Welcome to the Burberry Group PLC Q3 trading update conference call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Carol Fairweather. Please go ahead.
Good morning, welcome to Burberry's third 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 Q3 retail sales, then we will be happy to take your questions. In the third quarter, retail revenue increased by 14% at both constant and reported exchange rates. As Angela said in her quote, this performance was driven by a planned increase in investment in marketing, customer service, both offline and online, and in our retail portfolio. Comparable sales grew by 12% in this all-important festive period. By region, Asia Pacific again delivered double-digit growth led by Hong Kong, Macau, and Taiwan. Comp growth in mainland China reached double digits again, although our team on the ground in Asia believe this might have benefited to some degree from the earlier timing of Chinese New Year.
We're also pleased with our improving performance in Korea. Americas and EMEA delivered mid to high single-digit growth with a robust performance in the U.K., France, and Germany, while Italy remained weak. Many of the drivers of comp growth were consistent with previous periods. Traffic was weak offline but grew online. Conversion increased in both channels. Digital outperformed in all regions. Outerwear and large leather goods together contributed half of the mainline growth, men's tailoring and accessories grew strongly. The growth in average selling price moderated in the third quarter as expected, driven in part by the success of effective offer, boosting scarves, small leather goods, and beauty, but also by the performance of Burberry Brit. Brit Apparel clearly benefited from the halo effect of the marketing around the Brit Rhythm for Men fragrance launch, and we have the women's launch coming later this quarter.
As I said in the introduction, we had planned to drive sales during the festive period by increased investment. Taking digital as an example, we added three more languages to burberry.com, bringing the total to 11. Improvements in marketing and customer insight attracted more customers to the website. Having brought fulfillment in-house, we doubled the number of orders dispatched year-on-year whilst improving delivery options. Collect-in-Store was available in over 100 stores globally, we increased the number of people in customer service by about 30%. This strategy of increasing investment has clearly delivered results in terms of the 12% comp growth. Globally, we continue to execute against our five key strategies.
Under leverage the franchise, effective campaign created record engagement on social media, contributing to our success in the recent L2 Digital IQ Index, where we were named the fashion brand with the highest Digital IQ for the third successive year. Under intensify accessories, key shapes continue to drive the penetration of solid leather within ladies' large leather bags. Under accelerate retail-led growth, we opened a net five stores in the quarter, including the first Burberry Beauty Box, which opened in December in Covent Garden. Under penetrated markets, we completed the acquisition of three stores in Thailand, a high-potential market for domestic and luxury consumers. Finally, under operational excellence, we continue to enhance and embed the use of Customer 1-1, our iPad-based customer service tool. Looking forward, we have not changed any of our guidance since the interims in November.
The only significant factor to call out is the impact of the further strengthening of sterling, particularly against dollar-denominated currencies. At the interims, we said that we expected the GBP 4 million translation benefit to profit in the first half to reverse in the second half. Given the movement in exchange rates since then, if current rates persist, we now expect the impact of translation in the second half to be about a further GBP 5 million negative from where we were then, together with other FX impacts you expect in any global business. As you adjust your underlying model, remember that at current rates, this negative currency impact will continue into next year, too. In conclusion, we are pleased with our 12% comp growth driven by the planned investment in digital, marketing, customer service, and retail. The macro remains uncertain, and FX is a significant headwind at current rates.
We continue to focus on executing our proven strategies to deliver long-term value. With that said, I would now be pleased to take your questions.
Certainly. If you would like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, that's star one to ask a question. We'll now take our first question from Luca Solca from Exane. Please go ahead. Your line is open.
Yes, good morning. I wonder if you could give us a bit more background on how you see Chinese demand shaping up. I think that there's been quite a concern in the investor community about Chinese discretionary demand, and there seems to be a controversy there. When you point to the uncertainty in the macro, do you see any area where you have less clarity in terms of how demand could shape up down the road in 2014? I'm scratching my head in trying to understand where American luxury demand could come to. I wonder if you're seeing an impact from operating expenditure affecting your guidance on operating margins or not. Thank you very much indeed.
Okay, Luca, thank you. In terms of China, I think you asked about what's happening there in terms of demand. In the numbers we posted this morning, we are saying that China, in mainland China, returns to double-digit in this Q3. We think that may have been impacted a little bit by the timing of Chinese New Year, which is a couple of weeks earlier than last year. Therefore, I think the local Chinese may have been buying presents for the Chinese New Year celebrations towards the end of the third quarter. Notwithstanding that, we're pleased with our performance in China. I think we continue to see that our new stores outperform the stores we acquired. We continue to invest in customer service in China. We know that's really important.
We have our store in Shanghai at the Kerry Center, our largest store in Asia Pacific, opening later this month. We continue to see progress in China, knowing that the Chinese consumer is probably 20, 25 years younger, and therefore, really our digital innovation particularly appeals to them. As important is what's happening outside of China. Really the investment we're making in China is so that we also benefit when they travel outside China. We saw tourist numbers increase again in Q3. Chinese make up a large % of those tourist numbers. That's our view currently on China. In terms of the weaker macro generally, there's nothing specifically that we're calling out, I don't think.
No, I think you just point, for example, if you look at the latest Bain Altagamma report, they called their forecast down for the luxury market as a whole. Certainly, we share your slight confusion about the outlook for the U.S. We were there in December, and it's just quite a difficult market for us to read. Again, very, very pleased with the performance there, particularly on the digital side, where the U.S. consumer's behavior is evolving probably more rapidly than anywhere else in the world.
To your point on operating expenses and margin, what we're saying is no change to full year guidance today of the modest improvement from the 17.1% last year. Important to note that as we've talked to you before, the investment we are making in digital, in marketing, in customer service, in our retail stores is what has helped drive that comp sales performance in Q3. Continue to invest in activities that drive long-term sustainable growth at the top line. No change to operating or EBIT margin guidance today.
Excellent. Thank you very much indeed.
We'll now take our next question from Thomas Chauvet from Citigroup. Please go ahead.
Good morning, Carol, Fay. Three questions, please. The first one, you talked about the moderation in ASP growth largely due to the outperformance of Brit. It's probably the first time, if I'm not mistaken, that Brit outperforms the top end of the pyramid. What would you think was the reason for that in terms of perhaps the consumer mood around Christmas? Secondly, do you have any comments on the shape of your inventory position at the end of December? Thirdly, on beauty, you're referring to a complex transition year, as we know, which led you to trim your profit and margin guidance there.
Could you try to help us now that you're probably preparing for next year, understand how next year a normal year would look like for beauty from a revenue and margin standpoint based on what you're seeing in terms of inventory level, how you've coped with the manufacturing issues, what is your new maybe A&P budget, et cetera? Thank you.
I'll take the average selling price. Certainly what we've seen in this quarter is that the average selling price growth has moderated. There are two main factors behind that. Firstly, the success of festive has meant we've seen really strong performance from things like scarves, small leather goods and beauty, which obviously have a lower selling price. Secondly, we did see a very modest outperformance of Brit. I think we've said to you before that our pyramid is now kind of at the shape that we want it to be, which is broadly 50% Brit, 45% London, 5% Prorsum. I wouldn't expect to see that change much.
Clearly what we saw in the third quarter is with the marketing campaign behind the Brit Rhythm for Men fragrance, that clearly had a halo effect on Brit apparel, mainly in the men's wear, but also we had a very strong women's outerwear offer in Brit. It was pretty marginal, but it did have the impact of moderating average selling price. We would still expect to see elevation within product categories. We would still expect to see some like-for-like price inflation going forward.
Just turning to your comments on inventory, nothing to call out at this stage of any difference in terms of our inventory position at the end of December from what we were expecting. No new news there. In terms of beauty, we talked to you at the interim about the transition we have been through. We are holding the guidance we gave you in November of GBP 140 million of revenue, albeit constituted and comprised in a slightly different way than we expected at the beginning of the year, and around £10 million EBIT in this transitional year. As you'd expect, we're working through our budgets for next year right now, and we'll come back and share more with you, particularly in terms of wholesale guidance for H1 on beauty when we next talk to you in April.
Thank you very much.
Thank you.
Our next question comes from Mario Ortelli from Bernstein. Please go ahead.
Morning. Two questions from me. The first one, if you can give us some colors about the increase of marketing spend, especially if you're spending more on digital media or on traditional media, and which % of sales is this marketing cost spent? The second one is, what share of the sales are due to markdowns in the last quarter and in comparison to the previous year?
Yeah. In terms of marketing spend, I think we're talking about increased marketing spend. We've got more available to us. Now we've got the beauty business in-house, we're able to leverage off of that bigger marketing pot. We continue to invest in very innovative ways digitally. I think, in terms of our festive campaign, I think it sort of had the biggest take-up digitally in terms of the whole festive campaign on digital marketing. Digital marketing continues to, over the last few years, we have switched a large percentage of our marketing budget into digital. I think we're about rightly balanced now, but we'll continue to keep that under review. Just pleased to have the combined pot of marketing available to us of the beauty and the fashion budget together. In terms of markdowns, really nothing to say.
We went on sale at the same time as we did last year, which was after or in line with most of our peers. If you look at our full price sales in the third quarter, they were much stronger than our markdown sales. This sales performance wasn't at the expense of margin.
Thank you.
Next question is from Julian Easthope from Barclays. Please go ahead.
Hi, good morning. I've got three questions as well, if I may. First of all, in terms of your tourism spend, you said that it remained very strong. I just wonder whether you've seen a noticeable difference between the performance of the European tourists or the tourists coming to Europe relative to tourists coming to the U.S., given the sort of changes within the FX. The second question is the sort of general industry trend that we've seen with the move to leather away from canvas. Your checked bags, is it possible to say what % of your sales, of your large leather goods bags are actually the canvas bags in check? Whether or not they're suffering the same sort of issues that other companies are seeing, and how leather is actually performing relative.
Lastly, in terms of the same-store sales growth, is it possible to sort of give an indication as to how online did within that relative to the stores? As I assume it's been very good recently. Thank you.
Julian, in terms of tourist spend, we saw another nice increase in tourist transactions globally in Q3. In terms of America versus Europe, we know that the U.S. tends to be much more of a home market and less of a tourist-driven market. No big shift in terms of anything we've seen given the impact of FX in terms of tourist patterns to date. In terms of leather versus canvas, Fay?
I think we've talked to you before how the penetration of our solid leather bags is increasing significantly. You'll remember that we withdrew from Nova, it must have been now two years ago. There's been a lot of innovation going through around the Haymarket and House check. We are still seeing outperformance from the solid leather bags helped by some of the new materials and also by the key shapes such as the Orchard and the Crush.
Just in terms of like-for-like, we don't split out the performance of online, but we have said that online absolutely overperformed in this quarter. Important, Julian, although we don't split that because we do not think internally about online versus offline. We want to make sure that all the investment we're making in digital, whether people come into the store and then buy off the iPad, that's absolutely fine. Whether they look on the iPad and then come into the store. Digital outperformed. We know it helped drive the growth. Internally, we're reinventing the way we think about retail, and we just look at those two combined, really.
Thank you very much.
Next question is from John Guy from Berenberg. Please go ahead.
Good morning. Thanks. Just a couple of questions from me as well. Just following on from the online versus same-store sales growth. The iPad sales and the click and collect in store, just to confirm, they do go into the comp. Are you thinking about changing the way that you report that? That's my first question.
John, they do. iPad sales and click and collect at the moment, we record as a digital sale. I just spoke on the last question about just re-looking at the way we are thinking internally. As part of that our reporting will evolve as well. Safe to say, actually having those iPad sales in stores and the click and collect and the investment we've made is absolutely what helped drive our comp sale in this quarter.
Are you going to give us any sort of quantification on the 12% or?
No.
Okay, fine. With regards to Korea, obviously, nice to see an uptick there after, say, a progressive 12 months of new management. With regards to the new flagship, is that due to go into Korea in 2014 or 2015?
It goes in 2015.
Yeah.
2015.
It'll be a key moment for the brand in that market because to date we've just had concessions. This will be the first
Yeah
standalone store, and it's a pretty glorious store.
Okay. Finally, just with regards to some of the comments you made around festive trading, strong sales, slightly stronger sales in Brit, also scarves and small leather goods, all indicate a pretty positive mix effect in terms of gross margin. Relative to the investment that you've been putting into marketing, should we start to see maybe a little bit more positive leverage coming through given the implied positive mix here?
Yeah, no, I think we've talked before about the improvement we've seen in gross margin over the last few years now beginning to moderate. We are pleased with the performance of our gifting strategy over festive, and what that did in terms of top line. I wouldn't be changing particularly any of our gross margin guidance today, on the back of that. Don't forget, we've also flagged FX, which on a translation basis will also affect the reported number on gross margin going forward. Nothing significant to call out on gross margin today.
Okay, great. Sorry, just one final follow-up on the U.K., you also called that out as a strong market within Europe.
Yeah.
The Regent Street and Knightsbridge contribution, I think in terms of store openings, you mentioned in the release that you had two in China, you had one in Mexico, and you had the Beauty Box in Covent Garden. Out of the five net, where was the other one?
Singapore.
Singapore.
Yeah. Singapore. It was a children's store in Singapore, on that one. In terms of the U.K., Regent Street and Knightsbridge, yes, both performing very nicely. Regent Street, I think in terms of digital, what we've been able to drive there, both in terms of iPad sales and click and collect. We're very pleased with the performance that has helped drive over the Christmas period.
Fantastic. Many thanks.
Thank you, John.
Next question is from Warrick Gibbons from Deutsche Bank. Please go ahead.
Good morning. A couple of questions on space, please. Firstly, could you just help us understand the slowdown in the contribution to sales from new space, for this quarter, which I think was about 2% compared with 4% the prior quarter. Quite a lot of moving parts, I guess, if you could help us understand that. Secondly, could you give some indication of your space plans for the financial year ahead, just what sort of store opening program you anticipate and where closures might have to come as well? Thank you.
I mean, Warrick, in terms of space in the quarter, important to note that today we are calling out no change to our guidance on contribution from new space in the full year, which we still see as being low to mid single digits. Nothing that has happened in Q3 has changed our guidance. Important probably not to get overly analytical about the Q3 number itself. Remember, it's a net number, and so reflects opening and closures. The absolute amount of space that opened in Q3 was slightly less than has been in previous quarters. We tend to look at it on an annual basis, although stores are, of course, tested against our benchmark hurdle rate. No change to contribution from new space for the full year, even though Q3 does look like a tad off of that guidance that we have given you.
In terms of space for the year ahead, again, we're finalizing our budgets as we speak. We talked to you before about on average around 10% space growth over the coming three years. We're not guiding on space, specifically in terms of square foot going forward. That will vary year-on-year depending on the timings of openings, particularly with these larger flagships. Nothing new to say today on space guidance going forward or contribution from new space.
Could you maybe just talk about the areas where store closures will be required in the year ahead then, or just a sense of whether or not that activity is going to slow down or accelerate compared to this year?
Again, as Carol said, we're finalizing our budgets. Where you will see continuing evolution is clearly in the Chinese portfolio as we move out of those acquired stores. I think we've said that the new stores significantly outperform the acquired stores, and that's one of the reasons we're outperforming in China. It's almost on a case-by-case basis as we look at the opportunity to relocate some stores. For example, in this quarter, we relocated our store in Hamburg, and that counts as a store closure and a store opening. China I think is the one market where there's perhaps strategic evolution, and then it's being done on a store-by-store basis.
That's great. Thank you very much.
Next question is from Fraser Ramzan from Nomura. Please go ahead.
Oh, thanks very much. Good morning. Excuse me. Just really trying to join a few dots on online and digital sales, really. I think in the past you've indicated that sales generated online as opposed to in store were a mid-single digit % of sales. Is that correct?
Yes. It is. We said that digital outperformed in this quarter, that's nudging up. Again, it's still a reasonably small % of our overall sales base.
That would be a mid-single digit % of retail sales as opposed to retail wholesale, just to be clear.
Yes.
Okay.
Back to the point, Fraser, that we're not obsessing about the percentage because it's really about servicing that customer however they end up effecting the transaction at the end of the day with us.
Sure. At the half year, you also indicated that penetration in the Americas was more than double the group average. I think that's right, yeah. Would it be fair to say it would be in double digits then in the Americas?
Yes. It's definitely a higher percentage in the Americas, we said that we had a very nice performance on digital in the Americas or in the U.S. in the third quarter.
Right. You just indicated that your online shipments doubled in the quarter, I think, in your introductory comments. That obviously doesn't indicate that sales necessarily doubled.
The number ordered. Yeah.
Sorry, the orders doubled in the period. Okay. Just a final one. On your hurdle rates and paybacks, do you factor sales generated outside of a store into your payback calculations and IRR calculations for whether or not to make an investment in a store?
No, at the moment, we're continuing to evaluate it on a forward basis. Clearly.
Yeah
As it becomes a more important part, we talk about sort of reinventing retail. We need to relook at every metric when we're evaluating and reporting our KPIs internally.
Yeah.
We will evolve that. No, at the moment, those store projects are still evaluated just on a forward basis, and we may obviously look a memorandum in terms of what the digital contribution might be. We'll continue to evolve our models and evaluations as the business continues to shift.
That's great. Thanks. Very helpful. Thanks.
Next question is from Geoff Ruddell from Morgan Stanley.
Yeah, morning.
Morning.
Yeah, morning. three questions, if I may. The first one, just following up from Fraser. On your online sales, roughly what proportion has been click and collected?
I'll let Fay look that one up while I'll take the next question.
Okay. I'll move on to the next one, which is, I was wondering how you talk about increased investments in digital marketing. I was wondering how much of your traffic to your website comes from paid search.
That's a big. Can we get back to you on that?
Okay. Finally, hopefully an easy one. Do you have any clarity yet on when Christopher will formally take over as CEO?
No, we're still in transition. As we talked about mid 2014. Clearly, we're all working very closely with Angela and Christopher through this transition phase. Important to note that we had two and a half months of transition, if you like, in Q3 and posted this very nice number. It's very much focused on transition and business as usual, working as a management team as we have done for the last several years.
Okay.
Collect in store for the quarter is about 15% of digital sales, big regional variations and big variations by store.
Is your returns to store a similar sort of percentage, or is that higher or lower?
That's another. Could you stop doing that, Geoff, please?
Sorry.
No idea. We'll get back to you on that one as well.
Okay. Thanks so much.
As a reminder to ask a question today, please press star one on your telephone keypad. We'll now take our next question from Roger Fujimori from Credit Suisse. Please go ahead.
Hi, everyone. I was wondering if you could update us on how the Burberry pyramid composition in China compare with your other markets. Is it still a bit more skewed to Brit than other regions? Also, how has the gender mix in China evolved with your success in men's tailoring accessories? I'm just trying to get a sense of how much catch-up versus global average is still left to be captured. Thank you.
I think we've shifted over the last two years as we have taken back the business in China. We have evolved that pyramid, and therefore, it much more mirrors the global pyramid, if you like. I think there is still slightly more penetration of Brits than globally, but a significant shift from where we were three, four years ago when we took the business back. In terms of men's as well, I think there may be a slight bias in China towards men's, where we have been very successful in terms of particularly men's and men's accessories. Again, slightly higher penetration than globally, but not super significant.
Have you implemented any price increases in any of your key markets in January?
In January?
No.
Nothing specific, I don't think. We always talk about strategically, we are now broadly where we want to be from a pricing global architecture perspective. We will look at markets on a tactical basis and follow if there's something that everybody else is doing, and we think there's either a particular country or a particular product line that we may want to move, but nothing specific to call out.
No, because we tend to review our pricing at the beginning of each season, and clearly spring/summer goes in in November and then autumn/winter about sort of June time.
Thank you very much.
Next question is from Omar Saad from ISI Group. Please go ahead.
Hi, this is Vic in for Omar. I'm wondering if you could give us a little bit of an update on the Italy market and some of the weakness you're seeing there. Is there a stabilization on the horizon, or do you expect this to continue? Thanks.
Yeah. Italy, I think we've called out this morning continues to remain weaker than elsewhere in Europe, and clearly we're focusing on making sure that we can continue to perform well in that region. I don't think there's anything new or different to call out, compared to where we were when we last spoke to you.
Thanks. On Korea and the improvement in Korea, is there anything else to mention there? Is there any kind of key drivers behind that improvement?
I think we have talked before about the change that we've made in the management team there, and I think we are now seeing the results of that, and we just remain very focused on continuing to improve performance as the whole market also continues to improve. We're pleased with what we've seen in Korea.
I think it's around much more focused marketing, working more with VIPs and doing more PR activity there, elevation of the product, and as we mentioned before, looking forward to the flagship opening in 2015.
Thank you very much.
Our next question is from Erwan Rambourg from HSBC. Please go ahead.
Hi, good morning. Three questions as well. I'm sorry, it's a bit typical. Just wanted to come back to Korea, to figure out, is the improvement linked to the fact that duty-free is flying in Korea, or is it also linked to the local market? Is this improvement a Burberry specific, or are you saying basically the entire Korean market for soft luxury goods doing slightly better? That's question number one. Question number two is on China. If you can remind us of where your footprint is today and where you want it to be eventually. Also, I think you anecdotally mentioned that maybe Q3 had seen a bit of help from the anticipation of a slightly earlier Chinese New Year. All things being equal, should we expect Q4 to be slightly affected negatively by that?
Thirdly, coming back to the very strong same-store sales growth for the quarter, can you give us a sense of what is the balance between unit growth, mix growth and price growth, to explain this 12%? Thank you.
In terms of Korea, the duty-free market in Korea tends to be a wholesale market for us rather than a retail market. We're not reporting in wholesale on this quarter. The numbers we're reporting today are our retail business, which tends to be much more of a local market, domestic market. In terms of China, we're now at 72 stores, compared to, I think we were at 71 at the end of September. Continuing with our rollout plan, and we continue to evaluate all of those stores against our hurdle rate as you would expect us to do, making sure they're in the right locations with the right adjacencies. Happy to share more plans with you on China as they develop. We're continuing to see those new stores outperforming the existing stores.
The rollout plan continues, albeit continually evaluating against our investment criteria. We have talked about the fact that the earlier timing of Chinese New Year may have helped our same-store sales growth in China, which got back to double digit in Q3. We don't guide on Q4, but just to say we are well set up for Chinese New Year wherever that luxury Chinese consumer wants to be during that period, be it at home or when they're traveling elsewhere. In terms of what drove the like-for-like between unit mix and ASP, I think we talked before about the fact that it was more unit driven than an average selling price in this quarter, as we had planned for it to be. We're happy with the way the like-for-like was delivered.
Thanks for that. I just wanted to come back on the Korean question. The improvement in the underlying local market, which is driven by locals, is this Burberry specific, or are you seeing the overall market doing better in Korea?
Yeah. Sorry. I think the market is probably a bit better, from what we can see about how our peers are performing. Certainly, I think the actions that have been taken by the new management team around marketing and product, and starting to look at the concession base there, are delivering results.
Fantastic. Thanks a lot for your help. Thanks.
At this time, there are no further questions in the queue.
Thank you for your attention. As I said earlier, we are pleased with our third quarter retail sales performance, driven by those planned investments. Whilst the macro remains uncertain and FX a headwind, well, we have exciting plans in the coming period for retail, digital marketing and beauty, which we believe will drive sustainable long-term growth. We look forward to speaking to you again on the 16th of April, when we'll be announcing our second half sales. Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.