Hello and welcome to Burberry. We'd like to remind you that this is a live webcast. So kindly remember to turn your mobile phones off. Thank you very much.
Well, good morning, everyone, and welcome to our interim results presentation. Burberry has a clear strategy, a world class management team. And today, we are announcing another solid first half building on the momentum in the brand and in the business. Last month, we announced that Angela was leaving us to join Apple. And I would personally like to take this opportunity to thank her for the immense contribution she has made to the success of Burberry over these past 8 years.
Andrew I know how difficult a decision it was for you to leave Burberry, but I'm sure you'll always have great memories, a warm spot in your heart for this great, great British brand. At the same time, we talked about Angela leaving, we also made with Angela over the past 8 years and is a natural successor. Christopher will be supported by an incredibly strong team and you may have already seen some of these leaders present at past results and investor conferences. Christopher will lead Burberry into the next exciting chapter of its growth. And over the coming months, Angela will progressively transfer leadership responsibility to Christopher in such a way as to minimize disruption to the business this year.
However, the main purpose of today's meeting is for us to present the interim results. But before Angela and Carol do just that, I would like to ask Christopher to speak briefly about his vision for brand, his organization plans and what you should expect strategically to create future value for our shareholders. By keeping Burberry at the forefront creatively, digitally and operationally. Christopher?
Thank you, John, and hello, everybody. I would like to add a very warm welcome to Horseroy House, particularly to those who have not been here before. This building in which our design and operational teams work side by side is the real heart of Burberry, which is why there is no better place to be talking to you about our performance over the past 6 months, which Angela and Carol will do in just a moment. To set the scene, I would like to play a short video that recaps some of the highlights from the first half of this year. I hope that gave you some sense of our achievements these past 6 months building on the outstanding platform established in recent years and Angela's magnificent leadership.
As we reflect today on Burberry's performance in the first half and before I formally assume my new role next year, this feels like the right moment to say a few words about why I am so excited about the next phase of Burbridge our future organizational structure, and finally a word on strategic focus. Looking around the room today, it is a pleasure to see many familiar faces, but I'm also conscious that there are many of you I've not had the opportunity to meet before. As such, I thought it might be appropriate to begin with some brief insights into my Burberry journey so far. I joined Burberry in 2000 and one though my love for the brand started many years before that with a trench coat that I inherited from my grandfather. It was his pride and joy and I loved it just as Not least because that trench coat was made just 20 miles away from where I grew up in Yorkshire and where our iconic trench coats are still made today.
I had from that moment on an incredibly strong sense of Burberry's identity as a brand. I knew then that Burberry stood for Britishness and for excellence of design, craft and product. I also knew that it created things that people aspire to own and to cherish. It is these values that I have endeavored to keep hold of throughout my 13 years at Burberry. As we have built this company into a great British global luxury brand.
During my time at Burberry, I am proud to have played my part in shaping and building what Burberry stands for in the 21st century, designing not only the products, but also the environments and the experiences that connect and engage all our consumers globally. We have bought back our licenses and taken back control of our brand. The result is that we have built a company with an utterly distinctive and entirely consistent point of view. To achieve this has required new ways of working and thinking, uniting diverse teams and challenging ourselves as well as accepted norms to become a truly design led company. We have always seen art and commerce not as opposing forces, but as two sides of the same coin.
It is this distinctive union of the artistic and the commercial that defines Burberry today and that has played a huge role in our success to date just as it will in our future. There is no more powerful foundation for that future success than the united global teams that we have established in recent years under the leadership of an outstanding group of senior executives. I am excited by the prospect of leading and working alongside this team as we take Burberry onto the next stage of its journey. I would like to take a few moments to summarize how the organization has evolved to date, how we will structure the business in this next phase, as well as some new developments that will support me in my new role. We are still early in the transition phase, but are already well advanced an organizational structure that will see the direct reporting lines, which currently exist under me and Angela streamlined and distilled into 3 key pillars: product, our regions, operations and finance 1st product, which encompasses design all product areas and communication.
This first pillar brings together all the customer facing elements of our business and will be headed up by our seasoned Marketing Officer, Chief Marketing Officer and Chief Supply Chain Officer as well as our SVPs of Creative Media and Product Development and our SVP of Beauty, who joined us last year to oversee this new product division. In addition, I am creating a new role of Chief Design Officer to oversee all design activities under my brand. This new role is being filled internally by Luc me for over 12 years. The second key pillar is the regions. EMEA, Americas and Asia Pacific overseen by our 2 highly respected CEOs Andrew Maag and Pascal Perrier.
With 15 years combined Baudrillard experience and highly motivated talented regional teams Andrew and Pascal will continue to drive further growth globally in close collaboration with their functional partners at the corporate center. The final pillar brings together all of our operational and financial functions. We have another exceptional team of experts already in place in this area including our Chief Operating Officer, John Smith and our Chief Financial Officer, Carol Fairweather. John as you know has been on the Burberry Board for 4 years and took on the role of will and social commerce as well as optimizing our global licenses. You all know Carol and will appreciate her unique blend of institutional Burberry knowledge and exceptional track record.
In 7 years with Burberry, Carol has established an outstanding reputation both internally and externally and will continue to partner with the organization globally to drive long term sustainable growth in this next phase. We also have our highly experienced Chiefs of Technology, Strategy, People, Customers and Corporate Affairs. Across these three pillars, we have the best talent in the industry running the day to day operations of Burberry by channel, by region and by product division. They operate in a structure that will fully support me to effectively lead the creative and commercial dimensions of our business in its next exciting phase. It has been my privilege to have worked closely alongside this exceptional group of colleagues over many years and I look forward to partnering still closer with them in the months and the years ahead.
With this structure, I will have significantly less reports than Angela. To close, I'd like to say a few words on our strategies. As we said at the time of the announcement a few weeks ago, there will be no radical change to Burbridge strategies as we enter this next phase. Having worked together with Angela over the past 8 years to create the company we both always dreamed of building, I'm proud to have partnered closely in shaping the strategic direction for sustained financial growth from positioning Britishness and outerwear at our core to speaking to millennial consumers through digital to creating a cohesive and with a commitment to the next generation of young people. Burberry today is brilliantly positioned for future with tremendous brand momentum and significant opportunities by channel, by region and product division including the transformative potential of Burberry Beauty and the Japanese integration.
We will continue to evolve our 5 key strategies in support of these opportunities over the coming years, driving productivity, efficiency and focus in all areas. I hope these past few minutes have given you a sense of why I am both proud and excited to be taking on this new role and to have the opportunity to lead Burberry into its next chapter. I believe this is a brand and a culture like no other with solid business strategies and tremendous potential and fuel in the tank. As we transition, I look forward to updating you all on the achievements of the teams in the months ahead when I will have formally assumed my new role. With that, I thank you very much indeed.
And I will now hand over to Angela who will deal with business as usual.
Thank you, Christopher and good morning. We had a solid first half with revenue up 17%. Adjusted PBT unchanged year on year at $174,000,000 better than we expected at the start of the year, a strong cash position and a 10% increase in the interim dividend. Our five strategies remain as relevant today as ever. The portfolio is balanced by channel, region and product and we continue to unlock the power of our regional teams giving them brand momentum driven by digital collaborations with technology leaders such as Google and Apple, extensive use of outdoor advertising in flagship markets and innovation around Brit Rhythm For Men, our first ever direct fragrance launch.
Leveraging Burberry's capabilities across music, social media, compelling content and of course digital activation, all shot and produced by our in house creative media teams. So picking up on revenue. Total revenue for the half increased by 17% at reported FX and 14% at constant FX. Retail continues to be the primary driver, while wholesale and licensing were both impacted by the direct operation of beauty from April 1. In retail, revenue increased by 17 percent underlying.
Com store sales growth although uneven was still up 13% in both quarters. Average selling price remains a key driver of growth as consumers continue to buy more improved in both. As you know, we fully embraced and invested in digital online and offline, a point of difference from many of our peers. And we continue to see encouraging results from iPad's in store, which now comprise almost 30% of our online business to our new client telling tool Customer 1 to 1 which is now live in over 300 stores. And you can now choose to collect your order online or buy it online and collect it in store in over 80 locations globally.
All of this has helped improve customer service and further drive revenue. Turning to wholesale
to
better than originally planned. And this improved trend is reflected in our guidance for the second half as we continue to see the U. S, Asia travel retail and emerging markets as growth drivers. Turning to beauty, where we are as excited about the opportunity as we ever have been. But let me remind you briefly why we decided to take this under direct control.
1st, compared to our peers, we are underpenetrated in beauty, which is one of the largest product areas in luxury. 2nd, beauty is the entry to and the most widely encountered projection of our brand, so we must own it. And 3rd, direct operation will also facilitate a single integrated global marketing program with a 50% higher spend, providing a positive halo effect across apparel, accessories and beauty and continuing to drive our strong brand momentum. We talked in the statement this morning about some of the short term issues we face, which may reduce this year's beauty profit to around $10,000,000 as we encountered some supply chain and regulatory delays and higher than expected inventory levels at our distributors. Short term, we will be looking for offsets from the significantly larger divisions.
And longer term, strongly believe that Beauty will be a key contributor to our future growth and profitability, so we will continue to invest to drive this. With additional marketing spend behind Brit Rhythm, building the team and investing in product development in our small makeup business, all driving growth in beauty and building a halo effect across the entire Burberry brand. Finally, licensing where revenue was down 19%, but excluding fragrance from last year's numbers was up 2% underlying. While Japan was unchanged as expected, Watches and I were together posted double digit growth. As we've done in our core business, we continue to work with our partners to reposition To support this more luxury positioning, our partners relocating about 20% of the doors to more brand appropriate spaces.
This is absolutely the right thing to do for the brand, though may impact growth in licensing next year. The Japan team led by Pascal Perrier, our Chief Executive Officer of Asia Pacific continues to be focused on preparing for the transition to the global collection where the local apparel license expires in 2015. We've opened another mainline luxury store in Roppongi Hills, Tokyo to bring our total to 4 mainline stores and 10 concessions in that market. These stores are performing well as product, retail and marketing initiatives are more refined. As promised, the team will share more of our thoughts regarding Japan at the prelims in May of next year.
As you can see from slide, our business remains very balanced by region. Please note that the growth rates by region are slightly distorted by the new Beauty division. Excluding Beauty, Asia Pacific grew by double digits and EMEA by and the Americas by high single digits. In Asia Pacific, comp store sales were up double digits. And we're pleased with our performance in Mainland China supported by ongoing brand, product and store evolution.
Mainline comp growth slowed slightly in the 2nd quarter and was offset by Chinese customers shopping elsewhere in Asia, particularly Hong Kong and also in Europe, which is why we have been focusing our investment in these key flagship markets. In China today, we have 71 stores of which 30 were acquired and 41 opened by us including the 2 new stores you can see on this slide in Shanghai. We're continuing to evolve our store portfolio plans as the Chinese luxury customer shopping patterns change. I'm thrilled to announce that we have this week agreed to acquire 3 stores in Thailand, which were previously operated by a franchise partner. In EMEA, comp store sales growth was up double digits.
Performance in the U. K. Improved. France and Germany remained robust, while Dubai was weak reflecting soft tourism. A higher proportion of transactions in European flagship markets came from tourists in the first half compared to last year.
Hence, our investment in travel retail at Heathrow T3, a Britrhythm pop up shop in T5, the store takeover with Printemps in Paris and of course Regent Street and Knightsbridge are just annualizing in our home market in London. Turning to the Americas. Retail comp was up high single digits. The penetration of digital in our U. S.
Retail remains the highest of all regions. And although relatively large already, we continue to see strong growth through the dotcom sites of our wholesale partners as well. Real estate expansion for this region is focused outside of the U. S. Particularly in the high potential markets of Brazil and Mexico.
And the first stores in Chile and Colombia were recently opened by a franchisee. Our partners, our business and growth is also very well balanced by product. This chart includes Beauty, our 5th product division for the first time. Outerwear at nearly half of apparel is always at the core of what we do. Accessories remained our largest product division at 37 percent of revenue underpinned by large leather goods at over half of the business with the penetration of solid leather bags increased year on year and our key shape strategy performed very well.
And our growth initiatives in men's are also working well with the penetration of menswear and men's accessories increasing by a further 2 percentage points in mainline retail, clearly helped by the halo effect of the launch of Brit Rhythm for men in the last few weeks of the quarter. Last year, we delivered very strong growth over the festive period. So this year, we've been intensely focused on preparing for this time with cross functional teams working together since the beginning of the year to ensure we have the most diverse and compelling gifts every month which strongly feature in our messaging on and offline. As you can see from the slide, the theme is Burberry with love, building on Trench Kisses from the February runway show and Burberry Kisses by Google launched last June. So before I hand over to Carol, let me show you a short video that highlights the key festive marketing strategy.
Thank you, Angela and good morning. As Angela has already summarized, we delivered a strong set of results in the first half reflecting strong momentum in the business and brand with revenue up 17%, adjusted profit before tax unchanged at £174,000,000 a strong cash position and the interim dividend up 10%. We are pleased with our first half profit performance which was better than we expected at the start of the year and remain confident for the full year albeit we're still ahead of the all important festive period and operating in an uncertain macro environment. Turning to retail operating profit grew by 7% in the first half to £138,000,000 a 13.9% margin. The key drivers of this growth were a £4,000,000 translation gain from FX, a first time contribution from Beauty of £6,000,000 a reinstatement of part of the performance related pay charge, which was therefore £8,000,000 higher than the prior year and a £7,000,000 increase from the core business with operating leverage from the 17% underlying retail growth partly offset by lower wholesale revenue.
So let's look at these numbers in greater detail. Gross margin in the first half was unchanged at 69.2%. Beauty in this transition period was dilutive to gross margin. But in the core business in light of the significant benefits we have delivered over the last few years there were no major changes in gross margin trends. Excluding beauty the key drivers of the modest improvement continue to be the net benefit from FX, the mix shift to retail and some modest price increases.
Our operating expenses increased by £101,000,000 to 547,000,000 in the first half resulting in an operating expenses to sales ratio of 55.3 percent. About 1 quarter of the £1,000,000 increase was from the step up in cost to support beauty, another quarter resulting from the opening of new stores and the balance of the increase came from general inflation, increased investment in marketing and IT, volume related increases and the higher performance related pay charge. Turning to licensing profit for the half was £36,000,000 As you can see from slide, the change from H1 last year related predominantly to the loss of £11,000,000 of revenue from the discontinued fragrance license, offset by the growth in remaining licenses and lower costs. The impact of FX in the first half was £0.4 pound we're now expecting a negative impact in the second half of around £4,000,000 Working down the income statement we had a 0 point £3,000,000 of finance income in the half and expect it to be about this level for the full year. The exceptional item of £15,000,000 comprises 2 things the £7,500,000 amortization of the beauty intangible which will be £15,000,000 in the full year and a £7,400,000 charge relating to the China put option liability where there is a call option in 2015 and a put in 2020 over the 15% economic interest in the Chinese business not held by us.
The tax charge of £43,000,000 reflects our estimated effective tax rate on adjusted PBT for the full year of 25% against the 25.8% achieved in the full year 2013. And finally, the movement in the non controlling interest is primarily a result of us having taken full effective ownership of the small loss making retail operation in Japan as we prepare for the expiry of the apparel license in 2015. Our business remains strongly cash generative with £142,000,000 of cash flow from operations a small increase versus 130 €8,000,000 last year. Depreciation rose to £62,000,000 and we expect a charge of around £130,000,000 for the full year. Excluding beauty, inventories were up 9% at constant FX growing at a slower rate than retail sales which were up Translating that operating cash flow to net cash, Translating that operating cash flow to net cash, capital expenditure was £63,000,000 of which retail was about 70% split evenly between the regions and between flagship and other markets.
And we continue to expect that our CapEx will be around £200,000,000 for the full year. Tax dividends and other outflows totaled £168,000,000 so we finished the half with net cash of 208 million. The board regularly reviewed our balance sheet structure taking into account our lease commitments and is currently happy with this net cash positive position given our growth plans ahead. The slide in your pack summarizes our outlook and I would just like to highlight 2 things. The first is beauty where we have held revenue guidance at £140,000,000 with a lower proportion of sales from existing products due to the short term issues we faced as Anshoom discussed earlier, with a higher proportion from new products supported by additional marketing investments.
And although this may reduce year on profit to about £10,000,000 we will look to offset this shortfall elsewhere in the business and we remain confident about the growth opportunities in beauty. The second thing to highlight is the potential impact from currency. There was a translation benefit from FX to both revenue and profits in the first half. However, as you build your model please note that if current rates persist for the balance of the year the impact would be negative in the second half with little overall benefit to the year. To close, we are pleased with the momentum in the brand and business in what remains an uncertain macro environment.
We finished the half year with a strong financial position with the goal remaining to drive profitable growth and a further modest expansion action. So action. So thank you for your attention. And I would now like to hand back to Angela for closing comments.
Thanks, Carol. So in summary, we've delivered a solid first half. And as we head into the all important second half, the team remains focused on delivering profitable growth both this year and well into the future. As Christopher explained, it's very much business as usual during this transition period. The strategies are sound.
The culture closely connected and the senior team energized and fully committed behind did when I took the helm in 2006. And I'd like to thank Sir John Pease, Burberry's Chairman and the entire Burberry Board for their unwavering support throughout and Christopher for his trusting partnership and the entire Burberry team for their passion for the brand and compassion for one another and the communities where we all live and work. Personally, I am honored and humbled to have built and worked for such sector today. And Christopher, we did it. We created the kind of company we always dreamed of working for.
Thank you so much. Carol and I will now take your questions. Do you have
microphone? Not sure who
to give it to first.
Good morning. Mario Thalios from Bernstein. Three questions if I may. The first one is about your strategy. The new exciting chapter in the in the growth of Burberry implies an elevation of the brand become more exclusive.
And if yes, what are the investments linked to this further repositioning of Burberry? And what is the expected EBIT margin that you expect for the next years? The second one is
If you don't mind, could we answer 1 at a time or otherwise we'll get them? Yes. So there is no repositioning of the brand at all. I don't know if something was misunderstood. The strategies remain the same.
The positioning is exactly where we want it. The pyramid is so sound. Nearly half the business is porcelain London. The other half is Brit. The only new strategy is the acceleration of beauty, which we feel is a tremendous opportunity when we compare ourselves to our peers.
Yes. And in terms of investment as we talk about we always talk about investing for the long term growth of the brand. So we will continue to invest. Our strategies are clear in digital, in flagship markets, in servicing the consumer. And we will continue to aim to increase that modestly increase that retail wholesale EBIT margin as we have done over the last few years.
So very much the strategies are unchanged and investment plans unchanged likewise. If you If you want to give
a target of EBIT margin for the next 5 years?
We've never look.
I'll give it right.
That would be a change its strategy.
The second one is which percentage of your sales are due to travelers?
It's a really tough one. We've been building a consumer insight and analytics department over the last couple of years. So it's hard unless because a lot of them have second homes etcetera. We estimate maybe about 30%, 35%. McKinsey claims that half of luxury is done to
traveling consumers, but we think right now about
30%, 35%. And the last
prosumers sales are done in markdowns?
Yes. We have never ever broken out regular to markdown etcetera. But I will tell you we're running at the lowest levels in the history of the company.
Thank you.
Good morning. It's John Guy from Berenberg. A couple of questions for me please. First of all, with regards to China and the 71 stores that you have at the moment, I think you said that the 30 are still trading in the old format. When you look at the work that you've done within the new formats, larger stores, certainly a significantly higher percentage of sales running through from Porcelain.
I think some of the old franchise stores didn't even really have Porcelain in at all. So when you think about the real growth and the opportunity there in conjunction with what you're seeing in Japan, very again, a very high penetration rate within Porcelain. Why is your expectation for Porcelain for the group only still running at around mid single digit? That's my first question.
Yes. So again, I'm not sure where you're getting all the foursome information because we don't ever break it out. We don't break out the percentage in the stores, etcetera. I mean, we've always said that foursome percent is our goal was to have it be about 10% of the business because we want it to be the most exclusive unique part of the business. So it's not in all our stores around the world.
It's in about a third of our stores. It's in very few wholesale partners. Again, that's our limited edition almost if you will. So there is still tremendous growth for Porcim in China and throughout the rest of the world if we choose to expand it, but we intentionally hold it exclusive, hold it tight, because there's so many different levels of luxury customers that you're catering
to. Okay. Thanks. And with regards to Japan, you updated on the number of concessions that you have, 10 concessions and 4 DOSs outside the license. Angela, I remember you saying a while ago that looking to rightsize the store base within Japan potentially 50 to 75 stores over an undisclosed period of time.
Where do you think we may be by 2016?
And the 50 to 75 were locations. Those were not all freestanding stores. Those include big concessions with the big department stores etcetera. So we have a 3 year plan for Japan. I'm not going to get into a ton of detail Tokyo and they are preparing to share a pretty in-depth analysis with you at the prelims in May.
But there's a solid 3 year plan and you'll have to stay tuned.
Okay. Thanks. And my final question just with regards to the gross margin which was flat. When you effectively strip out beauty, could you give us what the actual gross margin was ex beauty?
We said this morning that beauty was dilutive in this first half at tens of basis points John nothing significant.
Thank very
much.
Thanks very much. Good morning. Fraser Ramsden at Nomura. A couple of questions. First one on beauty.
You flanked the supply chain and regulatory hurdles you faced in the half. But just at a bigger picture level, what's the biggest unlock to scaling up that business today from where it is to something even approaching your biggest product division, which I think is what you talked about previously?
Yes. Great question. And that's not what impacted the first half. I mean so much of the first half you're picking a business up on the fly from a long term partner. So just getting access to parts, getting access to information that really is what caused a lot of the delays.
And then the distributors also afraid and so buying a lot more so the channel was full. Long term, the biggest unlock, which is what we already have started to do with the Brit Men's fragrance launch. And if you haven't seen the commercials, go online. They're actually playing in America. Macy's is playing them from now until Christmas.
And that is simply engaging and extending the reach of the brand. We always said if our core brand could connect with have a consumer base of 10,000,000 roughly, this is 10 times that. How do you really get that reach out there? So the BritRythm launch leveraged everything we had in digital, everything we had in social, the music platform of the company and just extended that reach. That's why we've decided to accelerate the women's launch into this year and do the same thing because the women's fragrance business is even much larger than men's.
Okay. So leveraging marketing. And can I just come back to the 13 transaction,
AUR or at
least give us some flavor on AUR? But transaction AUR or at least give us some flavor on AUR. But I mean most of all it seems like conversion has been a big part of that if traffic's being down. So as we look forward to the second half, can you just talk a little bit about a bit more detail if you like on the gifting and festive setup such that when people do come into the tougher. I mean you and I know.
Here's my thing.
Tougher. I mean, you and I know. Here's my thing. First of all, just look at the 13 comp versus all of our peers, because we are guilty of just continuing to move on like everyone else. But it's a powerful performance, 2 quarters in a row to have a 13 comp on a business of this scale.
And that is why the focus has been on Festive. And so of course, it's traffic, of course it's conversion, but it's also units per transaction and that's what we're trying to capitalize on in this festive period. And festive is not just Christmas. Chinese New Year has the ability to be every bit as big as Christmas. That's why the second half that's why the business is not only shifting from wholesale to retail, so much of everyone's business is shifting to the second half because of these two important festive periods.
So a lot of with festive is simply units per transaction when a customer comes into the store, how do we sell them more gifts?
So is that small leather goods? Is it silk accessories? You
have not been online recently.
But year on year that's a big scaling up is it in the offer and its presentation in store?
Absolutely. Absolutely. And we've always said that our small leather good business is significantly underpenetrated compared to our large accessory peers. So we're looking to just pick up some of that market share from them.
And just being greedy with the mic, okay. Love it when AUR goes up, but in future years if beauty is going to grow, I guess we have to stop expecting that.
The difference is beauty is wholesale. That doesn't impact our
Lucas Olker from Exane BNP Paribas. On Beauty, if I may, your initial guidance was significantly higher, but was to be impacted by 1 offs. You're not saying that you have short term issues to tackle. I wonder if you could give us a bit more perspective on this business and what you think the operating margin will be at a run rate when you look at year 2 for example?
Yes. I mean we're not disclosing remember this is beauty in this transitional year we're giving you the numbers going forward. Beauty is our 5th product division and we won't be splitting out margins as we don't for men's, women's or accessories. So,
Okay. That was a try. Okay. Fine. You're saying that you're bound to offset this shortcoming from beauty this year in other parts of the business.
Which parts? And is there a possibly a sort of more reduction to come in wholesale next year? And is wholesale playing a part in this this year in this sort of?
So in terms of wholesale on our existing business not talking about beauty now. We are talking about wholesale in the second half now being up high single digit mid to high single digits. So nothing particular in wholesale to call out in terms of clearly if we get reorders going through the half that would help. But in terms of how we're going to offset it's our normal pay as you go approach. We'll be looking for efficiencies elsewhere in the business where we can leverage those opportunities to make sure that we look to offset that shortfall coming from Beauty in this transitional year.
But it's not don't look at the year. But it's not don't look at the beauty number in isolation. It's really about the halo effect that that beauty business is bringing to the existing business. And so although we're calling it out for this year, it's really we're managing to that bottom line number for this year. Okay.
And then, I'll just out for this year, it's really we're managing to that bottom line number for this year.
I understand the concept, but could you say which part of the business?
We call that menswear. It's outperforming based on the Brit Men's Rhythm launch. So I mean men's is we've called out men's pretty consistently. Remember we just relaunched it 2.5 years ago. Men's was all licensed up until 3 years ago.
So it is still a new men's apparel, men's non apparel, specifically men's London. Again, if you go online, you'll see the new travel tailoring concept that the team put out. So we see significant growth opportunity in men's especially in these high growth underdeveloped markets. You have a very male consumer in all of those high growth markets. So that will be one of the ways we offset.
Thank you very much. One other point about the demand environment. Most of the luxury goods players during the Q3 provided a sequential deceleration. You're experiencing very significant organic growth because of many initiatives you have. Could you potentially expand on how you see the demand environment?
And is there anything to be expected from the new travel rules in China that could affect your business?
Yes. If we could predict the future, I think we'd be sitting up here. But I think that we might be outperforming a little because 8 years ago when we put our initial strategies in place not only was it reinforcing our Britishness which no one else has and focusing on outerwear that no one else was born from, we decided also very strategically to target this millennial consumer. All the consulting firms told us that the next generation of high net worth would be 25 years younger than their Western counterparts. So I do believe that we have this younger audience coming in and connecting with the brand now where maybe a lot of our peers didn't jump on that as quickly.
And I don't see that slowing. The second part of your question though was?
About the new travel rules in China, this is going to having an impact as they came into place on the 1st October, expect it to have an impact in your view?
Yeah. I mean it is absolutely already having an impact. We didn't participate in any of the commission structures. But we have big partners, travel retail partners and it absolutely is impacting their business. To what degree, for how long, I don't know.
But I do think as the data shows, there are many levels of traveling Chinese consumers and only their first trip or 2 do they go through the tour groups. After that they're on their own. Typically when they come here they're on their own. So I think it's a moment, but I think again it will be offset.
Thank you.
Good morning, Tomas of Aristide Group. I've got 3 questions. The first one on China. If we look at the valuation of the Chinese franchisee put option, there's an interesting €20,000,000 swing year on year. Obviously, a credit last year because the world was tough for you and peers in China.
Now life has got a lot better for you in China, but your peers got a lot worse in the Q3 a bit worse. What are you doing differently in China that gives you confidence about this market against your peers? Can you talk about how far you want to bring the margin and the store base in that
put option some of that movement anyway is just due to the unwind of the discount. So it's not you can't look at it all in terms of growth. But in terms of China, I mean I think we've talked about the fact that we had a nice comp in China in the first half of last year. We know that was driven by many of the actions we've taken in China in terms of evolving the store portfolio, the way in which we appeal to that digitally savvy younger millennial consumer, the product particularly around men's, the evolution of the store portfolio. But it's not just about China.
In China for us, it's so much bigger than that. The put option specifically relates to the Chinese business. For us, it's much more about the global traveling consumer and the impact of them when they travel outside China, albeit in Mainland China or in Hong Kong or in Europe and increasingly in the U. S. And we called out in the statement back in October that we had seen an increasing number of transactions particularly in Europe from tourists.
And I think that's sentiment to what we're doing in China and the impact it's having on the rest of our business.
But you feel that in domestic China you have a lot of self help versus business
peers? Absolutely. I think the numbers we posted demonstrate that and that's what we've been doing over the last few years. We've still got 30 of those existing stores which and we know that the new stores are outperforming those. We know that through client service through digital there's a number of levers we've still very much got to pull in China.
But it's not there's a number of levers we've still very much got to pull in China. But it's not just about China. It's about what happens in the group globally.
Okay. Secondly, on Japan, Japan, I remember in May July you mentioned that you had very limited brand awareness in the country at this stage as a luxury brand product. The 1st 6 months seem to have showed double digit like for like in small number of stores 14. Has that brand awareness evolved? Can you share your view maybe Pascal Perrier's view about how you're going to drive that brand awareness in a very sophisticated Japanese market?
Yes. Again, I'm not going to go into some of the detailed plans on Japan. They're all being worked through right now. We've got a whole dedicated team going back and forth to Japan from Hong Kong every month spending weeks on end. So in May, they'll be able to share with you.
We're not doing anything significant significantly different right now. It's the same out of home strategy. It's the same digital strategy that we're applying in the rest of the countries. I think you can assume after that license, we will absolutely begin to accelerate. But it's a very small base right now.
Until the department stores have cleaned up the current product and have our product solidly positioned, you can imagine we're not going to aggressively overinvest to change perception there yet. So again the team will fully update in May.
Okay. And finally just to follow-up on Beauty. It seemed to me in May that the 18% margin you had given for the year was more like a medium term guidance. So I might have misunderstood at the time. I didn't think it was just year 1 18%, but more like a long term profitability of the business.
Could you just perhaps comment on that and give us the gross margin of that beauty business? Or if you've taken any assumptions beauty? I mean, as I said, we're not going to
be splitting
out specific margins on beauty?
I mean, as I said, we're not going to be splitting out specific margins on beauty going forward only in this transitional year. In terms of gross margin, I said this morning that it was marginally dilutive to the group EBIT margin. So you can back in what assumption you want to make on that in terms of H1. Going forward in terms of we'll be running Beauty's our 5th product division. So we won't be looking I mean we can allocate certain costs to Beauty, but it will be about leveraging the infrastructure, leveraging the marketing spend more generally.
And we'll just be running it as part of our 5th product division understanding the halo impact it brings to the brand. So in terms of operating costs when I'm not we're not going to call out a specific number or a percentage on that.
Okay. Thank you.
Hi. Good morning. It's Julian Eastay from Bartlett. I've got three questions, but maybe I'll start with Beauty. You said that in your May presentation that there was basically going to be 5 pillars of behind the beauty brand.
Now you've taken it over, there's clearly been some issues with Burberry Body because of the way that the transition worked. So I just wonder whether you've actually formulated which 5 pillars there will be and whether you're happy with it, you're not going to be just reliant on new product launches to actually drive the revenue and profits?
Yes. Great question. Nothing has changed from what the team presented to you previously. We put up the entire senior beauty team. Those strategies have not changed so ever just because we had some hiccups in the original body and that was more supply chain oriented.
Again, you go online right now, you'll see the new Burberry Body Gold front and Center. You go to any department store, you'll see Burberry Body Gold front and right prominently displayed. So no change to those core pillars whatsoever. Surprised.
We
surprised. We I just wonder whether you've actually got any more stores planned and particularly concessions because we hear that not necessarily the current license partner that you have in Japan isn't necessarily going out of his way helping you get through doors within the department store in particular within Japan?
Yes. It's a real balancing act. And we know that a lot of the department stores have been now finally been coming to London waking up and realizing that in a very short period of time that license does end. So yes, the retail teams are very taking place. And there will absolutely be more freestanding stores opening up from Kyoto to Osaka to Tokyo.
And then there's a team in place that will pick up the transition with the department stores. But again, a lot more details in May. They're going to get bored with Japan come May.
Okay. Brilliant. And lastly, just in terms of profit related pay. I think 2 years ago it was €15,000,000 And you had 13% comp store sales which seems pretty good, but it was only €8,000,000 in the first half this year. Would there if there were rebalancing between the way you're going to allocate the first and second half?
And will it actually go down in the second half? Bear in mind the second half last year was a lot better.
So just to be clear, Julien, in terms of at the half year, we have to make an estimate of what we think the accrual needs to be based on our full year outturn. The estimate we've made at the half this year has resulted in £8,000,000 higher charge than last year. Last year we called out £15,000,000 less you like than the year before. This year it's £8,000,000 higher than it was last year. As we go through the second half we then true that up once we get a better understanding of what the final out term will be against those stretching targets set by the Board.
So all we're highlighting this morning is in the first half of this year the way we're accounting for it
Thanks. A follow-up from me, please. Just with regards to, I suppose, your 8 years, Angela, within Burberry and looking at all the heavy lifting that you've done, looking at the radical change that you've made within the business and from taking out Spain to increasing or taking on the franchise stores from China and bringing in a whole new team and driving up your gross margin by over 1300 basis points over the period, a very impressive performance. OpEx went up over €1200,000,000 but I suppose you've got to spend invest for the long term. But going forward, it does seem that the next phase of the Burberry strategy is about monetizing digital, is about driving the awareness and you're at the forefront with your digital campaign.
Could you maybe talk a little bit more about Berbury 3 60, the CRM, how that's evolving? How you intend to really monetize digital? I mean, it's one hand, I suppose, easier potentially to monetize digital within a media organization. But how do you really get to grips monetizing effectively and seeing the leverage within a luxury goods company?
No. It's probably the most important future question for the company and I tried to share some of that in my presentation. So we had called it Burberry 360. And all that that means is that we are servicing the consumer wherever they want to shop around the world whatever platform they want to shop on. So I had mentioned we rebranded it customer 1 to 1.
That's the clienteling tool that we have been building for the last 18 months. That tool, that app is now solidly on every sales associate's iPad in 300 stores around the world. That is a big reason and why I called out that the iPad sales. So a consumer comes in realize that the largest flagship store in the world is Regent Street. But burberry.com is really the largest flagship store because it can carry eightfold what the number styles are in Regent Street.
And Regent is huge. So the stores go smaller in size from there. So if a customer and again all of the research will tell you that more and more customers are shopping online before they go into a store, so they odds are they're going to see a lot of stuff online and walk into that store and they won't have it. But the sales associates can get it for them, have it delivered in 24 hours regardless by ordering it from their iPad for them. So we have armed the sales associates.
We've built all of the tools that they need. They can also see now if the consumer opts in, they can see the shopping behavior. What are the shops around the world that they purchase from? What they have in their basket online? What they've said to friends about Burberry on Facebook, something they want for a birthday gift.
So this is digital today and it's really just the ultimate in servicing a consumer as their behaviors continue to rapidly change. And I do believe that we are absolutely
just thinking just thinking is there any room do you think maybe a niche in the app market for an I Chav app? Do you think that's something that you'll be looking at when you go to Apple?
I don't understand the question. Sorry.
Lead balloon. Don't worry.
If I may follow-up question about the organization that Mr. Bailey described before. He talked about a new role of the Chief Design Officer. I kindly ask you if you can explain us better what will be the organization of the design department considering that Mr. Bailey will have to devote less time to the creative side of the business and also to look after as good CEO to the whole company of Burberry.
Yes.
And it's Christopher announced that Luc is going to be taking over the Chief Design position and he has been with the company, been with Christopher for 12 years. But you should know Christopher has over 100 of the most talented designers in the world creating products and the average person in his department has been there 7, 8 years. But that's only he has been the Chief Creative Officer for the company. He that's not just product. Christopher.
The entire creative media team, every video you saw is produced in house by another team of 100. We don't use any outside agencies. That's all reported into Christopher.
So I think the misnomer is
that he's only been designing product. Trust me, he's already overseen half of the business up until this point. He will continue to do that. There is now an IT infrastructure and an executive human infrastructure that's in place to help him solidly pick up the other part of the business. But there's not a radical change at all into design.
He's just taken one of his top talent and he will help him as we go forward.
Thank you.
So it looks like there's no further questions. Thank you so much again for joining us and we look forward to seeing you January 15 for the Q3 update.