Good day, welcome to the Burberry first quarter trading update conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Stacey Cartwright, EVP Chief Financial Officer. Please go ahead.
Good morning, everyone, welcome to Burberry's first-quarter trading update call. With me this morning is Fay Dodds, our investor relations director. As usual, I'll provide a brief summary of our performance, then we will be happy to take your questions. With 11% revenue growth, we delivered a robust first quarter, continuing to invest for growth and clean up legacy issues to build long-term brand equity. As we talked about earlier this year, the external environment has been challenging and the trading pattern uneven. In retail, we delivered 14% total growth with 6% comps. That's up against 15% comps in the same period a year ago. Average selling prices increased again. Burberry, Prorsum, and London increased their penetration, and replenishment remained at around half of our business. By region, the U.K., France, Germany, and Greater China outperformed, while Italy and Korea remained the weaker markets.
Our business in mainland China delivered mid-teens comp growth as we anniversaried self-help measures from last year. Turning to wholesale, revenue increased by 9% underlying, helped by earlier deliveries in Europe. This performance is consistent with our expectation of mid-single-digit growth for the half as a whole as we rationalize distribution in the U.S. and Europe while pursuing growth opportunities in emerging markets, Asia travel retail, and key U.S. department store doors. Finally, on licensing, revenue was down 5% at constant FX and 2% reported. The main factor here being the termination of certain Japanese non-apparel licenses in June last year. We continue to expect full-year licensing to be broadly unchanged year-over-year, with good growth from global product licenses. The performance was once again driven by the consistent execution of our five key strategies.
Under leverage the franchise, we continue to clean up legacy issues, be it in the supply chain, wholesale, licenses, and this year, products. Here, we're rationalizing certain opening price point programs in core outerwear and large leather goods in line with the elevation of the brand. Under non-apparel, we remain excited about the potential for men's accessories, up by over 50% in mainline retail in the quarter. Under retail-led growth, we've opened six mainline stores and closed two, and especially look forward to the opening of the major larger format stores in London, Chicago, and Hong Kong later this year. Our plans to open 12%-14% more space this year are unchanged.
As we said at the prelims in May, as we move a higher proportion of our space away from small, highly productive stores towards the larger format stores, these larger stores will naturally have lower sales densities. We're expecting that the 12%-14% space growth contributes around 8%-9% to revenue growth. In under-penetrated markets, we're continuing to invest in high-potential markets, opening our fourth directly operated store in Brazil in São Paulo, while the first Burberry store has opened in Jordan in partnership with a franchisee. Finally, under operational excellence, we continue to invest in IT, people, and processes to improve assortment planning, inventory management, and drive efficiencies.
In conclusion, with the challenging external environment globally and by region, we remain responsive as we always are, managing gross margin and operating expenses dynamically to drive profitability while also doing what's best for the brand long term. This approach underpinned our robust performance in the first quarter. With that, Fay and I will now be pleased to take your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. Our first question comes from Louise Singlehurst of Morgan Stanley. Please go ahead.
Yes. Hi. I was wondering if you could give us an indication of what you're seeing in terms of the domestic European consumer, and also whether you could give us an indication of the level of the margin dilution that you're expecting for the first half.
Okay. In terms of the domestic EUR consumer, clearly, we've had nice, strong performance from Europe in this last quarter.
Yeah
I would point it more to the traveling luxury consumer, not to the domestic European consumer. I don't think we're in a position to give you any quantitative numbers there. You'll know our CRM activities are in the very early stages. Fair to assume that the growth is certainly not coming from the domestic consumer. In terms of margin, all we've simply guided to is the fact that with the shift in the business model, we're expecting margins to be down in the first half, but obviously in line with our consistent guidance that overall we're expecting retail wholesale operating margin to be modestly up in the full year as a whole, and that remains unchanged.
Okay. Thank you.
Thanks, Anna.
We now take a question from Thomas Chauvet of Citi. Please go ahead.
Good morning, Stacey.
Hi, Tom.
Three questions. The first one, you're talking about a more challenging external environment. In Q1, your ASP is up. London, Prorsum, leather goods are still outperforming. Have you, in recent weeks, reviewed any of your investment plan? My second question is on the space disruption in Q1. If we take Regent Street, Chicago, and the outlet closures, how much selling space does that represent in percentage term? Finally, there seems to be a six percentage points currency impact or negative impact, at least in Europe, in Q1. What is that, please?
Okay. Well, I'll pick up on the more challenging macro and what that means for demand. We haven't got any better crystal ball than you have as to what's going to happen in all of the different geographic markets. All we would say is, this is the beauty of a global brand and the fact that we have the diversification that we do. We do believe that brand momentum remains strong. As you rightly say, the average selling prices is up. We believe in major markets that we continue to perform at least in line with our peers, if not outperform from all of the data that we receive. In terms of investment plans, certainly in terms of new stores our plans remain unchanged. You know we have a high IRR hurdle rate, 25%.
We apply quite stringent sensitivities to the appraisals that come through to our investment counters for approval. The vast majority of projects well exceed the 25% IRR. We continue to believe that it's right to invest for the future, for the long-term health of the brand, with the majority of our investment continuing to go into the big flagship markets, which have obviously the higher penetration of the traveling luxury consumer. In terms of any other investment plans, if you're talking about cost management, the business remains dynamic. We have monthly reviews with all of the regions, the product divisions, the functional areas, and we adopt this pay-as-you-go approach. Everybody knows that if sales outperform, we can invest a bit more, and if sales come in a bit lower in certain regions, then we'll rein back in, and that continues to be the case.
I mean, space disruption, I haven't actually added it up for you, but clearly we've got Regent Street and Chicago, which aren't in the comps. They'll come into new space during the second half. Don't forget, we've also got some new openings such as São Paulo and Faubourg Saint-Honoré in Paris, which aren't in comps. Then we've got some refurbs and extensions in cities like Barcelona and Rome as well. One of the things that Stacey highlighted was the sort of disruption to our real estate portfolio as we upgrade our portfolio, and that's clearly having an impact on both comp and the space contribution.
I think the final thing was just on currency. Clearly, remember for us, we've got the competing pressures, if you like, for what moves one way on the euro. For us, you've got the almost equal and opposite move on the dollar as you go through the year, and the dollar-associated currencies. So clearly in this first quarter, you've got slightly more of an impact. I think, for example, the dollar rate for us, the average for the quarter, 163 last year, 158 this year, and the euro 113 going to 123.
Thank you.
Okay.
We will now take a question from Anne-Laure Bismuth of HSBC. Please go ahead.
Hello, good morning. I have three questions.
Okay.
On the U.S., can you give us a bit more details? The underlying growth is plus two, I suppose that the rationalization have some impact. Is it possible to have the figures without the rationalization? Can you also comment a bit on the local consumers there? My second question will be on the profit before tax for the year. Can you give us the consensus you have? Third, on Interparfums. You said that you're still in discussion. The deadline is at the end of this month. Can you give us a comment?
Okay. All right. I'll take each of those in turn. The first one was the U.S. +2%. Remember, when you look at a quarter's number in one of the regions, it's always distorted by wholesale, not just retail, and clearly the timing of wholesale shipments. Within that U.S. number on the wholesale side, for the half as a whole, because we don't like to focus on the quarter, we're still saying that we will have a nice underlying double-digit growth out of U.S. wholesale. Clearly there is rationalization going on with the ceasing of certain distribution, particularly some of the off-price product there. As far as the retail is concerned, retail impacted by the fact that we're up against quite historic high comps in the U.S. It was comping at about 25% this time last year.
The U.S. is also the market that I would call out as having the highest penetration of the opening price point product that we've been rationalizing during the course of this quarter. They're also higher in terms of outlet penetration. Clearly because we've got less inventory to flow to the outlets, that's impacting them. Whilst the core remains strong, clearly you've had those negative impacts within the numbers. In terms of the local domestic consumer, I think the macro outlook is pretty uncertain. The data points are mixed. Of course, you've got an election later this year. I think it is a more challenging market perhaps. In terms of PBT consensus, there's quite a wide range out there coming into today. I think the lowest at GBP 403, highest at GBP 476.
The only thing that we're saying is that we would expect the outliers at the very top of the range there to come more in line with the core consensus, which coming into today is about GBP 440. I think the final question was on Interparfums. I'm afraid there's nothing more to update you on. You're absolutely right. There is a deadline at the end of July, in terms of the exercise of the option, should we choose to do that, but discussions continue with Interparfums.
Thank you very much.
Thanks, Stacey.
We will now take a question from Warwick of Deutsche Bank. Please go ahead.
Yeah, good morning. Three quick questions, please. Firstly, just as a follow-up, can I just make sure that I understood this correctly. The reopening of Regent Street in Chicago is included in the 12%-14% space growth you've guided to.
It is, yeah. It's new space. Yeah.
Okay. You've commented specifically on mainland China. I was wondering if you could just comment on Hong Kong, how you think the environment is there.
Yeah. In terms of Hong Kong, we still saw double-digit growth out of that market in this last quarter. Clearly, a lot of other players have been calling out the reductions, the softening when it comes to gift-giving. I don't think we're any different to that. I'm not sure what else to say about the market, really.
No, it's quite a difficult market to read because, again, they were up against very strong comps in April and May because of the distortion to travel flows within Asia post the Japanese earthquake. Again, this uneven trading pattern is showing itself in Hong Kong.
Okay. Just finally, going around the regions, the Rest of World Group, I know it's a small quarter and what have you, but that growth rate slowed quite considerably from last year. Is there anything that drove that in particular?
Yeah. Again, it's the phasing of wholesale because you're looking quarter on quarter. The main driver of the retail comp growth is the Middle East. Dubai, I think as you know, has remained fairly volatile. Within those numbers, India is still strong for us, but it's relatively small.
Great. Thanks very much.
Will Hutchings of Goldman Sachs will ask our next question. Please go ahead.
Good morning, Stacey. Just two questions, just so I'm absolutely clear in terms of the phasing. I know this must be quite boring to go through, but just so we understand this. The impact of what you're doing in the U.S. in terms of rationalization, should we expect that to continue for the next two or three quarters? We understood that you started to implement that in the back end of last year.
Second half of last year. Pretty much through it by the end of the first half this year.
Okay. You'll be running on a normal comp base in the second half.
On the wholesale distribution, yeah.
The same one. Sorry, if you've been through this already, I know. In the China business as well, you obviously have the uplift of being able to take on your previous franchise-run stores and improve the like-for-likes. They were activities that improved the productivity of the stores. Are we now again at a point where you're just seeing that 15 double-digit or mid-teens same-store sales in China is reflective of just sellout? It's nothing that you're doing separately.
Yeah. Clearly, we talked about the fact that when we acquired the business back in September 2010, there were some early wins in terms of the merchandising, the focus of the Asia team on making sure we had the inventory from a logistics point of view in the right place at the right time. We've been putting in place the sales and service training program, which obviously it doesn't happen overnight. Then, of course, the latest was putting SAP in last November. Although we've been anniversarying some of the self-help, there's still some part to come. Interestingly, you called out the difference between the stores that we acquired from the franchisee and then, by implication, the stores that we've opened since.
I will tell you within that mid-teens number that we've had the strongest performance from the stores that we have opened, which are obviously more in line with the vision for the brand in that marketplace. These are the larger footprint stores, more like 4,000 square foot plus with bigger stores still to come in markets like Shanghai in particular. We've been closing the 2,000 square feet stores that we acquired from the franchisee as we've been evolving the portfolio. The performance from our openings has been strongly into 20% plus in terms of comps this last quarter, whereas the comps out of the acquired stores have been more high single digit.
I think that shows the power and the strength of the brand, and obviously augurs well for the quite aggressive store opening and closure program that we have over these next two to three years to refresh that whole portfolio and expand our reach in China.
That's very helpful. Thank you very much, Stacey.
Sure.
Our next question comes from Annabel Gleeson of Redburn. Please go ahead.
Morning, Stacey. Morning, Fay.
Hi, Annabel.
Two questions. The first one is, can you quantify how much your proactive decision to kind of de-emphasize the Nova brand has impacted sales?
Yeah.
Also, given your comments on elevating the brand, how should we be thinking about gross margin?
Okay. In terms of quantifying the actions that we've taken on rationalizing the opening price point programs, that's obviously core outerwear as well as the large leather goods. Order of magnitude, it's a couple of percentage points off comp, both before, obviously, whatever assumptions you want to make on substitution. Certainly, for like-for-like product, it's a couple of percentage points off comp. Then in terms of elevating of the brand, you remember we continue to pull levers elsewhere in gross margin. As we elevate the brand, and we push into new product categories, you're not necessarily driving for the same gross margin, but we've got other levers that we're pulling, which is helping us to keep nudging up gross margin. Like, how we're bearing on replenishment as a proportion of the mix, how we're driving that.
Clearly what we can do with higher full price sell-through in our mainline stores rather than what goes to outlets, as well as obviously, underlying pricing.
Let's just go back to the point that as you sell more across in London, although you might make a lower gross margin percentage, you make higher gross margin.
Pounds
GBP. Yeah.
This is all part of lots of moving parts in there. Clearly, one of the things that we factor in when we talk about modestly improving net operating margin year after year.
Perfect. Thank you very much.
Thanks, Annabel.
Ladies and gentlemen, as a reminder, please press the star one on your telephone to ask a question. We will now take a question from John Guy of Berenberg Bank. Please go ahead.
Hi, Stacey . Just a follow-up on Annabel's question around the de-emphasis. Within that 2%, does that also include putting less stock through the outlets? Would you say that there is an additional impact to be had as you de-emphasize the outlet stock?
All we're simply saying is that for what happened in the quarter, for product that would have gone through all of the mainline stores, that cost us a couple of percentage points on margin. Clearly, that's before any view on substitution. No impact on outwards.
Great. Thanks very much.
Thanks, John.
Our next question comes from Fraser Ramzan of Nomura. Please go ahead.
Thanks. Good morning, Stacey.
Hi, Fraser.
Just a question around inventory and your ability to flex your commitment as a business. Obviously, replenishment is a much higher proportion of sales than it was, and you've also invested in your supply chain. As you look forward in terms of your commitment over the coming months, how flexible can you be? Can you respond on your non-replenishment product to whatever the market environment may look like?
Well, I think probably as hopefully we indicated, even at the prelims, we are procuring much more tightly for higher full price sell-through to start with. If that gives you any comfort, we are adopting the stance internally of tight procurement and chasing if we need, rather than building inventories for sales levels that may or may not come through. We are being very prudent in the current environment.
That is the benefit of having SAP now throughout the business and having invested in the planning team.
Yeah.
Yeah. On replenishment product, I'm not quite sure how to ask the question. How flexible can you be? What's the variance, either from chasing down fashion in season or on replenishment in season?
We're not as sophisticated on replenishment by any stretch of the imagination versus what we like because it's still very clunky and manual, albeit we're using the SAP output. The actual replenishment modeling is done off system. The replenishment model will come later this year.
Nonetheless, clearly what you have the flexibility to do with replenishment product is to take the next slug of inventory that you've got coming in from suppliers and say, "Great, I'm not going to take that in October. I'll take it in November," and you start to push deliveries out. It's product that would never be marked down. I think we feel quite comfortable, although it's not as sophisticated as it could be. We've got our arms around it.
Thank you very much. Thank you.
Thanks, Fraser.
We will now take a question from Peter Farren of Bryan Garnier. Please go ahead.
Yes, hello. Just one follow-up question on China, please. Can you tell us how many of your ex-franchisee stores are left versus the kind of stores you're opening, please?
We've got 66 stores today.
I'd say probably about 40. I'll have to double check that.
Yeah. Two-thirds are ex-franchisee and one-third are new, approximately.
Okay, thank you.
Mélanie Flouquet of JP Morgan, up for our next question. Please go ahead.
Good morning, Stacey and Fay I have two questions actually. Hi. The first question is on Asia. I noticed that mainland China actually like for like some new things are decelerating, but still a pretty good performance. Asia in total is decelerating quite markedly in this quarter. I was wondering whether you can make comments on any one-offs that could have impacted this or whether some of the markets other than mainland China have actually seen a market celebration this quarter. That's my first question. The second one is just with 18% growth versus the 32, I think, in the last quarter.
I'm sorry, Mélanie. What was that? We didn't catch your second question.
The first question is on Asia, ex China.
Yeah. Second one, you said?
The second one is on the space growth. The space growth was 8% in Q1, and you are pointing to a lot of store openings coming later in the year. Should we expect a re-acceleration of this 8%, or is the fact that they are flagship still pointing to 8% for the rest of the year?
Yeah.
My last question is on like for like, given that the rationalization of the Nova bag and the outerwear entry price point is continuing throughout the year, should we expect a re-acceleration of this like for like or this impact, or at least the impact will it be tailing off, or will it accelerate through the year? Thanks a lot.
I'll go backwards. I think so in terms of the like for likes and the impact of the rationalization of the opening price points on large leather goods and outerwear, that will obviously continue for the balance of the year. In GBP millions terms, it's a little bit more in Q2 and Q3 than it was in Q1, and a little less so in Q4. Not markedly so. That's helpful for you to be able to do the maths around that. In terms of the space of 8% in Q1, I think we're consistent with what we said back at the prelims, that if we're adding 12%-14% space growth for the year as a whole, we'd expect that to convert into 8%-9% sales growth off the back of the larger format stores.
In terms of color around Asia like for like, clearly you've got China, we talked about being mid-teens. Hong Kong is still into double digits. Korea is the weakest market, and pulling the numbers down on that sort of number 3 in terms of size. Taiwan was sort of mathematically weak in the quarter, but bear in mind that we've opened the Taipei 101 flagship in the quarter. Clearly that's impacting comps because of this magnificent new flagship.
No worsening.
Sorry?
No worsening of the situation in any markets in Q1 you would single out mainly?
In terms of Korea is broadly in line, maybe a tad worse, but not hugely. As I said, Taiwan, a one-off really in terms of it being impacted by the flagship.
Thanks a lot. That's very clear.
Thanks, Mélanie.
Peter Testa of One Investment has our next question. Please go ahead.
Hi, thanks very much. Just a couple of questions to clarify a few things, please. One is just on the like for like, which is a bit less than people had expected. Could you just give some sort of sense as to where you're seeing the slowdown versus previous quarter like for like, and to what extent the space changes, for example, the pulling out of London and Chicago have affected that number? I was just a bit confused by the answer there. The second question was just on wholesale. You talked about in particular the U.S. being negatively impacted by phasing and say rationalization of base. Other areas are positively impacted by phasing. Is that a large offset to the total number as a positive in Europe, for example, because of the earlier deliveries?
The last question is, you mentioned on cost that you're remaining responsive to the environment. Given what you're seeing so far, are you taking any particular actions on costs or is the movement in the environment not substantial enough to change your plans at this point?
Okay. I'll take them in reverse order. I'll take costs and then let Fay pick up the other two. On the cost piece, this is no different to what we always do, which is that we have monthly reviews with all of our teams on product divisions, the regions, the functional areas. We're constantly reevaluating every month what we need to pull in and what we can afford to let out. We've been calling out for a little while now that with the team being as dynamic and responsive as they need to be, this is how we're making sure that we're staying on track with overall consensus for the year. In terms of wholesale
Sorry. Just to clarify that point. My point, I understood that's how you run your business. I was more wondering whether based upon what you've seen, are you actually doing it very much right now or not?
Well, the teams are constantly in action looking at how to drive out efficiencies and manage their costs that much more tightly. Yes, we are in action, but we've been in action for a while and will continue to be in action on that.
Okay.
In terms of wholesale, we always say to investors, please look at the first half because I'm kind of neutral whether we ship it on the 27th of June or the 5th of July. In terms of where we're seeing the growth in the half, we've pointed to the U.S., we've pointed to travel retail, we've pointed to emerging markets. Europe, because of the rationalization of the specialty accounts, is sort of broadly flat for the half. Within the quarter, yes, the deliveries were phased more into the first quarter in Europe. That was probably the main phasing impact. Always, please look at that half number.
No, of course. Just trying to be clear on that. Okay. On the like for like, just to help us understand what's slowing down. Because it sounded like, for example, China's really the same. Even Korea, which has been weak, is broadly the same, and I couldn't quite follow where the change had been.
Well, remember, Peter, China was 20%. We're now calling out that it's mid-teens.
Sure.
That's the first thing to bear in mind. We've called out that obviously we've got in the U.S. market, they're up against particularly strong comps this time last year, and they are the region most impacted by the rationalization of the opening price point product, and the higher % historically of outlet business in that market. The U.S. is marginally positive rather than anything else at this point. Conversely, Europe has held up very well in the quarter, helped by the traveling luxury consumer.
Great. Okay. That's very helpful. Thank you.
Thanks, Peter.
We have no further questions at this point of time.
Thank you very much, everybody, for your attention. In summary, with 11% revenue growth, we've delivered a robust first quarter with continued strong brand momentum. As we've talked about earlier this year, the external environment was more challenging and the trading pattern uneven. We remain true to our strategies, investing for growth while dealing with legacy issues, essentially to build long-term brand equity. Thank you very much. We look forward to speaking with you on October the 11th, which will be when we publish our first half trading update. Thanks very much.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.