Good morning. Welcome to our preliminary results presentation for the year ended March 31, 20 13. Our twelvethirteen financial performance has been strong in a challenging market. Revenue was up 8% to CHF 2,000,000,000 dollars adjusted profit before tax up 14% to €428,000,000 and we increased the dividend by 16 percent to 0.29p This year, we've once again consistently delivered against our 5 key strategies, including the integration of Beauty under leverage the franchise continued investment in our retail store footprint as well as the digital customer experience on and offline and evolution of our China business, still an underpenetrated market. This performance is a great testament to the strength of the brand and the talented team behind it.
As you're aware, Stacy is leaving us in July, and she has been a great partner to the business and to me personally. And we'd like to thank her for her dedication and her commitment over the last nine years. This morning, I'm also delighted that Carol Fairweather, our CFO designate, will present the financial review. And as you will have seen from this morning's separate announcement, Carol formally joins the Burberry Board this July. Congratulations, Carol.
And then members of the team that have led the integration of Beauty will update you on the current progress since April 1 and future growth opportunities in this, our newest and 5th product division. But first, let me summarize the achievements of the financial year 2013. As I stated, revenue growth this year was led by retail up 12%, now with 75% of sales in the second half compared to 50 percent 5 years ago. And Wholesale and Licensing were in line with guidance for the year, both broadly unchanged as we balance growth and continue brand legacy cleanup. Our brand momentum remains strong with record engagement through traditional and social media.
Further innovation around our runway shows, investment in iconic out of home advertising, especially in key airports and flag ship markets, while bringing Art of the Trench, our social platform to life to support our flagship launches. In September, we introduced the concept of Burberry World Live with the opening of our Regent Street flagship. This environment blurs the physical and the digital for the first time, bringing all aspects of our website to life, including the first physical introduction of Burberry Bespoke, allowing the customization of an iconic trench coat to Burberry Acoustic, hosting live performances by British bands, while testing and refining retail disciplines and services. So turning to retail. We're pleased with our performance, up against a historic year of double digit comps in 'twelve, 'thirteen double digit comps.
In 'twelve, 'thirteen, we saw comp sales growth of 5% on average ranging from 1% in Q2 to 8% in Q4. Mainline store traffic was soft globally, while online traffic grew significantly, reflecting the evolving consumer shopping behavior. In an uneven trading environment, our teams focus on optimizing conversions via the aggressive rollout of our Burberry Private Client Services, which we talked about last year and expanded and richer consumer engagement both on and offline, along with preference continued to lean towards Porcelain and London. In line with our retail led growth strategy, twelvethirteen was another year of strong space growth, adding 13% on top of 14% in 2012. This investment was clustered in flagship consumers see online.
This connectivity is critical as consumer buying preferences continue to shift, and Burberry is in an excellent position to capitalize on this trend. Servicing customers across countries, formats and devices is a key part of our retail led growth strategy. As we look forward to 2013, 2014, there's no change in our real estate expansion strategy. We plan to open about 25 mainline stores focused in flagship markets and high potential markets such as China, Latin America and the Middle East. And we will continue to close and relocate smaller stores percentage to retail revenue growth on average each year, still testing every project against our internal 25% IRR hurdle rate.
Wholesale was up 1% underlying and performance was balanced with growth from North America, Asia travel Retail and Emerging Markets, offset by weak domestic demand in Europe and the continued impact of our own actions, be it opening price point product or specialty account rationalization. We felt it was worth reminding you of how the wholesale business has evolved. Americas has grown driven by U. S. Department stores.
Asia Pacific has been driven by travel retail. Rest of the world expanded through our franchises. While we have, through our own actions, scaled back other activities whether converting to retail or exiting the local collection in Spain. So today, we're much more balanced in sale, which will always form a part of our route to market, especially with the integration of the new Beauty business. And while customers globally are currently buying cautiously and we're still gradually rationalizing accounts, we now have a healthier exposure to growth markets.
And licensing revenue for this year declined 1% as guided with continued non renewals in Japan, offset by double digit growth in the product licenses. As you'll hear shortly, innovation is key in these licensed products and this slide shows some recent launches, realigning our licensed products more closely to the brand's luxury fashion positioning, from Body Tender to the Britton Watch and Aviator and Splash Sunglasses. With the advertising and marketing campaigns always featuring core outerwear. And now a quick word on Japan, which is still the 3rd largest luxury market in the world behind the U. S.
And China. Japan last year was just over 60 percent of our licensing revenue. As you're aware, the apparel license expires in June 2015, enabling us to remove the more premium position licensed product from Japan and start to more aggressively import and sell our global luxury apparel and accessory collections. Although this transition is still 2 years away, it is top of mind for management and we look to offset the lost royalty income. Some of this will come from within Japan, where the small where our small retail and digital operations we have selling the global collection is performing well.
And we're also confident that there's term growth. We look very forward to outlining our plans for you next May. By region, Asia Pacific and the Rest of the world led the way with double digit revenue growth with Europe and the Americas delivering mid single digit growth. In retail, China, Hong Kong and India were strong. France and Germany remained robust, while Italy and Korea were weak.
And given the importance of the Chinese consumer, we continue to focus on understanding and engaging with these high growth customers. We continue to evolve the retail portfolio both on and offline from 50 stores in 30 cities at the time of acquisition to 69 stores in 35 cities today. We have already closed 15 of the smaller, less brand enhancing stores we acquired with more planned over time. And we're opening larger stores with more appropriate adjacencies, such as the first new 3 new stores in Shanghai. And our presence online is beginning to resonate with Chinese traffic up 70% last year.
We've also undertaken proprietary consumer research to better understand the influences and preferences of
this new first generation luxury customer
as well as the to refine our assortments, extending product sizing and fit, especially in men's apparel where huge growth opportunities exist and accessories, including men's and our new watch collection and in beauty by adding local colors and products. We must continue to invest in training and service, especially Burberry Private Client Teams and leverage our in store technology investments such as iPads and retail theater screens. And we're now offering customer service support on Ciena Weibo, the Chinese equivalent of Twitter. The Burberry brand has been in China for 20 years, so we're simply reeducating today's luxury consumers about the modern Burberry brand, strengthening our digital presence in line with other large markets and creating bespoke content across multiple platforms for major festive periods like Chinese New Year. Turning to our performance by product division, where the portfolio continues to be very balanced.
There was solid growth in core outerwear, especially children's due to the recent campaign. And women's, our biggest apparel division, still saw great growth. And men's, once again, our strongest performing division is on a historic small base. Tailoring is now in 70 stores London. We've increased focus on advertising and men's marketing, and we're thrilled to be bringing the menswear show back to London next month.
In ladies large leather goods, the core of accessories, we've been rebalancing our assortments between core iconic products and the new fashion leather group, ahead of industry trends and driven by innovation in fabric and shape, as shown on this slide, much as we do in outerwear and our other So before I hand over to Carol, let me play for you our highlights video showing all that this team has accomplished in just the last 6 months.
And chances, people tell you not to take chances, and they tell you that they're on. And he answers, and I'm starting to
Good morning. It gives me great pleasure to present the financial results for 20 twelve-twenty 13. As Angela referenced, the headline numbers were strong with revenue up 8% and adjusted PBT and EPS up 14 around £320,000,000 and we around £320,000,000 and we have declared a 16% increase in the full year dividend returning about £130,000,000 worth of cash to shareholders. We grew adjusted operating profit by 14% with almost all of the increase coming from retail wholesale where profit was up 17% on sales growth of 8%. Our retail wholesale margin reached 17.8 percent compared to 16.4% in the prior year, but this 140 basis point increase does require some explanation.
It is important to note that around 70 basis points of this improvement came from a £12,000,000 benefit from a lower performance related pay charge. Without this benefit, the operating margin would have been 17.1%, up 70 basis points from last year. In the current financial year, our aim is to modestly increase the retail wholesale margin from this normalized 17.1% base. Turning now to gross margin, which is up 250 basis points to 70.6% with a stronger than expected performance in
prices from mixed and modest underlying price
increases, continued FX benefits from sourcing, especially from the euro where we source the majority of our products and the ongoing mix shift to retail. To to the first half and the continuing benefit from improved inventory management processes. We procured less at the start of the season, which contributed to an improvement in full price sales compared to the prior year. And we further refined the global brand buy, which ensured greater consistency across the retail channel driving revenue growth and increased inventory efficiency where rationalizing the size of the assortment enabled us to buy key products in key colors in greater depth driving margin. Having delivered significant improvement in the gross margin over the last few years, the rate of progress will now naturally start to moderate in the coming years.
Operating expenses increased by £94,000,000 or 110 basis points to 52.8 percent of revenue or 53.5 percent excluding the benefit from the lower charge for performance related pay. The key driver was the continuing shift to retail with new space contributing over half the increase in £1,000,000 As the external environment remained challenging throughout the year, spend in both the regions and at corporate. For example, spend in the 3 largest functions, marketing, IT, product and design fell as a percentage of sales. And this allowed us to continue to invest for future growth in areas including digital, mobile and customer insight. And on licensing, we delivered £92,500,000 worth of operating profit up 3% on revenue of £109 million.
Note that of the £109,000,000 of revenue, £27,000,000 was royalty income from the fragrance and beauty license with Inter Parfums, which of course will not continue this year. Excluding this, we have guided to slightly positive growth exchange rates in the current financial year. Turning now to the income statement. I would highlight a net finance charge of €300,000 with facility fees offsetting the low interest income on our cash balance. For the current year, we would expect the interest charge to be broadly neutral.
Consistent with what we told you at the interim, the exceptional item of £77,000,000 is composed of a number of moving parts including £83,000,000 from the termination of the license relationship of which £71,000,000 relates to the termination payment itself, plus an additional CHF9 1,000,000 of setup costs and CHF3 1,000,000 of other costs that we have incurred in this year that will not repeat going forward. Secondly, the valuation of the China put option liability has resulted in a non cash credit for the year of £5,000,000 The tax charge is £92,000,000 and the tax rate on adjusted PBT is 20 5.8%. We anticipate that the tax rate will be around 25% in 20 thirteen-twenty reflecting the lower U. K. Tax rate where we pay a significant amount of our taxes.
And finally, the non controlling interest of 4,900,000 pounds represents our partner's share of income with the impact of profits in China and the Middle East balanced by losses in some of our underpenetrated markets such as India and the Japanese retail business. As part of our preparation for the transition in Japan in 20 15, we have effectively taken full ownership of our small retail business there, which will adversely impact the non controlling interest number in 20 13, 2014. As you can see from this slide, Burberry is a strong cash generator with cash flow from operations exceeding £2,000,000,000 over the last 5 years and more than 100 percent of operating profit converting into operating cash flow in each of
these years.
This has enabled us to invest significantly in growth opportunities be it retail expansion or refurbishments in in house acquisitions such as China and this year the one off payment for terminating CapEx project is always tested against our 25 percent IRR hurdle rate. And over the same period, we have paid nearly £400,000,000 worth of dividends to shareholders. So going into the detail of the cash flow statement, we generated £523,000,000 worth of cash from operations, up 8% on the prior year. Depreciation rose to £111,000,000 and we anticipate that it will increase to £140,000,000 in FY 2013 2014. We saw a net working capital outflow over the year of £54,000,000 Inventory was tightly controlled demonstrating the payback from our investment in planning teams and processes.
Excluding a £9,000,000 increase for beauty inventories were up only 7% at constant exchange rates against retail sales up 12%. And in 2013 2014, we would expect inventory excluding beauty to grow at a lesser rate than sales once again. Translating that operating cash flow to net cash, our largest cash outflow was £320,000,000 investment including £176,000,000 of capital expenditure and £144,000,000 for the termination of the fragrance and beauty license. With tax dividends and Aesop Trust purchases totaling £259,000,000 we finished the year with net cash of £297,000,000 This year capital expenditure is planned at around £200,000,000 Remember that this number includes some Spencer stores that will open next year as well as refurbishment spend. So it's never a direct function of space growth.
As you can see from the chart, the majority of spend is again going to retail with slightly less emphasis this year on flagship markets reflecting the timing on these larger projects. IT and other spend also increases in areas such as digital and mobile. And we are expanding our Horstree House headquarters. This space is needed as the business has grown nearly threefold since we committed to this building in 2006. Looking forward as you build your model for 2014, let me remind you about the impact of the transition year for pounds to wholesale revenue and to be neutral to adjusted PBT with about £25,000,000 worth of retail wholesale operating profitability each year, although as the business model evolves, the phasing of profit is changing.
So please note our current expectation that half year adjusted for this year is currently expected to be below last year's £173,000,000 There are 4 key factors which explain this. Firstly revenue which continues to be weighted to the second half. Secondly wholesale excluding beauty which is expected to be down 10 percent in the first half as we guided in April. Thirdly, beauty, which is expected to be dilutive in H1 as the profit from direct operations is currently expected not to fully offset the lost royalty income in the half. And finally H1 last year benefited from a lower performance related pay charge of about £15,000,000 as we disclosed in November.
For the financial year 2014, as Angela said in her quote this morning, while we do expect the macro environment to remain uncertain, we see significant opportunities for the brand and the business aiming to outperform on revenue growth, while modestly improving the retail wholesale margin in the full year from the 17.1% normalized level in 2012, 2013. So thank you for your attention. And I would now like to hand you back to Angela.
Thanks, Carol. And now it gives me great pleasure to introduce some of the team who've been responsible for the responsible for the successful integration of Beauty, our 5th product division, which includes both Fragrance and Make up to start. Having established a team of 90 functional experts from within Burberry and externally, we believe that beauty will be a key contributor to our future growth as the brand is so underpenetrated in this category compared to our peers and direct ownership will enable opportunities to be pursued more rapidly. So this morning, Alessandro Fabrini, our Senior Vice President of Licensing, who joined us 3 years ago from a luxury brand and an FMCG background, will remind you of the size of the opportunity and describe how we're working with our current distributors. Simona Catania, who joined us from Dior in November as the Senior Vice President of Beauty, will talk through the innovative product a complex infrastructure for beauty in just 6 months.
So, let me now hand over to Alessandro.
Thank you, Angela, and good morning to everybody. Today, I'm very pleased to share with you the market opportunities, how we build the beauty team and the work that we are doing with our distribution partner. Let me first start with the market opportunities. The premium beauty market, which includes fragrance, makeup and skin care, its size at approximately US100 $1,000,000,000 And this premium end, the one in which we play, is expected to continue to outperform us. More specifically the fragrance market shown in this slide is fairly concentrated in few territories.
U. S. A. And Europe accounts for more than 60% of the total market and our opportunity here is to grow share. But it's also worth highlighting the faster growing markets such as China where the premium beauty industry has doubled over the last 5 years and is expected to double again in the next 5 according to Euromonitor.
As Angela outlined in November, beauty is also the most widely encountered projection of our brand. It's our opening price point sold through thousands of points of sales. It appealed to younger, more digitally savvy customer and it represents over a third of our global media spend of our global media spend. And now the direct ownership will allow greater alignment and synergies across the Burberry businesses as you will hear this morning. Let's now move to the beauty team.
As you know to make the transition from Enter Parfums fast and smooth, we had to step into their shoes effectively working with the same supplier and the same distributors they had in the past. We now have a team of around 90 people in beauty. We have recruited exceptional talent who come with great skills and experience from leading beauty company. More specifically, we feel around a third opposition by reallocating internally people who had previous experience in beauty. We hired great talent from outside from organizations such as Dior, P&G and Chanel.
And finally, we leverage our existing related partners. But let me briefly talk about the distributors. Burberry Beauty is already sold in over 100 markets globally via a network of best in class distributor partners. While this is a large group, the business is quite concentrated with 15 of these distributors accounting for over 50% of the total business last year. And in March, we signed a contract with BPI, part of Shiseido Group, to distribute our beauty products in selected regions.
We want to build a strong partnership and establish excellent communications with our distributor. And to do this, in February, we hosted our inaugural beauty conference where our distributor partner were invited to the autumn winter women's personal show in London. We have rolled out Burberry Chat, our internal social media based communication platform to all distributors. And we have leveraged the power of our regional infrastructure, delegating them the responsibility for the relationship with the distributors to maximize growth and deliver synergy. Like for any other businesses we have integrated, we will continue to refine distribution strategy focusing on brand enhancing channel in department stores and travel retail and focusing on differentiation in retail and beauty, a strategy we believe will be particularly relevant to these products and this customer demographic.
So let me now introduce Simona Catano, who will outline the product strategy that will drive the growth. Thank you.
Thank you, Alessandro, and good morning, everybody. Today, I am delighted to share you our vision and development strategy for the newborn beauty division. Essentially, the big idea is to catapult our brand into the worldwide top 10 of beauty brands. So why do we strongly believe we can achieve this? We are convinced that leveraging the best of beauty and the best of Burberry will assure us of a unique position and result in dynamic growth.
Leveraging the best of beauty in men's, building on our established positioning in fragrances potential. Now on the barbery side, what are the key strengths we can leverage to have a solid competitive advantage. I want to emphasize this point. The top 10 is made by established solid powerful companies. And to succeed, we need to be different and not only a follower, me too brand.
And in Barbary, we are different. Firstly, we are always 1 company, 1 brand. If we consider all the other fashion and beauty beauty brands, the 2 are separate structures. On the contrary, broad consumer appeal in luxury fashion, where we are already the leading digital player. And you would expect us to leverage this to target the millennial consumer as influencer across genders and generation.
Our 3rd competitive advantage is our authentic British heritage. Britishness is an integral part of all our strategies at Burberry. Grounded by our heritage, yet constantly innovating, inspiring and disrupting, Burberry today is the leading British luxury brand globally. And tomorrow, it will be the most iconic British beauty brand. Now let's move to what are the key strategies for beauty.
As we have achieved with the fashion business, first of all, we want to establish our sense as a true luxury beauty house. To accomplish this, the most powerful weapon will be using fashion to Do you think As you've just seen, makeup, although only a very small business currently for us, was integrated into one of our key brand moments in the autumnwinter14 runway show. The show revealed a new barbery look and the interactive beauty booth enabled back stage images to be shared with our 2,000,000 Twitter followers, generating over 500,000 views in just over 1 hour. And the images were among the best performing on Instagram. Our next beauty strategy focuses continuous innovation, which is part of our DNA and essential to our success.
Brightful products, these variety communication tools, the digital model and the unique selling experience will be our priorities. Finally, to be truly effective, the story, what's new? Our plan is to run parallel to the fashion calendar and to create monthly stories to animate point of sale. Having outlined our 3 key beauty strategies, let me now focus on fragrance. Firstly, I would like to stress once again the importance of developing an innovative and distinctive positioning in fragrance.
We really believe that the British Fragrant House positioning is a unique and powerful statement. British perfumery has a fascinating history, a story that has never been told before. Very few people know, for instance, that under the reign of Queen Elizabeth I, all public places were scented since she couldn't tolerate bad smells Or that perfumer in England was first introduced for a barbershop in Germany Street. Here they created toilet waters of jasmine, orange blossom and lavender, still key notes in the English perfumery. And the British story is very different to the better known French perfumery, which was built opulence, classicism, Paris and French art de vivre, the rich interiors and the oriental floral lavish set.
By contrast, the British perfumery evocation is dramatically different with an eclectic mix of British heritage and sharp innovation, all growing tradition and eccentricity and the natural herbal scent of the British countryside fused with a London attitude. We want to acquire true ownership of the British fragrance heritage Barbary way. Our second strategy for fragrance is the need to elevate the image of fragrance, which is especially important for supporting the image of makeup. This will be achieved by partnering with Scent Experts to develop a truly distinctive scent proposition, focusing on raw materials to play in the luxury arena and creating a luxury stage to display our fragrances in an appropriate universe, whether it is a new or existing point of sale. Thirdly, we need to optimize our portfolio of fragrances.
We showed you in November the range of product that exists in the current portfolio. To be effective, we will focus on our pillar fragrances, a strategy that is in line with our largest peers where 90% of their business comes from the 4 or 5 key pillars that they support continuously. So which are the pillars that we need to support and drive? We want to mirror the positioning of our fashion pyramid. We want Brit to be the fundamental cornerstone and point of entry into the brand.
In any fragrance business, as I explained, it's important to have an exciting program of new initiatives. In the early autumn, we will launch our new Brit fragrance for men and we'll follow that with the women's launch in the following year. The London segment that is the most tailored designer expression of the brand is matched by Body, currently women's only fragrance, but we have plans to launch a men's version. And to match the elevated position of our pearls online, we will also launch a collection of very exclusive cologne to affirm our British position. We believe Body is the most powerful of our pillars and has a potential to get into the top 10 as our biggest family.
Launched in 2011, Bodies our number one line in the portfolio and there's a very intimate link with the star icon of the And this is just starting with the new Body Tender launch. Fresh, pink and playful, Tender is a new younger face of Body. And the first feedback is very positive. It's also the most Asian friendly fragrance in our portfolio and we will be launching Body Tender in China in September. I will now hand over to Roberto to highlight some of the amazing steps his team has achieved to establish the organization and supply chain for beauty.
Thank you.
Thank you, Simone, and good morning to everybody. I'm really delighted to be here today to describe how we have managed to effectively integrate a complex business into our supply chain, Valkyrie supply chain. In a matter of months. It is worth illustrating the scale and complexity of the operations we have integrated over accelerated time frame as while there are similarities with the fashion business in form of brand building, there are fundamental differences in terms of supply chain. The lead time for product development can be in excess of 18 months, meaning that at any one time we have around 20 separate launches being developed.
It is a complex component based sourcing model with an intricate legal and regulatory landscape. For example, we have needed to re register all existing products in many jurisdictions in which they are distributed today. We need as well to synchronize launches to many thousands of point of sales to our distributors network. With the combination of fragrance and makeup and the very large portfolio of products in fragrance currently, we already have business that involves over 80 suppliers, over 500 finished goods SKUs and over 1500 components SKUs. This is a year of transition in which we need to take over the existing operations, while at the same time preparing for the ambitious program ahead of us.
In order to execute the strategy that you have heard about from Simona and Alessandro, we need 2 things, organization and infrastructure. Firstly, I want to start with the people. The beauty supply chain team now consists of about 30 people. About onethree of them have been recruited from outside, bringing functional expertise, while the balance has been relocated from roles within Balbari to ensure Balbari knowledge and culture. It is a cosmopolitan team as befits this global project category with 10 nationalities represented, 11 different languages integration process was to replicate the Inter Parfum operating model.
Step 1 was to ensure the structure was in place well ahead of Andover on April on 1st April. The transition required to establish a relationship with suppliers as a matter of priority, enabling us to start placing system standpoint, we are now managing all our supply chain operations in SAP. And from a logistic perspective, we have worked hard with our colleagues in IT to establish warehousing facilities in France also fully integrated with our SAP our global hub, managed by a specialized logistics service provider, perfectly located as it is 30 minutes away from our main finished goods suppliers, where we produce more than 70% of our volumes. We are delighted to say that we took delivery of product into this facility ahead of the original schedule, and we have started to ship product to our distributors this year. But control of the existing business is not enough.
From a product development perspective, we need to work hard to ensure continued progress with the pipeline of new product launches that Simone has talked to you about. So how are we doing in this complex environment? More than 20,000,000 units of product placed covering over 6 months of forecasted demand, approximately 2,000,000 units already live in our distribution network and approximately 1,000,000 liters of fragrance currently in production. As Simona has talked to you about, we are extremely proud of our most recent launch and the first product being produced by BARBERRY, Body Tender and Wind Supply Chain have already produced over 6 months stock coverage. The machine is now built and running, and we believe it is scalable for the market opportunities Alessandro was referring to.
Looking forward, this is no different from the rest of our supply chain operations. We need to ensure we are flexible, reducing our time to market. Ultimately, we aim to have the fastest supply chain in the market. We need to continue to work with our partners upstream and downstream to enhance our supply chain execution. And we are already working on our fulfillment strategy to support our digital journey.
So we are delighted about the progress in integrating this business and we are very excited about some of the product strategies that are planning for the coming years. Thank you for your attention, and let me hand you back to Angela.
Thank you very much, Alessandro, Simona and Roberto. Prerequisite was you had to be Italian before you took a senior role in beauty. And
I'd also like
to take this opportunity to thank the entire integration team for all of the amazing work that they've done, enabling us to now seize the significant opportunity we have in Beauty going forward. So in conclusion, we've completed another strong year, particularly in retail. The team is closely connected and working to unlock the growth potential in beauty, men's and retail, both on and off line. And we're planning on the basis that the macroeconomic environment will remain uncertain. But we've got great confidence in our brand momentum and proven strategies to drive continued outperformance.
So thank you very much. And Carol and I will now take your questions.
Good morning so much for Societe I have three questions, please. The first one, I saw Pascal Perrier earlier in the room, so I was wondering if you could get an update on Japan. I know you will give technical financial details next year, but two points of interest for me. Firstly, you're talking in your release about limited consumer awareness about the luxury products of Burberry in Japan. How you're working between 'nineteen, 2015 to change that perception?
And secondly, do you expect Japan to be more profitable than your group average margin as it is the case for most of your peers? And secondly, on
UT Can we won't remember all of them. So can we answer that one first? So let me take the first part of Japan. I'll hand the second part to Carol. I don't have Pascal miked or prepped for this, and I just literally was in Japan with him 3 weeks ago.
So there is limited awareness. We're not spending a fortune from a marketing and advertising standpoint. We still have a really giant partner, right, with a very big business there. We've done about three things. 1, we continue to have top to tops with every major department store because we've got to renegotiate real estate in that large part of the business.
2, we continue to invest in our own real estate in our own stores. He's got a couple of big negotiations underway right now that we can't talk about. We've got a handful of stores open up, about a dozen shop in shops, if you will. And I will tell you, those with limited awareness are outperforming the rest of the group in that country. And then 3, we continue to strengthen the management team.
We've got a stand alone office. Pascal has hired a great group of people from CFO, etcetera. That infrastructure will mirror the infrastructure we have in other markets like Korea, like Hong Kong, etcetera. So that's where we are. He has also hired probably one of the strongest heads of strategy around the world, a very accomplished executive that is him and the team are going to Japan monthly now, again meeting and laying out what that strategy is.
So it would be remiss to go into much more detail than that at this stage.
Yes. And then to your question in terms of impact on margin going forward, again, as Angela says, we're working through all the details. We will come back and talk to you next May in more detail once we have more to share with you. But safe to say we are working very intensely internally in terms of coming up with those plans, but premature at this moment to share anything on margins.
Yes. And the only thing we do see in the 1 on 1 meetings is we are not going to we are not in that market, we're not going to offset
100% of that profit in that market. So you can hear me talk
about the relationship with market, but it won't 100% offset what's there now. And we market, but it won't 100% offset what's there now. And we don't want to be in the 500 points of sale that in. So we will pull that business back. We'll make a higher percentage of the profit versus just royalty.
And then we'll offset the balance of the profit through other big global initiatives.
Okay. Thank
you. On beauty, this one category that's pretty exciting and very exposed to Asia, you haven't mentioned is skincare. I know it's early stage, but is it something you have in mind? And could you elaborate on that, please?
Yes. I mean, skincare is a very important part of the business. Fragrance is the largest. Next is beauty depending on the region and or meaning makeup and then skincare. So give us about 18 to 24 months that is even more regulatory, etcetera.
So we will get there in the longer term. Phase 1 is, as Simona said, get these pillar fragrances, no different than outerwear in apparel or large leather in non apparel. These pillar fragrances that are the bread and butter, make sure we can handle the replenishment, the reorders on those. The beauty business is really tiny. She's got phenomenal her and Christopher, innovative things in place.
We need to get a monthly flow of those going. And then absolutely, we'll get into skincare, but it's not anything in the short term.
When you talk about narrowing the gap with peers and in beauty, I guess, skincare is one of the main differences?
We are well aware. We have every fact and figure on our peers. Trust me, we're playing to win in beauty. Why she said the top 10? This is that's why we have 90 of the greatest experts in the world today on this business.
It is the largest growth engine for this company over the next 5 years.
And just finally on FX, it helped your gross margin, I think, on sourcing pretty much last year. Can you elaborate on how the weaker pounds will affect your P and L, in particular, gross margin this year?
I mean, there is 2 aspects. There's the translation aspect, if we simply just translate our profits from overseas at the rates they are today and that will give us a benefit going forward. But then conversely, we had the benefit in gross margin this year from the way that principally the euro moved and again may go against us. So there's a number of moving parts in there. But just on a translation basis that would give us a benefit at today's rates, but we are only 6 weeks in.
Thank you.
I'll let you guys fight for hoover.
Luca Sorca from Exane BNP Paribas. You were referring to a challenging environment for luxury goods. I wonder if you could give us a flavor from your viewpoint where you see demand going by geography and what are the trends and the challenges that you see in the market? The second question would be about retail productivity. How do you see the evolution of retail productivity, especially looking at the significantly larger stores that you've been opening during 2012, 'thirteen?
And what
do you expect this to become going forward?
Just a clarification on fragrances and duty, is it correct to assume that you're selling in all markets through distributors? And lastly, when you say that business in Japan is not going set the significant profit you have with your license today, is it again fair to assume that it's going to set possibly at best 20% while 80% will have to come elsewhere at least in the short term. Thank you very much.
Okay. So Japan we're not going to give you any more color on. You got to be patient with this. There's a lot of work in process and I have no idea what percent. I have a rough idea, but I'm not going tell you.
Sorry. You have to allow us some time on these things. We still have 2 years. So that's one question.
Well, I think
we have the rough idea.
Excuse me?
It would
be nice to have the rough idea.
And I'm not going to tell you that we don't. But you know what? Anything I say will be held against me. So just let's do this in bite sized chunks. Let's focus on there's so much right now short term.
And I was going to say you had one of those questions was beauty I think. So refresh for me what you were saying on beauty.
On beauty I was just wondering whether it's like we assume that you're selling in all markets through distributors. Yes,
absolutely. And again, that's for now. We'll wait and see market by market how that evolves. And then we did do, as Alessandro mentioned, the one big agreement with BPI, which is the big division of Shiseido. So they've got some of the large markets, U.
S. A, etcetera. Retail productivity, are we going backwards? No.
You want to take that?
Yes. I mean we continue to work with all our teams globally to drive retail flagship stores, we will see different levels if you're talking about productivity in terms of sales per square foot. But in terms of profitability, the way we can operate those stores, we get leverage. So it's not as simple as looking at one metric. But our teams globally do remain intensely focused on driving productivity.
So the other segment of that is you know the technology we've invested in these stores. Every sales associate has an iPad in their hands. That is their global inventory pool. So we are averaging higher conversion rates year over year because we're not walking as many customers if we're out of a size or we're out of 48 hours, etcetera. So that's a this online to them in 48 hours, etcetera.
So that's a this onlineoffline connection is a huge part of driving productivity. 100 what we call Burberry Private Client Associates in our flagship stores around the world. These are the ones that give that extra level of service to these ultra high net worth customers who possibly don't even want to walk into a store. They want you to take the product to them. It's a very different way of shopping.
And service will be one of the biggest differentiators in driving productivity longer term.
Matt Cruz is it? No,
we talk about current trading whatsoever. So these are just simply your first question, was the global environment. So if we were to look if we were all to read the same reports, be it McKinsey, Bain, Altagama, Forrester Research, So that's where these numbers are going to come from. This is not our current trading numbers, right? So China should continue to be the fastest growing market in the world for us as well as most of the luxury peers.
But we don't we are not just focused on Mainland China. If I believe what I read from McKinsey, 100,000,000 Chinese consumers will leave Mainland China, will go to flagship cities all over the world. That's why 2 years ago we were focusing on what is our brand presence, what is our service proposition in these flagship markets. We have Mandarin speaking sales associates in all of those flagship markets. We've been opening up flagship stores.
Again, if you believe what read, not only will the 100,000,000 travel to the flagship markets, they will spend 6 to 7 times more when they travel versus when they stay at home. So that's China will continue to be large for us. We've been very focused on Latin America. John's sitting here. He's relocating from Latin America up to New York now.
But he's done a brilliant job, him and his team. We've got 8 stores open there. They've just signed 3 more franchise partners, Chile, Bolivia. So we've got franchise partners in place. So Latin America will continue to be very robust for us.
We've ended the year with 23 stores in the Middle East. That shows absolutely no signs of slowing down. And we've got roughly 8, 9 stores in India now. So we've done the right amount of investment and it was dilutive initially while we were doing it in Latin America and India. They're not now.
So I think we're well positioned for the regional growth in those high growth markets.
Thank you. Thanks. It's John Guy from Berenberg. A couple of questions for me, please. First of all, just on the leather goods opportunity.
You're very well integrated from a vertical standpoint in trench coats. It seems to me that there's a pretty big opportunity for you to maybe look at in house manufacturing at some point on leather goods and becoming more vertically integrated. So I'd like you to maybe talk about the opportunities potentially that you see within that part of your business. The second question is around, probably my favorite topic, operating expenses. Carol, you talked about the gross margin, obviously, a very strong performance this year.
And the natural moderation, which I think is fair to accept given where you are excluding the wholesale business. Retail stand alone looks pretty good now. So can you talk about how you're going to manage the cost side of the business in order to continue to drive that sort of push pull on gross margin and expenses going forward?
Okay. Can we stop there
and answer those because otherwise we won't remember? Okay.
So I'll take that one first, John. So in terms of gross margin operating expenses, no change to strategy there in terms of what we've been saying for the last 2, 3, 4 years now. We will continue to moderate between gross margin balance between moderate and gross margin and operating costs as we go to ensure that we consistently deliver a modest improvement in the operating margin year on year. So this year, we've gone from our 16.4% to our 17.1% normalized. And we will continue to, as we've demonstrated, from last year and the year before continue to balance between gross margin, taking
those opportunities where we can, taking the opportunity to
continue to invest in the business, but ensuring that we always continue to deliver that
regards to leather manufacturing, of England. We've got a big factory in the north of England. We've got to tightly manage the capital to be balanced between the investment in stores, the investment in technology and the investment in our own manufacturing facilities. So I will tell you until we get those state of the art and we get those where we want them, I can't see us doing I can't see us investing in another manufacturing facility. We may in due course, but again, we need to we make as much profit from our vertical outerwear facilities as we currently make in large leather goods today.
So a lot of our peers may be vertical in leather, but they're not vertical in outerwear like we
are. Okay. Thanks. And just so following on, when I look at the stock performance, just up about 13 percent year on year. And you're obviously talking about slightly reduced space on the back of large space growth over course of the last 2 years or above average.
You feel that stock is well managed, that the quality of the stock is or inventory is very
good at the moment.
Maybe just stop there and I'll let you answer that one.
Yes. No, I mean, I think in terms of the number we've reported today, excluding beauty, we have £9,000,000 worth of increase relating specifically to the new beauty business. Take that out of constant FX, we were up 7% on stock with revenue up 12%. So we were delighted with the year end performance on stock. The inventory has never been healthier in terms of the aging.
But working with Donald and the magnificence of what they've done in the last few years, there is still opportunity to refine that further. But we're very happy with where we've ended the year, but not plenty more to do in that Phase 2.
Okay, great. Thanks. And sorry just one final one. With regards to the beauty business, obviously the guidance on €140,000,000 revenue €25,000,000 EBIT still implies less than an 18% EBIT margin, which again relative to peers looks a little bit light, especially within the premium segment. So I guess you're being reasonably cautious to start with.
But if I look at the Burberry Body launch and you broke into the top 10 markets with Burberry Body, but I guess there wasn't the same momentum to follow-up and continue to sustain a top 10 positioning,
especially in the U. S. Market. Now you feel the pipeline
is significantly stronger and particular? I mean, I sure hope that you
We were under negotiations with Inter Parfums for over 18 months. So 200 distributors weren't sure to invest, not invest, invest, not invest. So we absolutely broke into the top 10. It was not sustained. We have gone back with Body Tender.
It's already rapidly going up. We're already taking and fulfilling reorders, etcetera. So the brand has such momentum and such strength today that and we believe the body pillar as a franchise, body will be like a trench coat, body to fragrance will be what a large leather goods is to accessories. So yes, we absolutely think we can regain that. It was a pity that the negotiations took longer than planned.
Slightly incorrect information. So you have a gigantic beauty market. You have a luxury, a luxury where our peers Dior, Chanel, etcetera play and then you have where the L'Oreales of the world play. Inter Parfums had a very different distribution Inter Parfums worked through distributors. So Inter Parfums worked through distributors.
So it's all not apples for apples. And off line, the team can go through with you how we're looking at it, etcetera. But we are at high levels of profit versus the big luxury peers right now.
That's great. Thanks
Hi. It's Will Hutchinson from Goldman Sachs all the way at the back here. I had two questions. One on your distribution growth, your space expansion and one on digital. So the first one is with your plan for net 10 store openings, did I read it right that 8 of those are going to be in China?
So I wonder if
you could update us on the store plans in Europe, the U. S, etcetera. And on digital, given you're not breaking out the numbers in terms of the amount of revenue you're generating from digital specifically and you're looking at in terms of the metrics in store. How do you think about the investment program? You said that you're going to continue to invest and grow your cost base on digital.
How do you think about calculating that 25% IRR? How should we think about that investment program? Thank you.
So you want to take the space, 25 stores?
Yes. I mean in terms of the stores next year, as we always say, it's really around finding you can't look just in the year in isolation, it's around timing. So last year, we had some great openings. This year, we've got openings that are focused in China and Latin America. But that's just simply a function of when the space becomes available, the time it takes to construct the stores and when they open.
So we're very happy with the stores. We've got 3 great new stores opening in Shanghai in the next 6 months, which will really a market a flagship luxury market we've been underpenetrated in. I think that will correct the balance there. We're still continuing to do more in Latin America as Angela said. And then in the coming the next year some of the CapEx we're spending this year in 2013, 2014 the €200,000,000 is to fund some more flagship projects with coming in the 2013, 2014, 2015 year.
So it's not necessarily a one for one equation. You really need to understand the store opening program. But we're happy with the plans we've got for next year.
Which continued. There's 25 stores, so it's pretty balanced, a little bit more in China, etcetera. But as Carol said, the LA and San Francisco, some of the big projects that we're funding this year don't open until the following year.
Digital? Perhaps you could explain where are the store closures then? Are they broadly balanced across the regions as well?
Yes, they are. And then I understand closures are not just retail stores. They're concessions, etcetera. So and this is absolutely nothing new. We're just giving you a little more color this time.
Every single year that we have done this as a great retailer, you will open, you will relocate and then you will close X number of stores. So we are opening 25 new stores next year and then we are closing if you will 10 be it stores, concessions, but it's no new news. We have done this every single year. So a number of the closures are the smaller stores in China. So the smaller stores in Shanghai all go away.
You go in with Kari Center Flagship and 2 Mainline stores all in new developments, all in the right areas of town, etcetera. So you come out 10 times better in Shanghai than you were before. So I just don't get fixated on some of the smaller closures. They're smaller. They weren't worth renovating.
It was more cost effective to move and relocate to another part of town and have a better brand statement.
Digital,
And that is probably the $1,000,000,000 question that we are all working on and we're working on it inside and outside of the company because consumer behavior is absolutely positively at an inflection point. And it's even trickier because of this traveling luxury customer. So nobody can totally tell you how many people shop online and buy in store. And do they shop online and
buy in store in one market? Or do they
shop online in Beijing and Senior Vice President of Customer Senior Vice President of Customer Insight. Today, he is the Chief Customer Officer. He has a team of people underneath him. We are capturing as much data as we can for ourselves from our partners to analyze these traffic trends to and if they log on online, then we can see what happens with them online. We've just launched
a it's a test base.
I don't usually tell you about these things until we're further down the line, but we will be in pretty much all stores by the end of the year. But we just launched what's called Burberry 360, which is our clienteling app for all of our 10,000 sales associates around the world. So if a customer walks into a store and identifies themselves in from their iPad, they can now see what they did online, what's in their basket, what they've said about us on Facebook, what they've tweeted about us on Twitter, how many times they've called customer service, what they bought in any other store from Burberry around the world. So, we're working towards we'll have much better analysis going forward. I think we're pretty progressive in this space compared to most of our peers who only have traditional CRM.
We're trying to take it to the next stage, but we don't have a lot of data to do that yet. What we do know from all of the research again from Bain and Alta Gamma that we read, you still have to have powerful brand statements. You don't have that powerful flagship store then they're not you're not going to be top of mind and they're not going to engage with you online. So it's kind of like nobody stopped going to the movies just because DVDs came out. It's no different.
It's a continued evolution and we've got to stay on the forefront as consumer behavior continues to change.
That's great. Thank you.
Hi, there. It's Louise Singlehurst here from Morgan Stanley. Just two questions from me, please. Just in terms of the retail initiatives that we were just talking about, obviously, you're annualizing some of the CRM data that you've had in place now. I presume you're annualizing it.
Can you talk about the I know you highlighted the average transaction spend improving across the customer base during last year. But in terms of traffic trends, repeat customers, is there anything that you can share with us on the CRM data to date?
So let's answer them 1 at a time. So not a ton, Louise, that we would have put in the presentation. So we've been cleansing the database, still really small database. Once we get a really rich, robust, one that we're really confident in, then we'll give you a little bit more color. So, we're looking right now at conversions.
We are looking at loyalty. So loyalty is up, conversions are up, average unit transaction is up from a on and line, but that's about as specific as we're going to give right now. It is still a very small database. We've only been at this 1.5 years.
And Plan Called Beauty, presumably that's targeting a brand new audience, a younger demographic coming through. I mean, what are you seeing so far that working in the store connects in a limited number of stores at the moment?
Yes. So the beauty business not dissimilar to when we shared the shoe strategy with you. We told you 80% of the shoe business would be done wholesale, not in our own stores. Shoes are in our flagship stores. We told you children's 80% would be done wholesale.
We don't want it in every store. It's only in our flagship stores. Beauty will be exactly the same. It will be there will be beauty presence in the 25 flagship markets around the world, our stores. The balance of all beauty will be done through the Sephoras of the world, through travel retail, through all the department stores,
etcetera. And is the distribution now where you want it to be for beauty?
Honestly, it depends market by market by market. I will tell you in China today, the fragrance is number 3, right behind Chanel and Dior. We've had a long term partner there, I think nearly 18, 19 years. So it all depends there, I think, nearly 18, 19 years.
So it all depends, market. America, no. Titanic opportunity,
which is why we've been meeting with all the we've been meeting with all the CEOs of every department store. We've got a great new distributor there. So we'd have to go through all 80 countries and tell you exactly. But based on the size of the business, I think you can overall say that it's not.
And my final question, one for Carol in terms of uses of cash, €300,000,000 of net cash at the end of the year was obviously much stronger, I think, than we all anticipated. What can you tell us about that? Thanks.
We were pleased with our year end cash position, you mentioned. I mean in terms of we've talked to you constantly about the fact we keep it under constant review with the Board and we'll continue to do so. We've been happy carrying our prudent balance sheet as we've been through this uncertain macroeconomic environment. But we come back to it very regularly at the Board. And if we choose to move our balance sheet strategy, we'll come back and share it with you in due course.
But we have I mean, you'll notice that today the dividend is nudged up slightly, a 16% increase in the dividend. So we'll keep it under constant review.
Mario Dei of Stifel Bernstein. Two questions for me. The first one on pricing strategy. What sort of price increases should we expect for this fiscal year?
And the second one on brand positioning.
As Burberry reached the target position in terms of exclusivity that you
have in mind, in particular, till 2011,
you were talking about democratic But don't you think that too many customer has got still in mind this idea of democratic luxury for Burberry? And in case you think so, how long will it take to do the full requisitioning of Burberry till a fully aspirational brand?
So first of all, we absolutely positively never use democratic luxury position to a consumer. That was to take you on the journey with us, right, from where we were to there to here. So the way the total communication we've always had with consumers is we and we've talked to you openly about our pyramid. So we have and we basically say that there's 3 big chunks of consumers. There is your ultra high net worth.
There is a core luxury consumer. And then there is what we call your first time aspirational luxury customer. And you know what, all of our peers have all three of those same customers. And we all have them in the same markets. So we have forced them for this customer exclusive limited edition not in all doors etcetera absolutely not about price, but exclusivity, about innovation.
We have our core London collection, what a working man or woman wears. I was sharing with you some of the statistics on the menswear business, how the tailoring was growing, etcetera. So that is what anyone in these flagship markets local customers need every day. And then, of course, we all are going to have with the growth coming out of China in the emerging markets, we are all going to continue to have great customers that are just moving up the structure into becoming. They want great brands, but they also want a piece of luxury, your small leather goods and your soft business.
It's where Brit plays, whether it's a polo shirt or so we don't Brit is designed journey. The journey. The brand is solidly repositioned today. Is each market slightly different? Yes, we're spending a little bit more in China because we just took the business back 2 years ago.
Of course, there's probably more traditional perception, if you will. So but again, we play in 80 countries around the world. Each one of them is a slightly different phase. But the more that we do online, more customers are coming to berbere.com. I mean, over tenfold will go to burberry.com this year, then we'll walk into every store around the world combined.
So the sharper and the more exciting and the more engaging we get that platform, the quicker it is to change consumer perception all over the world.
And about pricing?
We are pretty much again, if you remember our original pyramid and you look at the pyramid today between Foursome, London and Brit, we absolutely love where we're price positioned right now. We've been gradually taking up based on the cost of living or if all of our peers in one market are up, our teams are very aligned market by market. If all of our accessory peers have gone up 5%, 10%, we're a pretty fast follower. But aside from that, I think you're just going to see pretty modest increases in price going
Securities. I have just one question to Carole on the profitability of your Chinese business. When you acquired the business 2 years ago, you disclosed an operating margin north of 18 percent. After all the investment and all the growth, could you give us some feel of where profitability tends to take? Thank you.
We don't split out profitability by country or by region when we're reporting externally. So obviously internally we have some numbers, but on a macro level we don't spit that out. But we are very pleased with the progress we made in China. Let's just say that. I mean you can see the phenomenal growth we've had in revenue and in elevating the brand.
So more to go for in China, but we don't disclose profitability by country.
Rod De Zoon from Merrill Lynch. You highlighted beauty as one of the strongest growth drivers for the next few years. You've got menswear, which is doing extremely well as well. You talked about it a few months ago. Can you update us on this business and add a little bit of color on the next growth drivers?
Thanks. Specifically in menswear. Yes, absolutely. I tried
to do a little
bit of it. I had about 4 sentences in the presentation. So same exact product pyramid as all of the other businesses. So we're thrilled with the porcelain performance.
It's been
up double digits in men's pretty much all year. Men's London is where we've seen Suits are a much higher average unit retail than sportswear. And we were able to get that solidly positioned with our department store partners. We've got it in about 70 of our own stores today. So you will see in the London collection area, again, which is what a guy wears to work, you'll see tremendous growth there.
And then the whole Brit, which is the more casual component of the men's collection, has also seen nice growth, specifically driven by outerwear, where we think we've even got further penetration opportunities. So
men's
will be it's just on a much bigger base than Beauty is now. Realize Beauty is a small base, right? I mean, Men's is really starting to be significant now. So it'll be the 2nd largest business men's accessories. And I would argue there's tremendous growth opportunity there specifically in the Asian region going Terrific.
Well, okay one more. Not 4, 1. Just
on Korea, it seems like it's been pretty soft for the last 24 months and looks like it's starting to improve. Maybe just a few comments on what you think has made the difference. Is it a question a question of bringing a bit more freshness into the lineup in Korea? Any significant macro change in consumer sentiment? Of things,
right? It always begins and ends with people. We had a great new Managing Director of of things, right? It always begins and ends with people. We had a great new Managing Director over the country.
He has gone in now with every major department store. We were just falling behind in Korea. The brand wasn't keeping pace as it was in all of the other markets. So we've got a number of new shop in shops in Shinsegae, Lotte. They are understanding the modern Burberry now.
So new Managing Director, new team, new investment going with our department store partners. And I don't think it's been formally announced, but you will see some a phenomenal flagship opening that Pascal and our brilliant team in Asia have negotiated because we also never had a flagship store in Korea, which was one of our largest markets in Asia.
Thank you very much indeed.
Thank you. Thank you very much. I think there's one final video.