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Ladies and gentlemen, welcome to the Burberry Q3 Trading Update Call. My name is Stuart, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Julie Brown, Chief Operating Officer and Financial Officer.
Good morning, and welcome to Burberry's full year 2019 third quarter conference call. Slides are available to accompany this presentation on the IR section of our website.In today's presentation, I will cover 3 main areas: the operational progress we've made; our retail revenue results; and finally, our guidance for the full year. And with me this morning is Annabel Gleeson, our Head of IR. And we will be very happy to take questions at the end.Before we begin, I wanted to publicly thank our team for getting us to this point. A huge amount of work has gone into the preparation for next month's launch of Riccardo's debut collection, and we've made significant headway in terms of brand heat. While we are, of course, mindful of our financial objectives and are managing the business dynamically to deliver these as we transition from one creative vision to another, we're looking beyond our current performance, and we're excited about what is to come.So turning to the first slide. During the third quarter, we continued to build brand heat and shift consumer perceptions. In line with our new go-to-market model of frequent product drops, we continued with our monthly B Series, introducing limited-edition products designed by Riccardo. We collaborated with Vivienne Westwood, reimagining a range of Vivienne's iconic pieces in Burberry Check. And we launched our annual festive campaign. These activities underpinned improvements across our social media platforms. For example, quarter-on-quarter, we added over 1 million new followers across Instagram and WeChat. Our reach on WeChat grew by 50%, supported by the B Series, which was recognized as the most exciting luxury campaign on WeChat. And we saw a material improvement in sentiment relating to our brand on social media. During the quarter, we also invited our wholesale customers to place orders for Riccardo's Autumn/Winter 2019 collection, which will arrive in store from May. The results are really encouraging. In the U.S., luxury wholesale orders per door have doubled on a like-for-like basis. And in EMEIA, orders in our luxury accounts have shown a significant increase. However, as guided, our wholesale restructuring accelerates in this half and into next year, and this will weigh on our overall financial performance.Turning now to Slide 2, I wanted to review our financial performance in the quarter. Whilst we have a number of positive lead indicators in wholesale and social engagement, our performance in the third quarter does not yet reflect the brand and product changes. Against this backdrop, we've managed our business dynamically, delivering comparable store retail sales growth of plus 1% in the period. All 3 regions were up 1%. In Asia Pac, Mainland China and Korea grew a mid-single-digit percentage; while Hong Kong and Japan declined, with Japan particularly impacted by weaker tourist flows. In EMEIA, spend by European customers remained subdued, impacted by the macro situation particularly in France. And we saw an improvement in buying patterns quarter-on-quarter as Chinese tourists' spend returned to growth in the U.K. The Middle East remained challenging, also impacted by the macro situation. And finally, the Americas was impacted by a more challenging footfall in the U.S. market.Turning to Slide 3. Again, you can see the 1% growth in comparable sales. Space was a minus 1% impact. And during the period, we opened 2 new stores and closed 4, which takes our net store closures to 9 year-to-date. As we've previously highlighted, we had a negative impact from the move to a single retail calendar and the adoption of IFRS 15. In total, retail revenue was down 2% at CER. And finally, currency had a 1% benefit in the quarter, resulting in reported sales of GBP 711 million, down 1% year-on-year.Turning to Slide 4. We're currently navigating our business through the apex of the transition. On the one hand, we've introduced clients to our new branding and product; but on the other, the previous collections remain in store. As you can see from the chart, this situation will continue into Q4 as the contribution from Riccardo's collections build over the coming 9 months. In terms of the phasing of new product introductions, we start in February with the launch of the September runway. And from May, the Autumn/Winter collections start to arrive in store, which will build the waiting of Riccardo's products by September. Excitement is building in anticipation of Riccardo's debut collection arriving in store. Our preparations ahead of this launch are well progressed with activations planned in key retail stores and across influential wholesale partners. And complementary store refreshes are also underway.Finally, turning to the outlook on the next slide. In terms of full year 2019 financial outlook, we maintain our guidance for broadly stable revenue and operating margin at CER. We continue to progress well against our operational objective, including the delivery of GBP 100 million cumulative cost savings by the end of the year. However, we now expect our full year capital expenditure to be GBP 130 million, lower than the GBP 150 million to GBP 160 million previously guided due to the phasing in anticipation of the new store concept. As usual, we have updated our currency guidance. There is no change to our view of a GBP 25 million headwind from currency on operating profit. In summary, we're excited and well prepared for the launch of Riccardo's debut collection. While we know it will take time to achieve our ambitions, we're delivering on our strategic milestones, and the execution of our plan is on track. And with that, we're very happy to take any questions.
[Operator Instructions] Your first telephone question today is from Zuzanna Pusz from Berenberg.
So I have 3 questions, please. The first one is on trends by nationality this quarter. Would you be able to share with us some detail especially on the Chinese consumer and if you've seen any sort of deceleration towards maybe the end of the quarter? Second would be again on the trends throughout the quarter but just more generally. I appreciate that December was impacted by some one-off events like the riots in Paris. But is there any color you could give maybe on the exit rate just so that we understand what are the trends currently? And finally, would you be able to comment on the volume or value split of the 1% like-for-like growth in the quarter?
Thank you very much, Zuzanna. So in terms of trends by nationality, in particular the Chinese. The Chinese globally, we have seen a small uptick between the quarter-on-quarter Q3 to Q4. So the Chinese were growing at low single digits -- in Q2, sorry, and now we're at mid-single digits. We've tipped into mid-single digits, but it's a very, very marginal increase that we've seen and nothing to call out that I would call a trend from it, so I wouldn't read anything into it. The second part to your question around exit rates and in particular December, I think only 2 things to call out. Obviously, we don't comment on trading in the particular quarter -- in the months, but what is worth calling out, as you mentioned, is we had -- because of the French situation, we had to close some of our mainline stores in Paris in a few Saturdays leading into Christmas, and that did impact the mainline trading in France. But France as a country is about 3% of our sales, so it wasn't that material. In terms of other countries to call out, it would probably be America. We saw a softening in sentiment generally in terms of the macro environment in America. And you will have seen some of the department stores reporting reduced traffic in that -- in our third quarter. And we also experienced that as well in our physical business. Coming back to the 1% comp and the breakdown of the 1% comp, it was mostly driven by volume. So it was very little movement in price in the third quarter, it was all volume. Thanks, Zuzanna.
Next question is from the line of Elena Mariani from Morgan Stanley.
A couple of questions from me as well. The first one is on your fiscal year '20 guidance. So you've maintained guidance also on the upcoming year. And am I correct in assuming that you are expecting an implied acceleration in like-for-like given that you have the new products being launched in store in the coming quarters, and all in all, you're still expecting wholesale to be down over the course of the next year? Second question is about your planned launches and the phasing. I was wondering whether you could give us a bit more information about the leather goods segment. Is that going to be the most important part of your planned launches? Is it going to come a bit later? If you could give us some indications here, it would be fantastic. And finally, a small thing. Could you give us some indications on the expected FX impact on fiscal year '20, please, at the EBIT level?
Okay, thank you very much, Elena. So taking the first piece, the guidance. In terms of the acceleration, what we see happening here is that Riccardo's products, and it's basically the runway, will start to go into our stores towards the end of February. As you know, it will still be a small part of our business. Approximately 10% to 15% of our range at that stage will be coming from Riccardo, and this will build over the financial quarters Q1, Q2 from about 50% in May to just over 60% by September. So in terms of acceleration, we see this as being the next catalyst. We've done a huge amount of preparatory work to prepare the stores and the retail associates for the launch. However, it will build -- we see it building over time and not having a significant impact on our fourth quarter trading but more impact as we go through the next few quarters. So in terms of the wholesale component, this year we're maintaining the guidance of wholesale being a mid-single-digit growth rate. The wholesale rationalization program is going to affect the second half of this year and the first half of next year in the most pronounced way. In the second half of next year, we'll feel it the most, particularly in the U.S. So basically, this year, mid-single digits; next year, we do expect wholesale to be down, and we'll clarify the precise guidance on that when we give the results in May. The next part to your question relating to launches and in particular the leather goods category, I think we've probably covered the general launches in terms of the cadence of the product build, and we've got a slide in the pack that you will have seen. In terms of leather goods specifically, the transformation in leather is a multiyear project. We started to introduce new products, but building the full offer will take time. And clearly, a key part of the leather transformation will be the introduction of the TB monogram because we'll be able to denote Burberry through use of a monogram rather than the use of a check, which obviously suits leather goods in a good way. So we expect this to start -- bags will start to build up, but it's not going to be an immediate overnight change, okay? And then finally, in terms of foreign exchange, we have given specific guidance for this year. For next year, for full year '20, we would expect a very negligible impact at this stage from foreign exchange. We're likely -- at current rates, at the 18th of January, we're likely to have a positive impact on sales. But on operating profit, it's likely to be fairly flat because we'll still have the procurement contracts running through cost of goods.
Next question is from the line of Antoine Belge from HSBC.
It's Antoine Belge of HSBC. Three questions, if I may. I think in your comments, you've noticed the positive response from retailers, especially in the U.S. In that doubling of orders, for instance, any product category to call out that seems to be outperforming or really driving the year-on-year uptick? Second question, with regard, I'm sorry, to the short term, about the current quarter, so you highlighted maybe exit rates in certain region being negative. What's your view about Chinese New Year in general with the context of the weaker renminbi? And as you highlighted, the products from Riccardo will only impact a bit later in the year, so in other words, do you think that it's still possible for Burberry to record positive like-for-like in Q4, or is it going to be a bit challenging? And finally, with regards to the EBIT consensus today, I think it's a touch below GBP 450 million. Do you think that this should change in light of the sort of more challenging conditions or do you think that there are ways for you through maybe cost savings to make sure that this figure is broadly achieved?
Okay, thank you very much, Antoine. Certainly to those parts, the first one in terms of the positive response from retailers or U.S. wholesalers and basically how it's assigned by product, it's fairly across the board we've seen -- as you know, Riccardo's show was all dedicated towards the woman and the girl, the man and the boy. His whole premise here is to have inclusivity across the range, and we've seen a very good response across the range, both to his runway and also the first commercial collection, which will be Autumn/Winter '19. In terms of Q3 specifically and the exit rate, it actually wasn't that different, apart from the specifics we've called out in terms of the impacts of the yellow jerseys in France impacting our mainline in France with the store closures and also the softness in sentiment in the U.S. affecting traffic, which we've seen reported by a number of department stores across the U.S. Apart from those specifics that we've called out, there wasn't really a change in the exit rate at all. And you mentioned the Chinese New Year. We've had a specific dedicated campaign for the Chinese New Year, and we've complemented it with B Series drops, which have been extremely successful, particularly in the men's line. So basically, in Q4, we wouldn't expect a general change to the trajectory in Q4 that we've delivered in Q3. The key inflection clearly is when Riccardo's product builds through the quarters. And in the fourth quarter, it will only come in essentially 4 weeks before the end of the quarter, so we would expect that to build over time. The final part to your question relating to EBIT consensus. So EBIT consensus is at 449 at the moment. The macro conditions are somewhat more challenging, but we are maintaining guidance, so no change to our guidance of broadly stable revenue and operating margin at CER. The key thing here is that certain analysts who were on the high side in Q3, we would expect them to recalibrate their comps for our delivery of plus 1%. But apart from that, we're not expecting any change. We're maintaining guidance.
Maybe just a follow-up on my first question regarding the Autumn/Winter. For trenches in particular, is there also a positive trend for that important product line?
To Riccardo's collection, nothing really to call out. We've seen it across the board, across all the product lines. And clearly, Riccardo has embraced the trends and the designs, and it's part of the -- a key part of our collection.
Next question is from the line of Thomas Chauvet from Citi.
I have 2 question, please. The first one, on the deliveries of the new collections, so the product availability of Tisci's collection will be quite limited in Q4 and in H1. Given the strength in wholesale order book, how are you going to make decisions of allocating products to the wholesale clients versus your own stores or even between the various geographies? Secondly, on Brexit and the contingency plan, I saw some headlines of your media interview, Julie, earlier this morning. How much of your COGS are from products actually made or finished in the U.K.? So I'm not talking about raw material but actually made or finished in the U.K. versus Italy and other parts of the world. And in a no-deal Brexit scenario, how realistic would it be for you to shift parts of your U.K.-based apparel manufacturing to Italy, especially now you've acquired your Italian leather goods partner, CF&P? I mean, I know they make leather goods, not trench coats, but everything is possible in Italy, I suppose.
Thank you very much, Thomas. So just in terms of deliveries, you're right. In Q4, we anticipate it to be fairly limited. It will be the final 4 weeks of the fourth quarter where we'll have Riccardo's product, and it is the runway. So you probably recall Marco's slide that he presented, and we've also brought it forward. We'd expect to be about 10% to 15% of the range by February and then building to about half of our range by May and approximately just over 60% by September. So that's the sort of product cadence coming from Riccardo's collection. In terms of allocating the product, clearly, we've got good line of sight of the order book from wholesale, and indeed, as you've seen from the announcement, it's very, very encouraging. I think we -- in terms of we aim to satisfying the supply chain are absolutely geared to satisfying our retail needs and our wholesale customers' needs. And clearly, the wholesale customers are very important to us, particularly at this stage, because they have the fashion consumer, and they're a good way of introducing new fashion consumers to the Burberry range. So we don't see any issues with supply. Moving on to Brexit and the cost of goods and where the products are manufactured. What I was signaling this morning to the media was, if we have no deal, if we exited the EU with no deal in place, then we would be subject to world trade tariffs, which would increase the duty we pay on an annual basis by tens of millions. And clearly, we would have to take mitigating action against that. In terms of the -- where the product is manufactured, we have got the trench coats being manufactured in Castleford in the U.K., and we've also got the cashmere scarves being manufactured in Scotland. We have got a large manufacturing base outside the U.K., but it's mainly the disruption, if there was no deal, really comes from operationally moving the product between Europe and the U.K. For instance, our distribution center for the digital channel, we've got one in the U.S., one in China and one in the U.K. So the U.K. one is servicing the rest of the world. And it's the operational disruption that we would encounter with regard to shipping product to customers within the lead times, and that would obviously mean additional inventory would need to be carried as one of the mitigating actions in the near term.
Next question is from Rogerio Fujimori from RBC Capital Markets.
Julie and Annabel, 3 quick questions. First, a follow-up on leather goods. I appreciate it's a multi-season effort, but you had the Belt Bag big launch last spring, so if you could talk about how the Belt Bag is performing and how ASP is changing given its higher retail price point? The second is just double checking the markdown levels in Q3 '19 compared to Q3 '18. And the first (sic) [ third ] is any comments about e-commerce, about your digital performance in the quarter, burberry.com and third-party online partners?
Okay, thank you very much. Yes, so in terms of the Belt Bag specifically, we're very pleased with the Belt Bag. It's performing well. As you know, part of our strategy here is to go in more elevated price points, and the Belt Bag's gone in at GBP 1,590 and GBP 1,790 for the large size. And it's been very successful. It's a full leather design, as you've seen it, and a higher price point than usual. And it's been very successful. It's now our third best-selling bag overall. I think in terms of leather and bags, this is a strategy, and it is a multiyear strategy to build out the bag architecture over time. You will see more of this innovation coming through with Riccardo's collections, and we're really excited about that. But we do see this is a multiyear journey. I think that's the important thing. We wouldn't focus on one shape individually but the total architecture that we're bringing to our consumers. Just in terms of the markdown, we don't give the specifics on the markdown. But clearly, we've got 2 really clear priorities as a company. We want to prepare our retail stores to receive Riccardo's product, and therefore, managing inventory through this creative transition is a key part of what we continue to do. So it's all about preparing them for Riccardo's product coming in, that starts at the end of February, and also simultaneously ensuring that we protect the brand through that process. And then finally, in terms of digital, our digital channel continues to outperform the mainline. The major growth areas that we see in digital, we've seen Asia being very, very productive. We've also seen the localization strategy bearing benefit. And moving into new third parties, such as the Farfetch collaboration, has also been successful because it extends our reach and also gives us access to a slightly different customer base. So overall, we're very pleased with digital. And like retail, digital is fully prepared for the launch of Riccardo's product, which will come at the end of February, and expect to see some exciting things on digital at that point as well.
[Operator Instructions] The next question is from Melanie Flouquet from JPMorgan.
So I have 3 questions, please -- actually, 4, sorry. The first one is on the product split. Could you share with us a bit what happened from a product [ perspective ], sorry, in October to December, so in particular whether fashion continued to outperform, heritage continued to be under a bit more pressure and lesser goods in total? Because I know the Belt is doing well, but I think you were still in transition with the former collections. So that's my first question. The second question is, if I understood well, but please correct me if that's not the case, when you're looking at the doubling of the orders of the Tisci collection for the [ coat ] collection in the U.S., you're referring to the remaining doors. So I was wondering whether you can help us understand what these orders are looking like in total if we include all the closures that you're undergoing in the U.S. because, if I'm not mistaken, you're closing 60% of the doors. So I know you have a total guidance, but the total guidance is probably including everything. So on the Tisci collection, i.e. the more fashionable part and not the heritage products that have not changed, what is actually happening including everything? The third question is quick one on CapEx. Will -- should we expect a reacceleration of CapEx a year after? Or in other words, when is the store format expected -- the new store format is expected to start coming in? And then, sorry, your clarification on markdowns, you said you were preparing the stores for the Riccardo collection. I wasn't sure whether this meant markdowns had been slightly superior.
Okay. Thank you, Melanie. So going through those, in terms of the product split, we're no longer providing the distinction between fashion and replenishment because the strategy is very, very clear that we're moving more and more towards a fashion company, and now you'd expect the emphasis to be on the fashion lines. And so we're no longer providing the split. But the components of our business that's orientated towards fashion is performing at a much stronger level than replenishment, but this is a macro factor that we've seen across the industry. In terms of the wholesale position, your second question, you're absolutely right that the doubling of U.S. orders that we've seen relating to the November market, which was Autumn/Winter '19 from Riccardo, is a statistic that's coming from the remaining wholesale doors. So if we've retained, for instance, a floor or several floors in Neiman Marcus, we're comparing like-for-like in that sense. So it's a very similar statistic to comp in that sense, and it means that the productivity of those doors is anticipated to rise significantly because of the rise in the orders relative to the space that we retain. If you think about wholesale as a whole and you think about the closures, we are, as you quite rightly say, in the process of closing approximately 60% of our wholesale doors in the U.S. And so the total guidance is taking into account the whole situation. This year, we anticipate having a mid-single-digit rise in wholesale because the first half was not really impacted. The second half is more impacted in the U.S; it's negative overall in the U.S. And then next year, we would expect wholesale to be negative overall because we will have a significant pull-down from the closure of those U.S. doors, particularly in the first half. Moving on to the third part of your question with regards to capital expenditure, what we've done with CapEx is we have been through a serious prioritization exercise and basically decided which stores need to be refreshed at this stage, which is consistent with the strategy, so it's really the flagship locations, the high-fashion cities; and which stores can now wait for the new store concept, which is going to be developed and announced in the second half of full year 2020. And really, it's been a recalibration of that. So yes, you would expect us to stay with the overall capital expenditure guidance that we gave when we laid out the strategy, but there is going to be a back-phasing of that in accordance with our plans and prioritization. The final part of your question in terms of the markdown period, we don't go into the details of percentage of markdown or sale period. But what we have done is we've been very disciplined about the management of the inventory situation, the most important thing being that we do prepare the stores for Riccardo's collection, which starts at the end of February. And so the important stage now really is -- because we're changing creative and changing the vision, it's the importance of clearing that inventory accordingly. Thanks, Melanie.
Next question is from the line of Louise Singlehurst from Goldman Sachs.
Just a couple of follow-ups from me, please, if I may. Just on that CapEx, can you just tell us about the 10 stores that you're doing and in terms of, obviously, the key cities, where you're starting? And then in terms of management, I think the last -- from memory, the last additional announcement was the Chief Marketing Officer back at the end of last year. Has there been any other changes now we're pretty much through the entire kind of transition? There's obviously been a lot of change over the recent past.
Yes, thank you very much, Louise. Yes, so in terms of the 10 stores, we started with our 2 U.K. flagships, which were Bond and Regent. And I'm sure you've seen them. In terms of the stores that are coming through next, it made me focus on the key fashion-orientated cities where we've got key influencers and opinion leaders. So for instance, you'd expect New York, Milan, Paris, clearly some of our partners in London. And then the next phase is some of the major Asian cities such as Hong Kong, Shanghai, Tokyo. Those are the main areas that we'll be covering. In terms of your next question about people changes, yes, we're delighted to have welcomed Rod Manley to the company. He joined us a couple of weeks ago. Steeped in luxury marketing, so he joins us with a lot of experience in this space, so that's fantastic. I think in terms of the only other change at the senior leadership team is a change in our HR and corporate affairs. So we've got a new HR Director who's joined us recently, and she's joined us from American Express. Those are the major changes that we've got at the senior leadership level.
There are no further questions at this time. I would like to turn the conference back over to Julie Brown for any closing remarks. Please go ahead.
Okay. Well, thank you very much, everyone, for joining the call, and we look forward to seeing you again associated with the shows. I think we've got store tours, et cetera. And we'll also see you in May when we do our full year results. Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.