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Hello, and welcome to the Superdry Full Year Pre-Close Trading Update Analyst Conference Call. [Operator Instructions] And just to remind you, this call is being recorded. So today, I'm pleased to present Euan Sutherland, CEO; and Nick Wharton, CFO. Please begin.
Thank you very much. Good morning, everybody, and thank you for joining today's call. As always, I'm joined by Nick Wharton and also Ed Barker, who joined the company in April, and he'll take over from Nick in July. Overall, I'm really pleased with our performance over the last year, again, for what is a challenging broader consumer environment globally. The headline numbers show brand growth of plus 23.3% in quarter 4, which is another strong global multichannel growth quarter for us. Our growth has been consistent at the total brand level, with all territories growing brand revenue. Full year brand growth at plus 22.1% year-on-year with a half year plus 19.5%. This is powered by the focus in E-commerce and Wholesale, our capital light channels. Both divisions continuing to perform well, with Wholesale representing now over 60% of our brand revenue globally. This has led to another year of anticipated double-digit PBT growth, with guidance of GBP 96.5 million to GBP 97.5 million for the year. We've made progress across every aspect of the business and in all territories, and we have sharpened our focus on our Global Digital Brand strategy. We continue to diversify our overall business model across geography, channel and category. In turn, we are lessening our individual reliance on any individual market or sector. As we outlined at our last Capital Markets Day in September, this means investing in and growing our capital-light channels of Wholesale and Ecommerce. These channels are consumer-focused, high-growth and truly global, which will continue to improve our already high ROCE. Our model and approach means we can switch channels rapidly to meet changing consumer needs across the world. Focusing now just for a few minutes on recent progress against the 4 elements of our strategy. We continue to strengthen awareness and perception of the brand through integrated digital marketing activity, and this summer, we will reinforce the brand's global positioning even further through alignment with our 2 of -- our customers' core passions, music and sports. Our Superdry Phones campaign of summer festivals will continue to support emerging music talent, creating strong bond between Superdry and our consumers' interest in music, generating engaging content that we will amplify across our social media platforms. We are very proud to be partnering the U.K. Invictus teams. We delivered first milestone of our commitment as official clothing supplier at the recent selection trials and will ramp-up our involvement in marketing, as we progress towards the games in Sydney this October, driving a step change in awareness of our Superdry Sports Apparel credentials. Progress against our world market opportunity continues, with the rapid expansion delivered through our capital-light channels. We opened 75 franchise stores in the period, a 24% increase year-on-year, including 8 stand-alone Superdry Sport stores, which are exceeding our performance expectations. On top of that, we built Wholesale key relationships in 8 new markets, including Hungary and Vietnam and launched additional localized Ecommerce sites in the U.S. and Switzerland, taking us to a total of 23. China and the U.S. continue to represent significant opportunity for the brand, with our China business on track to become profitable by the second half of FY '20, in line with previous guidance. Performance in the U.S. was negatively impacted by several factors in FY '18, and Nick will explain in more detail the 3 principal factors for that. But our underlying progress is encouraging, and we exit the year well placed to drive good growth through our Wholesale and Ecommerce channels in the U.S. this year. Product and innovation remain at the heart of Superdry and form the key part of our DNA. We have seen another quarter of balanced growth across menswear and womenswear, and our focus on relentless innovation was evident through our range of denim jackets, which meet the highest ethical standards at price points below GBP 100. On top of that, we saw a sustained strong performance in our core categories, such as graphic tees, polos and sweats, and the introduction of our snow and sport ranges continue to drive market growth and customer awareness globally. Our trading success is underpinned by continued investment in our infrastructure and processes, as we strive for operational excellence throughout the business and across the world. In the period, we successfully implemented the Sterling Order Management System for Ecommerce, made our U.S. and EU distribution centers multichannel, and perhaps most significantly, completed a broad number of systems and process developments, which will lead us to consolidating our inventory pools of retail and Wholesale this autumn, on plan, as previously guided. And I'll hand over to Nick now to run through the numbers in detail, and I'll come back and summarize in a few minutes. Nick?
Thank you, Euan, and good morning, everybody. Today's update confirms our trading performance for the final quarter and also includes the second half and full year. And as always, I'll walk through the announcement flushing out the numbers where we believe helpful. I'll start with addressing the impact of currency on our sales performance, which in the fourth quarter at overall a 60 basis points tailwind is similar to that in the third quarter. However, it is noteworthy that due to the strengthening of Sterling against the U.S. dollar, FX did became a headwind to sales in stores, while remaining a benefit to Wholesale. Group brand revenues, which are reflective of the total retail sales prices paid by our consumers, grew by 23.3% in the quarter, driving a 22.1% increase on a full year basis to give an overall global brand revenue of GBP 1.6 billion. From a channel perspective, in line with our 5.0 Strategy, this growth continues to be driven by our capital-light channels. Taking each of those in turn. Wholesale sales grew by 29.6%, with a similar quarter 4 exit rate, in part supported by clearance activity, linked to the wider inventory rebase, which will continue until the end of the current Summer season. In terms of growth, we've always described this as coming from both commercial expansion but also, the benefit from ongoing process improvement. Having been chasing successfully down this process improvements for the last 3 years, further gains are likely to be less material and this is reflected in our forward guidance, that I will cover later. Within Ecommerce, we saw sales growth of 25.8% for the full year, and again, finishing strongly with 18% growth in the fourth quarter. This exit rate was achieved despite the challenges from the coincidence of the launch of all spring summer ranges, with a sustained period of seasonably cold and wet weather. Stores sales were up 3.4% on a full year basis, with the second half, and in particular, the final quarter, which saw revenues reducing by 6%, coming under pressure. This pressure reflects the ongoing practice of the consumer preference to our high growth Ecommerce channel and a challenging consumer backdrop, with a more contained impact from the adverse weather conditions previously mentioned. Within this broader weather story, we estimate that the three bouts of snow in our key territories contributed about 2% to the overall store sales decline in the fourth quarter. Finally, in terms of channel performance, I should also highlight that during Q4 close process, we identified an offsetting allocation between the Group's Ecommerce and Stores channels, which impacts the previously disclosed revenue performance for the third quarter of FY '18 but limited only to these 2 channels. To be clear, there is a net 0 impact to both Group and total retail revenues but the corrected channel growth values for the third quarter would be Ecommerce at 25.4%, while we previously disclosed 30.5%, with stores growing at about 4.8%, previously 3.1%. Now to gross margin. Gross margin performance is really a continuation of the drivers we discussed at the half year. Being channel mix, the Wholesale and investments made through planned clearance activities to rebase our inventory levels. Overall, we anticipate that gross margins will decline by approximately 200 basis points year-on-year, with dilution from the Wholesale growth of just over 100 basis points, and inventory clearance activity being at a similar order, offset in part, by smaller intake margin and FX benefits. As you recall, our inventory rebase program seeks to reduce carrying levels of stock by about 6 weeks cover by the end of the summer of 2018. And that the consequent efficiencies would offset the margin impact during the period of stock reduction. To date, we are on track against both of these goals with closing inventory expected to have only increased by low single digits year-on-year compared to a 16% increase in revenues. And finally, joining us in terms of profits, our guidance for the year is an underlying PBT of between GBP 96.5 million to GBP 97.5 million. The midpoint of this range would represent a headline group level profit of around 11.5% year-on-year. Excluding the impact of our development markets in the U.S. and China, and the cost of migrating out W&D operations to new distribution centers, core profit would increase by over 12% year-on-year. This is ahead of our underlying profit growth due primarily to the losses of around GBP 3 million we are now expecting in the U.S, which primarily reflects significant sales disruption experienced in 6 stores. These 6 stores represent approximately 1/4 of our U.S. states and were the largest single drag on performance, negatively impacting profit by about GBP 1.5 million. Other factors, including investments to bring our Wholesale operations in-house as well as delisting some online gray trade customers to protect the health of the brand both in the U.S. and also globally for the long term. Turning finally, to guidance and looking ahead to FY '19. We remain confident on our long-term growth opportunities and fundamentally remain confident in delivering double-digit profit growth. In terms of the key drivers of earnings, we expect to generate high single-digit statuary revenue growth, led by continuing midteens growth in our capital-light Wholesale and Ecommerce channels, and both of those are in line with the ambition outlined at the Capital Markets Day. Balanced against this, we are planning more cautiously regarding both new owned space deployments and underlying store sales, while we roll out our next-generation store format. Specifically, in terms of new owned space, we expect that we will only open stores that meet our payback criteria with headroom while we confirm our space guidance in July. This is anticipated to reduce from the current about 8% to around 5%, but this will be compensated by continued expansion of franchise stores as Euan have said atAbout 20% growth per annum, and an acceleration of lower cost refits to existing stores.Two of our pertinent factors include the recovery of some trajectory in the U.S. and secondly, we will also deliver on our commitment to future operating efficiency, leading to moderate operating margin expansion in line with the 20 to 50 basis points guidance outlined in September. That completes my summary.And I'll hand back to Euan.
Thank you, Nick. And just in conclusion, FY '18 being a further strong year of operational and financial progress, as we develop Superdry into a Global Digital Brand. Another year of double-digit sales growth and profit growth in what is a challenging global consumer environment. We benefit from clear brand positioning, agile infrastructure that serves our global consumers through truly multichannel proposition and increasing operational excellence. This multichannel proposition means consumers can choose how they want to engage with the brand, which is core to our proposition, allowing them to switch easily between our stores and digital and capital-light channels. We're confident that Superdry's reputation for quality, design detail and strong value for money underpins our continued investment in the business and leaves us well placed to maintain consistent double-digit earnings growth for the future. So with that, we'll pause and open up for any questions that you have. Thank you.
[Operator Instructions] Our first is from the line of Jaina Mistry of Deutsche Bank.
I got 3 questions. The first one is on your PBT guidance for full year '19 -- I'm sorry, full year '18. Given the underlying PBT range, it seems from my estimates you must have seen some significant operating leverage in the second half. Can you give any more color around this at this stage? And my second question, even after the snow disruption at 300 basis points, it seems store like-for-like is still slowed down quite significantly since the third quarter. And again, can you give more color around what you think is driving that?
Yes, we can, Jaina. And I'll hand over to Nick in terms of the operation -- the update on that. I think on the -- just headlining that, it was always our intent to begin to demonstrate the operational leverage in the business as we came through the back end of FY '18 and you start to see that coming through and that continues into the guidance for FY '19 but I'll leave Nick to kind of fill in some of the details there. I guess, like-for-like, we've got a multichannel proposition and we're kind of channel agnostic as to where consumers will shop from us. We worked very hard over the last 3 or 4 years to build a platform, which is truly global and truly multichannel. I think for me, in quarter 4, yes, you're right, we've seen a slowdown in the store like-for-like and, I guess, 2 or 3 pertinent impacts, some of those quarters particular. The key snow weeks were an impact. I think that was one of those areas where being a big European business wasn't the greatest thing because if it was snowing hard in the U.K. it was even more disruption across Europe and also the East Coast of the U.S. The spring-summer season has been very, very slow to start, it's only really started beyond the guidance period that we're giving you now. But we are seeing consumer switch to more digital channels and that has been, I guess, accentuated within our business because we've rolled out the Ecommerce proposition that we have enjoyed in the U.K. to all of our European territories during the end of the first half and the beginning of the second half of the last financial year. So in short, that meant that our European customers now have a greater flexibility to access the brand through digital channels than they've ever had. So there is a continued move towards that. We think that's right for the long term and, therefore, we will continue to invest, and you will see us investing even more in the Ecommerce channel in the year ahead. But that will mean that we see some switching away from physical stores. We have put a relatively small number of global physical stores and flexibility in the lease profiles of those stores going forward. Nick, you want to cover more operational leverage?
In terms of the leverage, Jaina, you're absolutely right. If you recall from the Capital Markets Day, the source of that leverage is broadly twofold. Firstly, we talked through our whole work that we're doing in terms of increasing efficiency in our design process, so our central processes, meaning that we, having invested significantly in that internal capability over the last 3 years, that actually our head office constituent of growth would slow down and that would give us some operating leverage in the head office space. More materially, you'll recall that we committed when we talked about the reduction in inventory is that essentially, on a pound-for-pound basis, the efficiencies in the sales and distribution aspects of that business would cover the margin investment we're making to reduce that inventory. That comes through essentially, in terms of store labor, in terms of processing stock and warehousing and distribution costs in terms of processing that. And that has come through. So the intention and the ambition was always clear, and we were confident that reducing the level of stock without impacting availability to our customers would drive material efficiency and it has started to come through in the second half year as you have observed.
We now go over to John Stevenson of Peel Hunt.
Two questions from me, please. Back on the like-for-like, I'm afraid also it's quite an eye-catching number. I mean, could you maybe talk about -- I mean appreciate -- no point in pulling out a single week or particularly small areas, but is there a better indication of what the underlying run rate is maybe looking at the exit rate once some of the one-offs were out or any point to territorially that would give a sort of slightly better read of how we should think about store like-for-like going forward? And secondly, just in terms of the relative profitability of online versus store sales. I know you talked about it in the past. No you can sort of reiterate the sort of profit you will make through the online sales.
Yes, so first one's pretty difficult to do just because it's just hard to separate out accurately. And I don't want to give you a wrong number. Certainly, the quarter 4 has been a slowdown from where we would expect the store like-for-like to be. We've seen small negatives in the store like-for-like as we went through the first half. That continued into kind of quarter 3 bridging into quarter 4. It kind of feels mid-single-digits kind of negative is probably a sensible place, if you're going to try and pick a number. And so I think we've been adversely affected. The key thing for us though, John, is the move to capital-light, which we drew at the Capital Markets Day. The significance of our investments into Ecommerce and Wholesale, the significance of the continued double-digit growth that we're seeing there shows the brand is healthy. It's very consistent across all global territories. And as I said in my update, we have seen brand revenue growth positive in every territory across the world, which includes the home territory. So there is a bit of mixing for us. There is clearly a mixing that our consumers are doing. They are still digesting the brand very positively. And even though you would kind of say, well, what's the difference between our own stores and our franchised stores. What we're seeing is given the global nature of the brand, the specific benefit of having a very strong set of franchise partners in local markets means they get the range edit more accurate than we do. And from here, it's more tailored to individual markets and the platform for sellout, if you like, thorough franchise multibrand, Wholesale, et cetera, is a better mix. So that, for us, continues to very strong returns, given the very light capital cost we put into those channels, allows us to switch investment from physical stores where we see the rest of the world all suffering the same pattern and move it into an accelerated development of our Ecommerce and wider digital platforms. And Digital for us, just as a footnote, it doesn't just mean Ecommerce. It means the whole automation of the business. So everything from 3D design, avatars being used and shared with our factories, speed of response, et cetera. So kind of, end-to-end on that. But I think it's I think our guidance reflects the fact that we always wanted to be cautious. It's still double-digit earnings growth, it's still pretty high revenue growth, but we are in a world, which is seeing a switch between physical and the digital selling environment. So I think that's I hope is a bit of color and help on that. Nick, you want to?
In terms of the profitability of the Ecommerce channel, we've always talked about sort of the tipping point of scale. And we're now at a point where essentially, with Ecommerce being about 20% of our group revenues, we're at the point where we established a material channel where you can start getting some decent cost leverage on there. So where we are is now on an absorbed basis. Ecommerce is slightly more -- is more profitable than the stores on an absorbed basis. Naturally, we always have to remind that in the short term, our most profitable sale is a walk-in like-for-like to an existing store. But on an absorbed basis, we're now at a point where there is accretion from transfer of sales onto online. If you look at the big constituents elements of that, the margins between stores and Ecommerce are broadly similar because we run a consistent global promotional program across all of our channels for brand purposes. Obviously, the warehousing distribution is materially greater than it is in the store because we're sending small parcels to large number of locations. And also, the marketing cost of online is substantially higher than the group average through customer acquisition and social media activity. We also then have a reasonably large central team focused on essentially, development, which is OpEx, that we talked about before, but that is still materially lower than the fixed cost and carrying costs of the store base, so now at a place where on a fully absorb basis, it is probably accretive.
We now go to the line of Michelle Wilson of Berenberg.
A few questions from me. First of all, just looking at the high single-digit revenue growth guidance you set for next year. If we kind of back it out between the channels assuming midteens Wholesale about 15%, online at 18%, that leaves store growth of flat basically, 0%, and like-for-like it looks like minus 3.5% to minus 4%. How do you, kind of, get for that store like-for-like number? What gives you comfort that, that would be like-for-like over the year ahead? Shall I get them all at once?
Yes, if you could please.
Okay. Second question, in terms of the refurbished stores that you've done this year, what kind of performance are you getting out with those stores now? What kind of gives you comfort that's continuing to refurbish that store space is the right use of capital? Third question is on surplus cash returns. I think you've talked previously about I guess committing to returning cash to shareholders where you see a surplus. Has anything changed from the results that you've seen over the last few months? And when are we likely to get an announcement around that surplus cash return? And then final question, just on those new stores. I think you said opening the 5% space. You said openings the space you've been opening this year. And what kind of leases are you signing up to there? And how long are the lease lengths? And also, when you're getting rent renegotiations for the moment, are you seeing any decreases in rental costs?
Okay. So there's a lot of interconnectivity between those questions. So I'll give it a go and then Euan chip in. So in terms of new stores, we've always said that the maximum lease length, and this has been true over the last 3 years, that we would commit to is 5 years. We'll trade additional flexibility and that is part of the overall lease arrangement where there is a reminder we're looking for material contribution from the landlord, to get a bit of relationship between essentially rent and the turnover as well as a relatively short lease duration, and we'll play those off. But we won't sign a lease that is more than 5 years without a break that is for the tenant. In terms of the point around -- in terms of rent reviews and lease expiries, we are in a place where we are starting to see some elements of rent reduction on lease expiries. So that is coming into the mix as we move forward, and we have an increasing number of lease expiries and renewals over the next few years, as Euan has already said. In terms of that component of store contribution, you're right mathematically, that if you do our guidance for capital-light channels at around flat, you'd come to around 9%. So there's a number which is around that, kind of, number. The premise for this is being cautious. It is the channel that is more difficult to read. And at that level it would imply negative like-for-like as you said with our reduced space guidance of that low single digits. We -- part of that is caution. In terms of the levers that we will pull, we will continue, and probably accelerate, our refurbished store program. But we will again do that in a capital-light way. So if you recall, we have Arndale, our first next-generation concept that we were rolling out. That still demands relatively high capital investment for us. So what we've been doing more recently, and we've done in the last 6 months is actually to look for more capital-light version of Arndale, it introduces the key aspects of the Arndale format but also, looks to more directly linked in a digital way. The store experienced through our online experience, but we do that in a -- with the CapEx requirement, which is materially less than that for Arndale. And below that, as Euan has said, there were some key principles we can actually learn from our smaller stores and indeed, from our franchise partners in terms of localized ranging and also introducing in a very light touch way, again, some of the key concepts like category blocking that we would have as a fundamental in the next-generation concept. The short version of that is we're likely, going forward, to look to tough more stores, from a refit perspective in a lighter way rather than doing a small number of large interventions on key stores. And I guess, that's the single point. And it still is -- has the foundation of the success we get in terms of sales uplift from the 10 or so stores that we've done into the Arndale format this year. But it enables us to touch the store portfolio in a broader way. And that's a constituent to essentially, like-for-like recovery from what would be the exit rate. Back to John's previous question, it's difficult to call the exit rate because of the number of moving parts if nothing else, what is demonstrably a slow start to the spring season. Finally, in terms of surplus cash, we will update in terms of our view on that at the prelims in July.
Great. Just 2 quick follow-ups. In terms of the rent reduction, you're getting on renegotiations. Can you quantify that at all? And also you talked about reducing store rollouts and lighter touch refurbs. Does that mean we should expect CapEx to come down next year?
To the latter point, yes, broadly. Although, we will increase our investment in 2 aspects of digital. Firstly, ongoing further investments in the Ecommerce experience, both front-end and back-end, and secondly, to Euan's point, about digital being not just about essentially Ecommerce, but a way of thinking and operating across the business. We will be introducing an automation into our distributions centers, extending the trial of things like RFID in terms of that throughout the supply chain. So there'll be a bit of trade-off there. But in broad terms, you'd expect that CapEx requirement to be slightly lower than historic norms. And the first question on sales, I forgot.
Rent, is this the rent? To be honest, it's highly variable. And at the moment, a little bit limited to the U.K. So it's a small population. So it's really, I think, too early to draw a mean in terms of that population but in terms of the direction of travel, I think we're starting to see what I guess what the market is seeing in terms of overall space demand and the quality of that. Although I would say, we are in the top end intentionally of locations across the world and particularly in the U.K. Therefore, our deflationary benefit may be slightly lower than the market average.
We'll now open the line of Sanjay Vidyarthi of Canaccord Genuity.
Just one question from me on the reduced space growth guidance for the year ahead. Does that apply to any particular markets? What do you think you may be opening fewer stores than previously you thought? And second, is there any store closure incorporated within that guidance?
So no, it's not market-specific, Sanjay. We are just -- we've always been cautious in getting the right capital discipline into our new stores. That's serving us well in the overall profitability of our stores. But -- so we're applying an even stricter capital discipline globally. So you'll still see, even on those -- on that reduced guidance, stores opening in the EU and in the U.S. which are our 2 territories that we were focusing on previously. It's just more selective and compensated, as we've said, with more franchised store openings. They tend to be more Europe, Eastern Europe and the rest of the world focused. So we're seeing good growth from that investment. In terms of space reduction, we'll look at that on an individual case-by-case basis where we do have even very stringent criteria for renewing a lease, which demand more flexibility, shorter lease, et cetera. We will do that on a case-by-case basis. I would emphasize that we don't have a long tail or indeed a tail of underperforming stores, but -- as well as that, we will continue as we've done over the last couple of years, to just manage the portfolio to maximize its value and minimize risks. So there may be some opportunities we take, as we have more lease renewal opportunities.
Okay. Just a follow-up to that. Longer term, how are your franchise partners thinking about the online channel when they are opening stores?
Yes, so great question. We have got an increasing synergy between our in-country online Ecommerce offer proposition promotional program with our Wholesale partners and in particular, our franchise partners. So we've extended -- in previous updates, we've updated the iKiosk technology, which allows our franchise partners to access the total range, which sits on our Ecommerce platform. We are now putting lots of synergy into the sales proposition, joint promotions, if we do in any in-country across franchise. So Ecommerce, in that sense, is not a threat to our franchise partners, if that's where you're going with it. It is an added value benefit by tying together systems, processes, delivery and also the sharing of the benefits across the contracts that we've got with them. So again, that's very consistent with being totally multichannel and a Global Digital Brand. So you can see that, moving forward, at the end of this year and into next year.
And lease lengths are flexible enough, particularly in Europe, I guess, to accommodate kind of the channel shift over time?
Yes, yes.
We go to the next question, which is Doriana Russo with JPMorgan. [Operator Instructions]
First question has been answered. I've got 2 more questions. The first one is, coming back to your retail performance in the Q4, can you be a little bit more specific in terms of the exit rate and the impact that you have had across geographies? And secondly, how close are you with your wholesaler in terms of, say, slowdown with them as well and perhaps, leading to higher inventory and I don't know, an excess inventory being in the channels?
Okay. I'll take those, starting with the retail in Q4 and I'm assuming you mean stores within that. So our headline performance in the fourth quarter was minus 6%. The one point within the overall weather impact in that fourth quarter that we can isolate is the impact of snow, and that impacted all of our key territories. It was at its most severe in the EU, then the U.K. and there was impact in terms of East Coast U.S. Isolating that, that's probably about 2 percentage points of that, about minus 6%. And we've also got an FX drag, as I said in my commentary, of about 0.5 point in terms of the dollar impact on store revenues in the fourth quarter. So you go 6% minus 2.5% gets you to 3.5% is a point there. Our new space, when we deploy it is usually about 70% productive historically in its first year. The new space this year are less productive than that because of the participation of the 2 West Coast stores that are under-tenanted that we talked about in January and indeed, in November. So if you're adding back probably about 7%-ish for new space, you get to a like-for-like number on an underlying basis, which is probably around the 10% number. What that doesn't make any adjustment for, because it's very difficult to isolate, is the impact of I guess of an inclement weather, cooler, wetter, et cetera through the start of the spring-summer selling period. So some portion of that move from what in quarter 3 was mid-single digits negative like-for-like to high single digits negative like-for-like in stores is the spring-summer. But there is, as you said, those continuing trends of consumer preference and the strength of our Ecommerce proposition that's in there. In terms of Wholesale, we get good indications of weekly sales data from within our Wholesale business, and which we can match against essentially selling to give us an indication of sell-through. And while as you would expect, it has been as challenging for our Wholesale partners in the early part of the spring-summer season than it has been for us. Actually, we still got a decent part of the season ahead of us and looking at weather patterns in the U.K., and Europe, they are improving and forecast would more clement over the balance of the period. Sufficient to say, there is enough selling window ahead of us, but at the moment we are not seeing any indications for us or our wholesale partners in the main of stock overhang that is a problem for them as they go through.
We are now over the line of Wayne Brown of Liberum.
Just a few questions from me. On the impairments, you're clearly accelerating your refurb programs. I guess, can you just give us a view of this is there going to be any accelerated depreciation that we should expect from that? And then clearly, there was an impairment for your flagship store in Berlin. Are there any other underperforming stores, which could be at risk from the time of the order where there could be other noncash impairments? I suppose that's question one. The second question is outlet stores, particularly in Europe, what necessarily percentage of the estate is represented by outlet stores? And also in respect of sales, how should be we thinking about the mix of outlet stores as we look into spring-summer and beyond? And just a view necessarily on the promotional activity within the market, because clearly, Q1 would have impacted all retailers and missing them at the beginning of spring-summer probably indicates that maybe margins could be under pressure across the sector as a whole as people trying to sell-through their inventory, slightly later in the season. Just a view on gross margins, your mix of promotional activity versus full cross sales and of course that outlet sales point would be helpful.
Okay. Thanks, Wayne. So just taking the other one first, it is about 10% -- 10%, 11%. I was just getting the exact number for you. And across Europe, the position going forward is flat. So there's not a particular growth in our outlet channel in any part of the world. Impairment, I mean that's really centered around Kranzler. Nick, you want to pick up. There's no other stores that are going to fall into that guidance.
Yes, so on impairments, as I said before, we don't have a long-term of underperforming stores. However, we do view all those stores to ensure that they don't require any impairment. It is safe to say that we have the odd store that has a small impairment, which we absorb within our underlying profit but nothing material over the last couple of years. Kranzler is different in terms of -- it's a very different investment model to the ones that we would now sign-up. This store was approved in the early parts of 2015. So as I've said, in terms of the store now, we're looking for it to be at a tight footprint of between some 4,000 to 6,000 square feet. That would give the higher intensity in terms of sales. It would have a short lease, there would be a relationship between the turnover and the rent in the stores on a variable basis and there would be a contribution from the landlord towards store entry costs. But Kranzler doesn't really fit any of those criteria. It is large, it is a prominent location that carries an appropriate rent for that location and has disappointed in terms of our targeted intensity. It is the -- it does require impairments because of those factors being completely out with the CapEx approval we'd have now. It is a one-off, it's being treated as one on the line and all other impairments of standard stores would be taken through their underlying performance. And as I said before, on the odd occasion, there is a small level of impairments. Other flagship stores, which in reality is anything really Regent Street's and maybe 34th. 34th was approved well into the process of tighter capital discipline and Regent Street, as we talked about before, we get to work very, very hard. It is a prominent location but has multiple floors of intensive retail to get with our global Wholesale showroom, and also, our own offices and third-party offices. And so no impairment requirements on that store because we work it very hard.
And so accelerated depreciation on new refurbishments that you said you're going to be focusing on?
No, that's all part in terms of the investment model. So I mean the bigger bit in terms of the drag on the OP in the year is actually the disruptions of the store while it is being remodeled rather than any accelerated depreciation.
Okay. And then just also that point in full cross sales probably versus promotion would be helpful. I suppose you just can't guide us obviously next reporting today as well. I just get a good feel of how you saw that mix in the quarter gone by, but also just a view on looking into 2019 and how we should be starting to think about the margin movements there?
In terms of the full price and against sales mix in quarter 4, I don't have that number in front of me, but I can get back to you during the balance of the day and give you an indication of that. As you understand, that promotional mix of indices and clearance activities are some twofold kind of activity and then activity around the high days limited in our world to 20% activity is where we are going forward. And out with the extra investment this year to reduce the inventory on a one-off basis, it's pretty consistent year-on-year.
If there are no other questions, then we should bring the call to a close. And we'll be around all day and happy to answer any follow-up questions. Thank everybody for being on the call unless there's any other questions coming through.
We have 2 just come through. One is at the line of Kate Calvert on Investec.
Two questions. The first question is on your guidance FY '19. Would you be disappointed if you reported negative in store like-for-likes, given obviously, you'll be up weak comps, you've got refurb activity and the brand is pretty immature within Europe. So I'm just trying to get an understanding as to why your guidance appears quite cautious there? And the second question is on the U.S. and the GBP 3 million losses you're now guiding to in FY '18. How should we think about the profitability of the U.S. going forward? Would you expect it to be profitable in FI '19? Or do you think it might now take slightly longer to move into profit again?
Okay, thanks, Kate, 2 good questions. I think, I guess two phases for the like-for-like. And one, we always try to be cautious with all channels. I mean, as evidenced in our continued guidance in Wholesale, for example, at midteens when the teams keep coming in that kind of prosperity. I think -- and we never want to see any channel being a negative, so that's not our ambition. There's just a realism in the channel switching that we can see with our consumer base. And the relative sophistication and of our Ecommerce proposition globally, and that will extend, and we have seen that switching happen in Europe in the second half. So I guess, there was a mix in there by being realistic about the market in general where consumers are shopping and digesting our brand and others, alongside some offsetting factors of the refit are a good thing to do in the stores that we're doing, and we're seeing improvement. But some cautious guidance in there. So I guess, take from that what you will in terms of where we would like it to be. We are just always cautious in any channel but always driving to over-deliver. The second bit was in the U.S. Yes, you -- I think as Nick outlined, we -- I think, the 3 reasons for the slight dip in the improvement in our trajectory in the U.S. One is slightly out of our control and slightly an indication of physical retail in the U.S. to be honest, where we've seen stresses even in the top 100 malls as mall operators change some of the use. And given that we've got quite a small physical estate there, even a small number of disruptions has a bigger impact in a short term. So I think those will run out. And then, the other 2 reasons for the slight dip, we think, are sensible, medium and longer-term investments, i.e. we pulled in-house the Wholesale operation that will allow us to gain greater and more profitable growth faster in the short to medium term in the U.S. Wholesale business. And third one was an Ecom reason, which we outlined, I guess, a bit of a detail on that, where we had some gray traders who were individually buying larger lumps of stock that we could then identify and they were shipping to Asia, which being a global business, wasn't helpful for our Asian partners. So we've taken proactive action there. So a number of shorter-term impacts. We still see big opportunity in the U.S. and in China. Both of those markets long-term profitable. And so our turn to kind of small profit would be kind of, a sensible kind of place to be i think.
Yes, I think where we are is -- obviously, Euan has articulated a number of reasons that some of the drags in the current years will reverse. We have to balance that against. We're at the point' now where we have a significantly material U.S. business that it needs to be slightly more self-sufficient of the U.K. than it currently is requiring investment and also the point where it's longevity we start to invest more significantly in the brand, which requires slightly different activity in the U.S. than it may be in Europe. So it's some reversal and recovery of trajectory towards profitability is probably the guidance that we would give.
Okay. So I'm taking from that you're not expecting to be profitable in FY '19? [indiscernible] and then you pulled back really, to be honest [indiscernible].
Yes. I think it's a small delta negative and it will be a kind of breakeven, small delta positive. So I think where what we're looking for.
Okay. And just going back to your answer to the first question in terms of -- you obviously talked about quite a bit of channel shifting in Europe in terms of impacting the store like-for-like. Would your like-for-like performance have been worse in Europe or in the UK? Because it sounds it's like being a big change to switching between channels as you've improved your proposition in Europe.
So taking Europe as a whole, there's not a massive difference between the U.K. and the whole of Europe. Some winners, some losers, as you would expect in the fourth quarter, doesn't appear to be a massive difference. Well, everything is a massive difference between UK and the group.
We have one final question and that's back to the line of Michelle Wilson of Berenberg.
I'm just -- one follow-up from me. Just in terms of kind of channel mix of your revenue growth when we talked about potentially being kind of minus 3.5% to minus 4% store like-for-like. Is such channel mix actually a lot more weighted into Ecommerce as we see in the current year? What impact would that have on profitability? Would you still be able to achieve double-digit profit growth?
I think, it depends on the materiality of that shift in, sort of, foreseeable variables around that. That would drive further efficiency into the business and, therefore, I think, the answer is probably, yes.
Okay. And can you quantify any sort of range around store performance and Ecommerce performance, where double-digit earnings for us is still achievable?
We haven't quantified that. I think, we're probably likely to put of little bit of flesh on the bones of the prelims where we're trying to give a bit more clarity on probably the flexibility of that channel proposition and also, the flexibility of our store base, but no, we haven't got that numbers at hand.
That was the final question for today. Could I pass it back to you for any closing comments at this stage?
Thank you, and as I was highlighting before, we are around all day. And beyond that, if you have any other follow-up questions, happy to take those, and we'll see all soon. Thanks very much.
Thank you.
This concludes today's call. Thank you very much for attending and you can now disconnect your lines.