Welcome to the Burberry third quarter trading update conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Carol Fairweather. Please go ahead, ma'am.
Good morning, welcome to Burberry's third quarter trading update conference call. I will make a few brief comments on this morning's announcement, then we will be happy to take your questions. We are pleased with our retail performance in the third quarter, with revenue up 15% underlying and up 14% at reported FX. Retail comps grew by 8%, consistent with Q2. This performance was underpinned by our continued planned investment, both offline and online, in store, in digital, in customer service, and in marketing. By region, both Americas and EMEA delivered double-digit comp growth. We did see a slowdown in Asia Pacific, which delivered a low single-digit comp growth, primarily reflecting the sector-wide disruption in Hong Kong, which accounts for about 10% of our global sales.
Footfall in Hong Kong was significantly down in the period, we focused on the things we could control, further increasing conversion and average selling price, leading to only a low to mid-single digit decline in comp sales. Mainland China and Korea both delivered robust growth. Globally, key drivers of mainline growth included higher conversion and average selling price, which more than offset the lower in-store traffic. Digital outperformance in all regions, helped by our upgraded mobile site, with mobile doubling its penetration of digital sales in Q3 relative to the first half. A strong performance from Heritage rainwear and scarves, as well as the runway-inspired ponchos, demonstrating the brand momentum in both core and fashion collections, and a strong focus on the festive period from design to marketing to in-store execution, benefiting North America and Europe in particular.
Globally, we continue to execute against the five strategies that Christopher updated when we talked in November. Let me just highlight some actions under three of these during the quarter. Under inspire with the brand, the relaunch of our iconic Heritage Trench Coats and scarves delivered strong growth. These were supported by targeted advertising campaigns, including the halo effect from the My Burberry fragrance launch, as well as the festive campaign, which has been viewed almost 9 million times. Personalization is becoming a key theme in luxury, we were delighted that in this key gift-giving period, customer response has been strong. For example, on .com, nearly 70% of the bottles of My Burberry fragrance sold were monogrammed, as were over 70% of the ponchos. Under optimized channels, we opened five mainline stores, three of which were relocations.
These included a flagship store on Rodeo Drive in L.A., which more than doubled our selling space there, which together with the refurbishment of San Francisco, which opened in September, has significantly improved our presence on the West Coast. We also opened our second dedicated beauty store globally, which is located in Seoul. As you'll have seen from this morning's statement, we have confirmed the contribution from net new space at 5% for this financial year at the top of previous guidance. Finally, under unlock market opportunity, in Japan, ahead of the license expiry later in 2015, we relocated our store in Omotesando in Tokyo and opened a further two concessions. We now have four mainline stores and 12 concessions and saw strong double-digit comps in Japan in the quarter.
With Osaka due to open in the spring and Shinjuku, Tokyo later this year, and positive discussions with department stores, our plans for the transformation of this market are on track. Before I conclude, let me just outline a couple of factors which have changed since we spoke to you in November. Firstly, there has been a modest improvement in exchange rates, although we still do not expect a material impact on our business in the second half. This modest improvement has been more than offset, primarily by both the slowdown in Hong Kong, which is a high-margin market, and a shift in regional revenue mix, which has a negative impact on margin. Please bear these two factors in mind as you build your model for this year-end and beyond.
In summary, we are pleased with our performance in the quarter in what continues to be a challenging external environment. This performance has been driven by our continued investment in key initiatives, which will drive long-term growth and create value for shareholders. With that, we would now be happy to take your questions.
If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off. Again, please press star one. We will pause for a moment to allow everyone to signal. We will take our first question from Thomas Chauvet of Citi. Please go ahead.
Good morning, Carol, Faye, Charlotte. Thomas Chauvet from Citi. Three questions, please. The first one on Hong Kong, which seems to be the main reason why you're guiding for PBIT to come down slightly for the year. Were LFL negative in each of the 3 months, or did you see an improvement? What do you think is purely in this quarter a one-off due to the traffic, the protests, or from perhaps a more profound change in the way the Chinese tourists are apprehending this market? Just still on Hong Kong, can you tell us perhaps how roughly much more profitable this market is versus mainland China and the rest of the group? Can you comment on the performance in Europe in a bit more detail, comment perhaps between local and tourist demand and what markets have been particularly strong in the third quarter?
Finally, in terms of product mix, how much do the relaunched Heritage Trench Coat represent as a percentage of apparel, perhaps of outerwear? I would expect this category to be a key driver of ASP going forward. What was ASP in the period, please?
First, there's more than 3 there, Thomas. First of all, on Hong Kong, the like-for-likes across the month, we don't split out like-for-like, month-by-month for you. What we are saying is that footfall was significantly down across the whole quarter, and we worked very hard, our teams, to offset that where we could through improved conversion in ASP, such that we only ended up with a negative low to mid single digit down. Not going to split it out month-by-month, but it's fair to say significant decreases in footfall across the whole quarter. Then you've asked whether that is a one-off or more profound. We commented today that the external environment remains challenging. We're not going to comment on current trading.
It's safe to say that from the external data points that we can look at in terms of hotel occupancy and other things, Hong Kong at the moment will continue to be challenging from an external perspective. Clearly, we're focusing on making sure that we optimize the opportunities that we had ahead of us with Lunar New Year. From what we can see on those external data points, it looks like it will continue to be challenging. In terms of how much more profitable is it versus China and the rest of the group, no different to many of our peers.
Hong Kong is a high margin market, simply driven by the fact that store productivity, because of the size of the stores and the footfall, tends to mean that it is absolutely one of our higher margin markets and represents for us over 10% of group revenues. Looking at EMEA, we were pleased to have double-digit comp growth in EMEA over the quarter. We did see, looking a bit market by market, the U.K. performed well, France was strong, Italy remains a little difficult. Milan isn't in comp at the moment because of the relocation there, difficult to get a read in terms of the comp number.
Local versus tourist, I would say that, in London, we saw great demand from our local customer in the lead up to Christmas, which I think was really pleasing given all of the investment we had made in festive, in the local advertising, the billboards or whatever. I think very much seeing the resurgence of the local domestic customer in London. Tourists declining a little bit in the U.K., we're still seeing a little bit of growth elsewhere. Overall, in terms of Chinese in EMEA, we're still seeing growth in the number of transactions and absolute value of sales. Product mix, Faye?
Yes. In terms of product mix, as you know, outerwear is about half of our apparel, and of that outerwear, about half is rainwear. The majority of that is the Heritage Trench Coat. The thing we called out in the statement, the simplification of the range has made it much easier for the customers to understand. It's made it much easier for the sales associates to sell. We've done some amazing marketing around it. It really drove a significant part of our comp growth in the third quarter.
Any sense of ASP growth, sorry, in the period?
It was the key driver of comp growth.
Thank you.
Our next question comes from Warwick Okines from Deutsche Bank. Please go ahead. Your line is open.
Good morning. 2 questions, please. Firstly, is there anything to say on markdown? I think this time last year, you talked about running an identical sale period with the prior year. Has that changed at all in this quarter? Secondly, last year you also gave some statistics on online. In particular, you said that online orders doubled year on year. Wouldn't imagine it was anywhere near that this year, but just wondering if you could just give a bit more color on digital growth and how significant that was to the comps. Thank you.
In terms of markdown, absolutely no change to last year, Warwick, entirely consistent. Nothing new to update on there. In terms of online, again, we said that online outperformed globally, we were really pleased. In terms of stats, I think one of the interesting things I just touched on it in the script this morning was around the penetration of mobile, which more than doubled in the quarter. And I think, a fun fact is something like our mobile sales in December alone, albeit off a small base, were more than we made in the whole of 2013 and 2014. That investment in mobile absolutely paying off.
Other than that stat, Carol, can you give us any more sense of the digital outperformance? Was it up 50% year-over-year?
As we say, we don't obsess about that number, Warwick. That's not how we think about it. We are saying that if you look at digital sales, they did contribute a few percentage points to comp growth as they had in previous quarters. That's not the way we like to think about it.
Okay. Thanks very much.
Our next question comes from Erwan Rambourg from HSBC. Please go ahead.
Hi. Good morning again. Three questions as well, please. You mentioned that the margin was under pressure with the combination of a slowdown in Hong Kong and the change in the regional sales mix. I get the sense that you're saying twice the same thing, but obviously, I'm probably wrong. I understand why Hong Kong is much higher margin, but what do you mean by the change in the regional sales mix? That's the first question. Second question is, contribution of new stores being at the high end of your previous guidance range. I get the sense that more and more brands are focusing on like for like growth and not necessarily on opening new flagships or rolling out stores. Do you think this will moderate in the future, or do you think you still have a lot of potential to open new stores?
Leaving aside Japan, of course. Thirdly, on Japan itself, maybe can you give us a bit more color on where you're at in terms of negotiations with department store operators, and I think you have four main line stores, today, 12 concessions. Where does this go to over the next few months or the next year? Thank you.
Okay. In terms of the margin, what we're saying this morning, is that the impact of the disruption in Hong Kong clearly has had an impact on the top line. Because it is a high margin business, that flows through in terms of GBP millions of EBIT, if you like, that then impacts on the bottom line. Just looking at that impact on overall group margin, that if you lose that percentage of EBIT in the quarter, that in itself affects the margin. Secondly
Yeah
The EMEA and Americas grew more strongly in this period than Asia, there is a mixed impact as well. It's the two things. It's the GBP millions of profit, if you like, relating to Hong Kong itself, and then the regional sales mix as well. One affecting EBIT-
Okay
if you like, both affecting margin. I'll just do Japan. Faye can do the comment on contribution from new stores. In Japan, we are making, as we said, great progress. Of that four mainline stores we've got now, one is the relocated Omotesando, which I think has been really well received in the region, showing how Burberry is going to present itself in Japan going forward. As I said, we've got Osaka opening in a few months time, and then Shinjuku in the high traffic area of Tokyo. That will take us up to six. We'd originally talked about getting to something like between eight and 10, something like that, by 2016, 2017, and I think no change to that guidance. Likewise, on concessions, we're at 12 now. I think relationships with department stores have never been stronger.
Pascal's doing a great job in building those relationships. I think we had previously spoken to getting to something like 30. And again-
no reason to change that today. Plans for Japan are firmly on track. In terms of new space.
What we've done this morning, previously, we were guiding to a low to mid single-digit % contribution to retail revenue from new space. We've just confirmed that today at 5%. This year, we've relocated quite a lot of stores. We've opened quite a lot of airport stores, so they tend to be quite productive. That's really just a tweaking of guidance. As we look forward over the next two or three years, we expect the contribution from new space to be 2%-3%.
Very clear. Thank you very much.
Our next question comes from Luca Solca from Exane BNP Paribas. Please go ahead.
Good morning. I was just wondering whether you could give us a bit more details on demand by geography. We've seen, I think, contrasted trends as far as the U.S. demand is concerned. Tiffany wasn't particularly exciting, but I think there was an important element coming from tourists. You have strong results in the U.S., and you mentioned the U.S. as a fast growth market. I wonder whether you see any difference according to location, product mix in that category, in that market that you can share with us. I also wonder what you see coming in Eastern Europe. A number of brands have been increasing prices in Russia significantly at the end of 2014. I wonder where you stand on your Eastern European markets and what you see coming from there. Thank you very much.
Okay. In terms of the U.S., yes, we were pleased with posting a double-digit comp. Clearly, the U.S. market for us tends to be probably over around 90% domestic, less impacted by tourism. I think the numbers that we've posted there are a reflection of the investment we have made, continuing to make in digital, continuing to make in customers. Effective campaign in the U.S. was very strong for us. A great response and execution by our teams, then response from our customers. Again, from product perspective, Heritage trench coats, the relaunch of Heritage scarves, personalization, all of that, I think, is what has underpinned that double-digit comp growth in Americas.
If you look at Russia, we have basically no direct business there. The franchise expired in April of this year. We have a very small wholesale business, so we're not really looking at dynamically moving prices there or in other parts of Eastern Europe because it is predominantly wholesale.
Okay. Understood. Another question, if I may, on the beauty side. At one point, you hinted that there could be an interest on your part to build a sort of partnership or cooperation in skin care, that you were happy with being in fragrances on a standalone basis, and cosmetics was probably somewhere in between. Could you give us any update on your thinking on these categories?
No, fragrance first, we're delighted with the launch of My Burberry. I think that has been the halo impact that has brought to the fashion business and vice versa, is absolutely in line with our strategy and great reaction to the launch of that, our first iconic fragrance. In terms of makeup, we talked about this being a year of sort of testing the rollout, and that's progressing nicely. Then skin care, we said that at some point in the future, we would be looking at skin care. Inevitably, if we were to do that, we would look at probably doing that with a partner because of the specialized nature. Nothing new to update on Burberry Beauty strategy today.
We did open, I touched on it in the statement in terms of our second beauty store globally in Seoul, in Korea, and that's had a good reaction so far. Nothing new strategically to update on today.
Thank you very much, indeed.
We will take our next question from John Guy from MainFirst. Please go ahead.
Yes. Good morning. Thanks for taking my questions.
Hi, John.
Hi. Morning. Just on the retail like-for-like, looking at the split between volume and value contribution on the +8%, is that effectively broadly 50/50 as we've seen in previous quarters? Secondly, with regards to Korea, it was about a year ago that we started to see an improvement in the Korean market. I know that you put some new management in. I think parkas back then sold very well. Maybe could you just talk about the ongoing evolution within the Korean market? Excuse me. Also how many flagships you intend to put into that market because, I guess over a year ago, it was very much a concession-driven model. Could you also update as regards to the rates of replenishment for men and women's, have there been any major changes or are we still around the 50% level? Thanks very much.
I'll take the ones on Korea replenishment, John, Faye can just talk about the composition of the retail like-for-like. In terms of Korea, we posted high single-digit comp in the quarter. Like you said, we have been building that business over the last two years, testament to the new management team we've put in, the strength of the brand. Outerwear in that market did very nicely for us in the period. Nothing new to call out, except to say that that trajectory we have been on continues. Likewise, on replenishment the other thing to say probably on Korea actually, John, is of course we're very excited that our flagship store, our first standalone flagship store, will be opening in Seoul towards the back end of this year. In December, I think it's scheduled now to open.
Very much continuing to invest and elevate in Korea. In terms of replenishment, no change really. Still around 50%, and obviously, Heritage is an important part of that as well.
Yeah.
In terms of the balance between value and volume, we've already said that actually the increase in the average selling price was the key driver of comp growth. Driven very much by the success that we saw in Heritage trench coats, and also, the runway-inspired ponchos, which are I say, a nice price point for us.
That's great. Thanks, Faye. Maybe just one follow-up on wholesale. I know that you've kept your guidance for the second half of the year on 2015 effectively unchanged, the tone seems to be a little bit more cautious. Is there anything that you can talk around for the first half of 2016, or should we wait until the full year results for that?
Yeah. No. The words that we've used for our guidance for the second half have been identical since October, no real change there. Then we will update in April what our expectations are for the first half of next year based on the orders that we're currently collecting.
Thanks very much, Faye.
Our next question comes from William Hutchings from Goldman Sachs. Please go ahead.
Good morning, everyone. Two questions for me. One, I wonder if you could give me an update. There were a lot of initiatives over the last six to 12 months with you partnering with third-party digital partners, whether it was Tmall or Twitter buy button, all of these kinds of things. Whether you can give an update in terms of where you are on these and how much contribution these are having into your numbers at the moment. The second question is just to help me understand on profitability. It all sounds a bit of a mix with some positives, some negatives. Can I just help understand the driver in between gross profitability and operating profits? Because presumably with ASP increases and currency gross margins are more positive offset by greater SG&A. Is that the right way to be thinking about the profit guidance? Thanks.
I'll take the one in terms of initiatives. As we've talked to you, those are relationships we have with third parties. Always looking at it through the brand lens in terms of reputation, then reach and revenue. Tmall is still tiny for us, Will, but we've actually expanded the product range we have on that site, and it's doing nicely for us and allows us to access a market in China that we maybe otherwise wouldn't be able to get to, whilst also, of course, importantly, cleaning up the gray market product on that site. The relationships with the right third parties continue, but nothing new to announce today. Twitter was a one-off. Again, innovation that we do with partners around continuing and coming up with new innovation. It was the nail polish around the runway collection and had a nice response.
It's tiny in the overall scheme of things, but just really testament to the way in which we like to innovate and keep at the leading edge. Yeah. You're absolutely right in terms of profitability. It is hugely complex, and I think the thing that we're trying to call out today is the regional mix with Americas growing faster than Europe growing faster than Asia. That impacts our EBIT margin, and it also impacts the gross margin. That's probably the big change that we would focus on today.
Just to be clear, that's the right way of thinking about it. Gross margins are better, and the EBIT margins.
No. The impact of the regional mix will impact gross margin negatively and therefore fall through to the EBIT margin.
Okay. Very clear.
As you identified, there are some offsets to that. The big change since we spoke in November is that the regional mix is adverse to both gross margin and EBIT margin. The loss of profit.
Yeah
on the Hong Kong disruption flows straight through at high margin to the bottom line, therefore also has an impact on the margin.
Okay, fantastic. Thanks very much.
Thank you.
Our next question comes from Rogerio Fujimori from RBC Capital Markets. Please go ahead.
Hi, Carol. Hi, Faye.
Hi, Rogerio.
What is the latest feedback you got from your Asian travel retail partners like DFS during November, December? Given the negative sales trends in Hong Kong, do you expect a material reduction in rental costs for fiscal 2016? Thank you.
In terms of DFS, nothing new to update today. We're holding our guidance. As you know, it's a wholesale partner, no change to guidance for this year. As Faye said, we'll come out in April and talk to you about what next year looks like. In terms of rents in Hong Kong, clearly, all of that is commercially sensitive. Safe to say that there is an element of fixed rent in Hong Kong, which, given the disruption, is why we've seen the EBIT impact that we have. Nothing to talk about publicly in terms of any of those rent negotiations.
Okay, thanks very much.
Our next question comes from Omar Saad of Evercore ISI. Please go ahead.
Hi. Thanks. This is Vicken for Omar.
Morning. Hi.
Hi. Just one question from us. Could you give us an update on marketing, in specific, about the new Heritage Trench Coat collection? Is there any new marketing going behind that collection?
The trench coat is embedded in all of our marketing. Whether from the actual Heritage collection itself to what we do with My Burberry to the festive campaign, it sits at the heart of everything we do. Nothing specific to call out.
If you look at the new campaign, Jourdan Dunn is wearing a trench coat, we do that every single season.
Yeah.
It's very much, as Carol said, at the core of what we do. It's very much our iconic product.
Okay. Thank you very much.
As a final reminder, to ask a question today, please press star one on your telephone keypad.
In summary, we are pleased with our third quarter retail performance, and as Christopher said in his quote this morning, we will continue to focus on the opportunities ahead, while being mindful of the challenging external environment. Thank you very much, and we look forward to speaking to you again on the 15th of April when we have our second half trading update.
Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.