Good morning, and welcome to Verbra's First Quarter Trading Update Conference Call. With me this morning is Fay Dodds, our Vice President of Investor Relations. I will make a few brief comments on our retail performance, and then we will be happy to take your questions. We are pleased with our retail performance in this relatively small Q1, with revenue up 17% underlying and up 9% at reported FX. Retail comps grew by 12%, which was in line with our expectations and was underpinned by our continued planned investments that we talked about at the prelims, both offline and online, in our stores, in digital, in customer service and in marketing.
By region, Asia Pacific delivered double digit comp growth, led by Mainland China and Hong Kong. The Americas also delivered double digit comp growth with a particularly strong performance with penetration of double the global average. In EMEA, we saw low single digit comp growth with softening demand, particularly from domestic Eurozone consumers and some tourist groups in our major markets. The drivers of comp growth remained consistent with previous periods. Both average selling price and volume increased, while digital outperformed in all regions.
We also continued to see consumers changing the way they choose to shop with physical footfall down, but online traffic up and conversion up in both channels. Globally, we continue to execute against our 5 key strategies. Under leverage the franchise, we have put our iconic products under a microscope. With an integrated program of initiatives in design, marketing and retail, we have tested a relaunch of our iconic heritage trench coats and scarves in 30 stores. For the trench coat, we have simplified the selection of products, making it easier both for our customers and our sales associates to identify them.
This trial has seen some good early results and we will be rolling this out to all of our retail stores in the autumn. Under intensify accessories, the focus on key shapes continued and the penetration of solid leather within ladies large leather bags increased. The new shape, the Bloomsbury went down the runway at the autumnwinter 2014 Poulsen Womenswear Show. And under Accelerate Retail led growth, we opened 4 mainline stores, 1 in Edinburgh and 3 in European airports, key for our travelling luxury customer. In underpenetrated markets, we celebrated Burberry's heritage, bringing London to Shanghai with our digitally led store opening event for our carrier center flagship.
The program of media activity supporting the event drove record levels of brand awareness and engagement in the region. And under operational excellence, we continue to improve the use of our iPad based customer service tool, for example, enabling our sales associates to better personalize contacts with customers. Looking forward, there is no change to the revenue guidance we gave in May, but currency headwinds have increased. We now estimate that rebasing 13, 14 retail wholesale profit for currency exchange rates would reduce reported profit by around 55 £1,000,000 which is £15,000,000 more than when we spoke to you in May. And including the £10,000,000 on licensing, this takes the total impact to £65,000,000 which will be H1 weighted.
And please also note that as we continue to grow the business globally, the FX impact in 2014, 2015 will clearly be bigger too. So in summary, we are pleased with our Q1 retail sales performance. And while FX will be a material headwind this year, we are confident in our underlying growth strategies for 2014, 2015 and beyond. So with that, Clay and I would now be pleased to take your questions.
Thank you, Ms. Fairweather. Our first question comes from Thomas Shivett of Citigroup. Please go ahead.
Good morning, Carol, hi, Charlotte. A few questions. Firstly, any reason behind the slightly better than expected contribution from new space in Q1? It was plus 5%. I think market was expecting perhaps low single digit once again like at the end of last year.
Secondly, can you elaborate on the comments of the softening European markets perhaps splitting local versus tourist demand and whether you've seen deteriorating demand patterns throughout the quarter? Thirdly, on Japan, I was curious to know whether you own retail stores. I know it's a small part of the business, but how did they perform in the period after the boost from calendar Q1 ahead of the sales tax increase? And more generally, is there anything you want to highlight on the progress of the Japan transition in Japan, the discussions you're having with the department stores on the search for retail space in particular? And finally, just a few housekeeping questions on digital For Q1, can we get a sense of the split of e commerce between pure online sales, click and collect and iPad install?
That'd be great. And are you able to give any data on the returns rates, for instance? And also whether the penetration of online is higher in some markets than group average? It sounds like the U. S.
Is already probably a much, much higher portion of the retail business there than the group average. So if we could get a sense of the geographic penetration of online, that would be great. Thank you.
Okay. So in terms of NewSpace, I mean, Faye, I think in terms of there's no change to guidance in overall revenues from NewSpace. I think we've talked before about quarter on quarter, it's not sensible to look at it on a quarter by quarter basis. So nothing new to say today, Thomas, I don't think. In terms of EMEA, we are saying that in the quarter, as we had flagged that the prelims, we saw some softening towards the end of H2 and this has continued into Q1.
Looking at the transaction data we have, we see this principally coming from a slowdown in terms of Mainland Europeans, both in their own markets and when they're traveling. And in terms tourist transactions, we see a lower number of tourist transactions, including from Russian tourists, except for the Chinese. So I think the slowdown in EMEA, if you like, is really a continuation of that that we flagged in H2 and is largely Eurozone based and tourists other than the Chinese. And then I think you asked about Japan in terms of retail, I think over the quarter, I think we had a nice growth again, Fayez. Yes.
I mean, you have to kind
of put April to one side, but actually if you look at the last couple of months, we returned to a double digit comp growth there. But do you remember that's off a very small base, 4 stores and 10 concessions. You asked about negotiations department stores. I think Pascal is out there negotiating, but nothing really to report in 6 or 7 weeks since we talked to you in May.
And then in terms of digital, I mean, we don't split out much of the data because that's not how we think about it. We want to make sure that we service the consumer, however we do. But we do know that iPad sales in stores performed very nicely for us again this quarter. And I think we've talked before about it being around 25% of total digital sales. And also collect in store, we've seen again a nice pickup in terms of collect in store where we're now in something like 100 and 31 stores, I think, globally.
So digital continues to outperform. And in terms of penetration, I mean, we do say that the U. S. Is particularly a market where digital sort of punches above its weight compared to our other regions, I think largely driven by our initiatives, but also driven by the way in which the U. S.
Consumer perhaps likes to shop. And in terms of returns, say, I don't know in terms of data there.
Yes, I mean, it's not based that we share, but we know there's been no unusual trends during the quarter.
Okay. Very useful. Thank you.
Thanks, Thomas.
Our next question comes from John Guy of Berenberg Bank. Please go ahead.
Yes. Good morning, Carol. Good morning, Faye. Just two questions for me, please. First of all, on the 12%, could you split out volume and value for us in terms of how that's progressed during the year quarter?
And also you mentioned that the percentage weighting of leather bags across your women's wear range in Bagswear has increased. I was wondering if you could just give us some numbers around the percentage uplift year on year in terms of that penetration rate in leather? Thanks very much.
Yes. In terms of the 12%, I think we're saying that we saw increase both in AUR and in absolute volumes probably broadly split something like half and half across the quarter. So reasonably consistent, I think. In terms of percentage weighting of LeatherFay?
I mean, again, I don't know if it's something we're still going to share externally except to say, if you look on last year, we've seen several percentage points increase in the penetration.
That's great. Thanks very much.
Thanks, John.
Our next question is from Amar Syed of the ISI Group.
Hi, thanks. This is Vik Mohan in for Omar. Just one question from me. Could you talk a little bit about the Mainland China and Hong Kong markets, where you seem to do be doing a bit better than some of your competitors?
Yes. I mean, I think, again, we had double digit in both Hong Kong and China in the quarter. We're saying that I think in China, we know that we've got a number of self help measures there, which we continue to be very focused on, which I think enables us to deliver an outperformance perhaps compared to some of our peers from the evolution of the store portfolio. Remember, we only opened our 1st flagship in Shanghai earlier this year. Our digital engagement, the Chinese luxury consumer tends to be much younger than elsewhere in the world.
And I think everything we're doing in the digital space gives us a point of differentiation there, both when they shop at home, because also as we called out, we did see an increase in the number of transactions from Chinese tourists globally in this quarter. So I think it's really that continuing focus on product, on customer service, on digital that has driven that performance in both China and Hong Kong in the quarter.
Thank you.
Our next question comes from Warwick Atkins of Deutsche Bank.
Yes, good morning. Three questions, please. The first is on digital. I thought I'll just try again on Click and Collect during the quarter. You did say over peak at Q3 that it was about 15% of digital sales.
Is that sort of a broadly representative number for the quarter? Secondly, could you talk a bit more about the trench trial just in terms of price architecture changes, SKU can't change? Just a bit more detail around that, please. And then thirdly, on your Beauty guidance for the year of 25% growth, you have previously said that you expected the sales in sterling to be pretty evenly weighted between H1 and H2. Just wondering if you could confirm if that's still the case?
Thank you.
Yes. So in terms of digital, in this quarter, we saw Collect in Store actually increase to something like around 20% across all as you look at the average across all three regions, we're now in 131 stores. In terms of the work we're doing around heritage, I mean, we're very excited about what we're doing there. We're really focusing on that iconic trench coat and making it much easier for the consumer to shop. So being very clear about 3 styles, 3 colors, 3 lengths.
And I think from the trial that we've done in our stores, that has resonated very well with the consumer both in store, online and also with our sales associates because it makes it a very focused product offering in terms of those core trenches. Nothing specifically to call out in terms of price on those. And then in terms of beauty, yes, we're saying 25% for the year. As we're looking at the order book now, it may be a tad more weighted towards H2 than H1, but no change to guidance today in terms of the 25%.
Thank you very much. And just actually on Collect in Store, it's in 131 stores. How many presumably, all of those are mainline rather than concessions. How many do you think you might get to by peak? And is there any opportunity in concessions?
Yes. I mean, in concessions, it's a bit more difficult because the space tends to be smaller. It's about how you can actually service the customer when they come in from Collect in Store. We'll continue to roll this out in those key larger format mainline stores. So I think we will continue to look on a store by store basis to where it's appropriate to do that.
Helpful. Thanks so much.
Thanks, Warrick. Our next question comes from Rogerio Fomori from Credit Suisse.
Hi, everyone. I have just one question about Asia Pacific. I was wondering if you could comment on the trends for the other key Asian markets. Thank you.
Okay. I mean, as we said, China and Hong Kong, double digit. Korea continued to perform well through the quarter. Clearly, sentiment was a little subdued in the 1st part of the quarter. Southeast Asia tends to be a little slower for us, so that's probably the market that is more challenging.
But in the key markets of Hong Kong and China, still seeing double digit growth.
Thank you.
Our next question comes from William Hutchings of Goldman Sachs.
Good morning. I've got some two questions. One is on I hope you can help with what are the natural offsets you've got in your business to FX? Because clearly, the way that you're helping us understand it is translating last year's profit performance and P and L based on current spot rates. But presumably, there's some natural offsets both in terms of hedging, in terms of what you can do with sourcing, in terms of what you can do with pricing both on a mix and like for like basis?
And also just help us understand, are there any things that you can do in terms of the where your incremental spending goes on CapEx and OpEx in terms of presumably you get a bit of a support from the FX on those spending outside of the Sterling region. So that would be very helpful. And just the other question is, when you talk about your digital initiatives, I wonder if you could just help just in terms of what's gone on in the quarter or perhaps in the next quarter as well. What are you doing explicitly which is new related to either digital marketing or to direct e commerce initiatives? Just to help us
clearly, we're not going to necessarily change our key strategies because of the movement in FX rates, because what we're focusing is the underlying strength of the business. So as you would expect, where we can hedge transactions, our policy is to do so. Whether it's 3rd party transactions out sort of cross border, it has always been our policy to hedge those and we continue to do so and that is built into our guidance. Remember hedging only actually brings you certainty for the next 6 months and the numbers we've guided to today include the hedges we have in place, both for our euro and dollar procurement and our licensing income. So we will always hedge 3rd party external transaction cash flows.
We don't hedge translation and the FX impact we're talking to you about today is translation. Clearly, we do get some offset from OpEx, where we're incurring the OpEx in our overseas companies. But as we've talked about before, if you look at the balance of overseas revenues and OpEx, because we are HQed in London and we have a our corporate cost base here, we don't get a proportion of offset for the impact of FX on the revenues. In terms of sourcing, we wouldn't look to change our country of origin of sourcing just to offset FX. We're a luxury brand and therefore we have to make sure that we source appropriately.
So it's really around controlling what we can control. And likewise, your comments on pricing, as we always do, we will look season to season to see where we need to take any price movements, tend to be a false follow-up rather than actually setting that and we will continue to look at where we will take prices over time, which could offset part of this, but we won't be doing anything short term just to move prices a region because of the offset to offset the FX impact at current exchange rates.
And on that, have you seen others take pricing action? As in if you tend to be a follower, do you monitor what's going on? Do you see prices going up elsewhere from your European peers?
I think we saw we certainly saw people move prices in Japan last year when the yen rate moved. For us, the business in Japan is quite small, but we did follow there. At the moment, there's nothing significant that we're tracking. I mean, we look at it all the time where we can on like for like products. And there's nothing that we're planning on doing in the short the very short term to in terms of changing prices.
Our working assumption is that you have price increases of sort of low to mid single digit, which isn't significantly different from where we've been in the past.
Okay. That's helpful. And just to confirm that so that guidance you've given is based on the translation impact is not transactional, as in it would be a different impact if you reflected the full transactional impact?
That is the full impact of the movement in FX rates on our reported number. If we just simply take 13, 14 and look at what we've got at today's rates, translating the overseas profits and taking into account the hedges that we've got in place on procurement and those Japanese royalty flows. So the net impact of everything we're saying is around £65,000,000
Yes. Okay. Helpful. Thank you.
Okay. In terms of digital, I mean, it's quite a long question. I mean, there's probably 3 buckets to think about. First of all, what we're doing on dotcom, on bovary.com. And later this year, you'll see us relaunch our mobile site.
More traffic is going to mobile, but our conversion rates there are quite low. So we're relaunching mobile. I think we've talked before about we believe there's a lot of opportunity for e commerce in China. At the moment, we fulfill that out of the U. K.
We'll be looking to fulfill that from in China, so we think that will unlock e commerce within China. So that's kind of on the dotcom side. The second thing is we're actually using a lot of our customer insight tools to drive better quality traffic to dotcom, and I think you'll see a better return on investment from that. And then the third thing that we'll be working on later this year is really just negotiating with other third party digital retailers, building on our experience with Amazon and Tmall to work with more partners and to broaden the assortment that we're able to sell through 3rd parties. So a lot going on.
That's great. Thank you very much.
Our next question is from Ashley Wallace of Merrill Lynch. Please go ahead.
Hi, it's Ashley. My questions have actually been answered, but I was just wondering if you could maybe give us a little bit more color on your conversion rates during the period. You said that, that increased. But can you talk a little bit about by region where you're seeing the biggest improvements and where you still have an opportunity for improvement?
Yes. I mean, I think, Ashley, we were pleased because both offline and online and in all regions, we saw conversion continue to increase. And I think that's digital initiatives, which I think have underpinned that. It's safe to say, we talk all the time about the opportunity that still lies ahead of us in terms of productivity. And really, there is an intense focus on looking to continually improve conversion rates in our stores and online, which will ultimately drive those productivity gains, which we know we need to continue to focus on.
So I think more to come on conversion, but it was across all regions and both on and offline, if conversion moved up again in the quarter. Yes,
Our next question comes from Mario Auretelli of Bernstein. Please go ahead.
Good morning. Two questions for me. The first one is possible about new openings. How many store openings are you planning for this year? And if I may, how many of them are travel retail?
And I would like to know if the travel retail revenues that you forecast for the store are more or less in line with the global average are more or less? The second one is your guidance on margin shows a great pressure from FX. Have you got in mind any cost cutting or cost reduction initiative in the company to trying to offset a bit of this pressure on margin? Thank you.
Yes. Hi, Mario. So we're still saying around 20 to 25 new mainline store openings this year. We've obviously had, in terms of travel retail, we've had the 3 airport stores in this quarter. We've got Hong Kong, which is a big one coming up for us, a relocation in Heathrow.
So absolutely focused on travel retail. We see that as an opportunity for us. So Hong Kong and the relocation Heathrow to come up in the remainder of this year, but we'll be focusing on travel retail as we move forward. In terms of your comments on margin and FX, yes, so we're now saying looking at last year's number at today's rates, we'd have around 16% operating margin. In terms of we talk about continuing to invest to drive that top line growth that we've reported today.
So in light of FX, we're not looking to do anything significantly different in our investment plans because we're investing for the long term revenue and profit growth. And therefore, this is obviously, it's an impact on reported profit, but not on the underlying health of the business. Investment plans at the moment that we've talked to you about in terms of looking to increase margin over time.
Thank you very much.
Thank you. As there are no further questions over the telephone, I will now hand you back to the host for any additional or closing remarks.
So thank you. So in summary, we are pleased with our Q1 retail performance. And as Christopher said in his statement this morning, we will continue to focus on the things we can control and remain confident of delivering sustainable profit growth into the future. So thank you for your attention, and we look forward to talking to you on the 14th October when we have our first half trading update. Thank you.