-up. When you're saying I saw that on Reuters, I think that the Chinese business, the Chinese clientele is positive in other markets. Are you suggesting the slowdown in the Q1 in both Hong Kong and Mainland China is actually offset by an acceleration elsewhere in Europe? It doesn't seem to me that Europe accelerated.
But do you see Chinese demand elsewhere accelerating? And again, do you see gray markets in Europe developing?
Yes. So I mean in terms of what we said was that we have seen growth, albeit slower than in H2 in for the group globally from the Chinese consumer and growth in all markets other than in Hong Kong. So just we've got double digit growth in EMEA broadly in line with the same sort of rate of growth as the second half. But we do believe that was underpinned by tourism and the Chinese in particular. And we called out France, Italy and Spain slightly less tourists in London, I think, influenced by currency.
And in terms of gray market, clearly, we are acutely aware of what's going on there and have our brand protection teams in place to do what we can to mitigate against that and procedures in our stores. But inevitably, that issue does
exist. Yes. And clearly, the relationships we have with some of our 3rd party digital retailers, and I'm thinking particularly Tmall, helps tidy up the gray market in areas and regions like China. Thank you very much.
And the next question comes from the line of Louise Singlehurst from Morgan Stanley. Please go ahead.
Yes. Hi. Good morning to you all. Three questions from me 2, please. I'll switch geographies and go for the U.
S. You talked about the higher or the improving footfall throughout the quarter. Can you talk to us a little bit about ASP spend and what you're seeing in consumer group? I imagine they're still part of the brand elevation story that's going on in the U. S.
As well. And just a comment on how digital behaved for the U. S. Market. Secondly, can you update us on the pricing benefits in Europe during the quarter?
And any plans for any further changes? It might be a little bit early for you to talk about that this stage of the year. And then finally, can you talk to us about the level of discounting end of season product? Was there any change year on year what we saw in terms of the number of SKUs or the length of duration of the promotional activity? Thank you.
Yes. So yes, in the U. S, we did call out in May that it had been a slightly softer start for us. We saw that improve through the quarter as footfall came back. And in terms of the retail metrics, ASP was up, conversion was up.
So and digital again performed very strongly with, as we've said before, a higher penetration of digital sales in the U. S. Compared to elsewhere in the world. So pleased with the performance in the U. S.
As we went through the Q1. In terms of pricing, no further changes. Important to remember that the price changes we made in Europe and on the selected products in Hong Kong and China were part of our normal pricing strategy. And there's nothing new to talk about today. We'll look at it again as we always do as we enter the second half of the year, but we're very satisfied with the decisions we made around pricing at the beginning of end of April.
And in terms of discounting, absolutely no change to the duration of the sale dates or the sale timing or the level of cadence of markdown within that period. So very consistent year on year.
Thank you. Finally one last one for me. On Hong Kong specifically going back to Asia, can you just give us an idea of the magnitude of the deceleration? I know you talked about the double digit declines in like for like for Hong Kong, but is that near or minus 10, near or minus 20? Is there any range that you can help us with there?
Yes. I mean, we're not being particularly specific about it except to say it's in that range of 10 to
Great. Thank
you.
And the next question comes from the line of Tom Ford from Breen Capital. Please go ahead.
Yes. Hi. Thank you for taking my question. I had a couple of questions. On digital engagement, you talked about Snapchat and you talked about some of the other new initiatives.
Can you indicate if these efforts are as effective in not only driving engagement, but also in driving sales as some of the other digital efforts? And then can you update us on the percent of your sales mix coming from your customer one to 1 in your collect in store sales efforts? And then lastly, if you see continued pressure in Hong Kong, are there additional levers you can pull to modify the business there either in store closing or in promotional activity? Thank you.
Yes. So I'll take in terms of digital engagement, as always, we continue to innovate. And this quarter, our relationship with both Periscope and Snapchat, I think the LA event, which was our big brand moment for this quarter, I think we had a record level of something like over 100,000,000 impressions from social on the back of that digital engagement. So really pleased with the way in which we continue to engage. And likewise, the menswear show in June also where we used Periscope again and Snapchat again, the best coverage I think we've ever had in terms of digital engagement.
So very pleased that we continue to innovate there. And in terms of sales, obviously, you've seen the number for the quarter. We can't be precise in terms of what it drives specifically. We talk about digital being an integral part of everything we do from that initial engagement to the fulfillment at the end. So very important and we had that 6% comp growth.
So pleased with that for the quarter. In terms of Hong Kong and then Fei can just touch on the collect in store data. In terms of the other actions we're taking, I mean, we said we're very much targeting the local domestic consumer, given that has traditionally been largely an 80% tourist market. We're saying, okay, what can we do with that local consumer, redirecting some of our marketing efforts there, using our customer value management tool, using our Burberry private client associates to bring back those customers in the store, making sure the stores are appropriately merchandised. So very much focused on driving conversion from that local customer.
And then in terms of rigorously managing the discretionary cost that we can in that region. And then in terms of rents themselves, clearly, we at the moment, we're at the threshold where all of our rents are now fixed. But as those leases come up for renewal, we're already out talking to landlords about what we might be able to do in terms of negotiating improvements to those terms going forward.
And in terms of your questions on digital, I mean, I think it's been fairly consistent that collecting store is over 20% of our digital sales. Ipads in store are over 25% of our digital sales. And that's really you know that we're sort of agnostic about whether the consumer researches online, purchases online, purchases in store, has it delivered home, has it delivered to office. So that's a good offer that we've got across the customer journey in digital. In terms of CVM, I don't think we've really got much more to say than what Steve said at the prelims in May.
We're just really refining and extending the use of our customer insights rules.
Thank you.
And the next question comes from the line of John Guay from MainFirst. Please go ahead.
Hi, sir. Good morning, Carol. Good morning, Faye. Just a couple of questions for me, please. With regards to product categories, you mentioned scarves, ponchos.
You also mentioned outerwear, trench coats, etcetera. Could you just comment on how large leather goods performed within the retail channel over the quarter? And then with regards to Mainland China, Carol, you flagged that you're still effectively cleaning up some of the legacy stores on the back of the franchise acquisitions, I think, back in September 2010. Could you just maybe give us an indication now in terms of how many legacy stores you need to clean up and what the total store count will be in Mainland China for the year end? And finally, just in terms of Hong Kong and Macau sales exposure versus last year, could you just comment on that in terms of what the sales exposure is and how changed year on year given the moves that we've seen this quarter?
Thank you.
Yes. So in terms of product categories, you asked specifically about large leather. I'd say we had a steady performance on large leather through the quarter. What we're really excited about is we've got those 2 key standout opportunities coming next quarter, the banner bag that went down the runway at the men's show, innovating around that bag, which has already been very successful for us. And of course, following on to the women's show, the bucket bag.
So very excited about the large I think we ended at the end of March, we had 68 stores. We're now at 67. So of those, 54 are stores that we've opened ourselves, 13 are legacy stores. And by the end of the year, we expect to be at around something like 63 with 10 legacy stores remaining. So ongoing cleanup there and elevation continued elevation of the store portfolio.
And in terms of the Hong Kong percentage
I'd say Hong Kong and Macau last year was about 10% of retail wholesale. I haven't really run it for the Q1, but I wouldn't expect it to be significantly different from that.
Sorry, was that 10%?
10%, yes.
Yes, yes. Okay. So no real no significant change there. And maybe just one final follow-up on Japan. I know that you flagged that the Q1 you've seen some very strong growth in excess of the 30% like for like as of last year.
Just in terms of the number of concessions that you I think you said in the second half of the year, you're looking to add 5 concessions. You've got the Xingu store opening later this year. Are there any other developments from a concession and mainline perspective that we should be aware of? Still no change in terms of Ginza?
No. I mean, so we're very much on track to deliver the sort of we talked to about 8 to 10 mainline stores and 30 to 40 concessions. And as we sit here today, that feels very much like where we will we're still on track to deliver that. Omotasanda Osaka doing very nicely. We're very excited about opening Shinjuku, taking back the children's wear.
And then as we said, we've got 5 or more concessions in those key luxury department stores coming in the second half, which will really reposition us nicely in those locations.
Thanks very much indeed.
And the next question comes from the line of Warwick O'Kunz from Deutsche Bank. Please go ahead.
Good morning, Carol Fey. Could you put a number please on the growth rates of the Chinese consumer globally this quarter? No.
I mean what we're saying is that overall we still saw growth in all markets other than in Hong Kong albeit slightly slower than what we had seen in Q4 last year. But I don't think we've actually put a specific number
on it, have we? No. It's sort of low to mid single digit.
So it's fair to assume it's slightly below the sort of global growth on a comp store basis? Below the 6?
Yes. Yes.
Okay. And could you say whether the inventory pooling in Mainland China boosted the comp in the quarter?
Yes. And I think it's still reasonably early days. I think we're pleased that we can now fulfill those digital sales from that store inventory, but nothing specific call out other than we were excited by the fact that we're able to do that in China and looking to roll it out both in the U. K. And in the U.
S. As we come towards our big sort of festive period. So a nice beginning for that initiative in China.
Great. Thank you very much.
And the next question comes from the line of Mario Portelli from Bernstein. Please go ahead.
Good morning. Hey, good morning, Carol. Three questions if I may. The first one is about Macau. How was the performance in Macau in relative terms to Hong Kong?
The second one about pricing. You have cut the prices in mainland China or Hong Kong on some specific products. As you notice a difference of the consumer behavior between the products for which you cut the prices and for the products which you didn't cut the prices? And the last thing the last question is about digital and especially mobile. Can you tell us which is the percentage of access to your website or the percentage of digital sales done through mobile and through the traditional PC?
Thank you.
Okay. So in terms of Macau, I think we have one store. I mean, we're opening another store and we have very soft opening on that at the moment. But in terms of the existing store that we have in Macau, I think it wasn't dissimilar from the double digit declines that we saw in Hong Kong through the quarter. In terms of pricing, as you know, we did take some prices up in Europe, again, part of our normal strategy and took prices down on selected products in China and Hong Kong.
And that's performing broadly in line with our expectations and we're satisfied with the pricing decisions that we made back in April. In terms of digital mobile, it's absolutely becoming increasingly important. I think 40% of the traffic now to the site or to our digital traffic comes from a mobile device. And as we I think in terms of
the penetration of mobile sales as a percentage
of total digital, we've had more sales in total via mobile device in this quarter than we did in the whole of the festive quarter last year. So all fines pointing to the fact that investment we have made and will continue to make in mobile is absolutely in line with the way in which consumers want to interact with us.
Excuse me. Just one clarification about price cut in Hong Kong. I want to be clear with my question. Probably in Hong Kong, you cut prices on specific item and on other item, you didn't cut the prices. And you said that is going with your expectation of the consumer behavior.
So what does it mean that in the products that you have cut the prices you have seen that the volumes has even growth and in the other you have a significant decline vice versa. I just wanted to understand better what was the reaction of the consumer to this price cut? Is it really the boost or the capital volume in the domestic market in comparison to the other products in which you didn't cut the price.
Mary, I'm afraid we're not going to dissect price and volume by product line by market. Really just to say that we're generally very satisfied with the reaction that we've seen from the consumers to those selective price changes.
Okay. Thanks.
The next question comes from the line of Rogerio from RBC. Please go ahead. Hi,
Carol. Hi, Faye. I have two questions. I was curious to hear about trends you see for your domestic European clientele in May, June after the price increases in French coats and scarves in April? And my second question at global level, you said that price mix is still driving comps growth.
But could you give us extra color on how price mix and volume contributed to retail comps? Or how is it changing versus your contribution in the second half of last year? Thank you.
Yes. I mean again in terms of the domestic European consumer and reaction price increases, again I'm not going to dissect all that, but we have delivered double digit comp growth in EMEA, which we're very pleased with. And then in terms of the price mix, I mean, Carol said in the script that the majority of the driver was average selling price. And that was pretty much the same as the second half and that was driven by product mix, the success we saw with the heritage trench coat and the poncho which are quite high average selling price products.
And just one last question. Any change in trends in the UK market?
No. I mean, I think what we said was that in our Q1, we probably saw less tourism in the U. K. Market than we had in the Q4. I think we called out the strength of the tourists in France, Italy and Spain, slightly less tourists in the U.
K. And I think more a function of what happened to currencies. And therefore, on the back of the movement in the euro, they chose to go to Europe instead of London, which for us, I mean, as long as they're shopping somewhere, clearly, that's fine. And then the U. K.
Domestic market remained pretty solid.
Thank you very much.
And the next question comes from the line of Julien from Barclays. Please go ahead.
Yes. Hi, everyone. Just a couple of questions as well. Just in terms of the Hong Kong markets, presumably the stores are still quite profitable even after the double digit declines. I think the 4 wall margins are probably certainly ahead of 30%, 40%, certainly they were at peak.
So just interested to know if they're still very profitable. And the second question, you didn't comment that margins would be flat reported. So I just wonder whether that was a deliberate decision to not comment.
Yes. So in terms of Hong Kong, yes, all of our stores remain very profitable, notwithstanding the comp declines that we have seen. I'm not going to give you a specific margin percentage, but safe to say they all remain very profitable. So nothing else to call out there. And in terms of the margin, we didn't address specifically, Julian, because there's no change broadly the net impact of the FX and the Hong Kong challenges mean that again I think on a reported basis we think margin will broadly be flat year on year.
Okay. Thank you very much.
And the next question comes from the line of Melanie from JPMorgan. Please go ahead.
Yes. Good morning. Sorry, I have three questions actually. The first one is on a confirmation. When you say the mainland Chinese consumer at home and traveling is up low single digit to mid single digit in Q1, This includes Hong Kong, right?
Yes.
Okay. The second question is on Space growth, which is up 2%. You had guided for low single digit. But when is it going to accelerate in the second half? Or should we be on that very low single digit number?
No, no. I mean, we are not changing any of our guidance. So we had said low single digit before. Remember, it just depends at the rate at which the space comes online. And so we're holding our guidance on low single digit for the full year and it's really just timing across the quarters.
Okay. And can you update us on what is happening in Wholesale U. S? Retail, it seems to be released that it actually caught up towards the end. But what are you doing in the U.
S. In wholesale? Can you update us? And when do you expect this to pick up? Thank you.
No. I mean, so there's no change. We guided back in April May to our first half expectations for wholesale in the U. S, which was to be broadly unchanged from that of the second half. And there's nothing to update on for that.
I mean those orders were placed back in the previous market and we're holding for that guidance today. So I don't think there's anything specific we can say on wholesale. Yes. The thing that's going on in
the U. S. Is that we are there's 2 things going on. We are seeing great growth where we're getting dedicated shop in shops, but we are also taking the opportunity still to kind of elevate the brand. And I think we've talked to you before about pulling out certain menswear doors with one of our big partners.
Yes.
So we will still see growth in Americas wholesale notwithstanding that elevation. But no, nothing new to say compared to the guidance we gave back in May.
Yes. I was more interested in strategically what are you doing to the wholesale U. S.
Business to take it to the next level.
We continue to elevate Melanie. I mean it's been very much we've talked to you before. I mean last year we walked away from some of those doors, those men's doors that weren't appropriately brand positioned And we will continue to do that. I mean, it's very much part of our strategy and our pay as you go approach to continue to elevate in those really key doors and to move away from those doors that aren't so brand appropriate.
Thank you very much.
Okay.
Thank you. We currently have no questions coming through.
Okay. So thank you very much for your attention. And we look forward to speaking to you again on the 15th October with our first half trading update. Thank you.
Thank you. Ladies and gentlemen, thank you for joining today's conference. You may now replace your handsets. Thank you.