Pandora A/S

CSE:PNDORA

Earnings Call Transcript 2020-Q2

[Operator]

Welcome to the Pandora Interim Financial Report for the Second Quarter, First 6 Months 2020. [Operator Instructions] Today, I'm pleased to present Michael Bjergby, Vice President, Investor Relations, Treasury and Tax. Please, go ahead.

[Michael Bjergby]

Yes. Thank you, operator, and good morning, everyone, and welcome to the conference call for Pandora's Q2 results. My name is Michael Bjergby, and I'm heading up the Investor Relations team. And with me today here at the head office in Copenhagen, I have the usual team with me: CEO, Alexander Lacik; CFO, Anders Boyer; and the hard-working IR guys, Christian and Mikkel. The Q&A session will be at the end of the call. [Operator Instructions] Pay notice to the disclaimer on Slide 2, and I'll jump quickly through that to Slide #3 and hand over to Alexander. Alexander, please.

[Alexander Lacik, President & CEO]

Thanks, Michael. Good morning, everyone, and thanks for joining today. At our last earnings call, global economies were in the midst of an unprecedented situation with the changes, I think, rarely seen before. The world is still very uncertain, and we have probably not seen the full consequences of COVID-19 yet. Sales recovery in the second quarter was faster than we expected, but we still expect the period with the higher-than-normal uncertainty in the months to come. We managed Pandora through the crisis with the highest integrity and a long-term focus. Tough decisions had to be made to protect cash and profitability but without compromising the health, safety, jobs and our employees' salaries. But when there's change, that also means there might be opportunity. I'm very proud of how this organization has shown agility and determination. We have generated tremendous e-commerce growth, and we have found creative ways of operating while physical stores have been impacted. When markets reopen, all companies have to consider how aggressive they wanted to reenter. We leaned more on the accelerator and less on the brakes. We're operating in a quite fragmented industry, and our scale advantage and P&L structure means that we can invest heavily in market share gains when opportunities arise, like the one we've just experienced. Given the unusual circumstances, we are satisfied with the progress. Sell-out growth so far in quarter 3 is around minus 10% versus last year. This has to be considered as reasonably strong as a fair amount of stores are still closed, we're operating with reduced hours and with the limitations of social distancing. The sales recovery here in Q3 has not been as clear as in Q2. We are seeing an effect of new surges and local lockdowns, so uncertainty continues to be high, which we will discuss in more details later. Please move to the next slide. Management attention in Q2 was, to a large extent, on crisis management. But we maintained a long-term focus and ambition to improve the fundamentals. Programme NOW is progressing as planned, and successful initiatives have now become part of our normal routines. We are therefore rescoping the focus of Programme NOW with fewer and sharper priorities for the final stretch. The new executive leadership team is in place and operating in the new organizational structure, which we implemented during the quarter. We can already see an effect on decision-making, cooperation and best practice sharing globally. Fundamentally, we're as such moving in the right direction. The primary objective of the program is that we keep our brand relevant and exciting for consumers. Despite the current disruptive environment, our key brand metrics are still indicating that the brand momentum is solid and improving. Please turn to the next section. The health and safety of our customers and employees has been and remains our top priority during this pandemic. This had to be balanced with the need to protect cash and profitability. Of the number of different initiatives, I'd like to emphasize the work that we have done with UNICEF, the long-term partnership that we kicked off last year. During the C-19 pandemic, we have supported UNICEF in helping children and societies in developing countries where C-19 is a critical health risk because of the limited health care capacity. To raise awareness, we've cooperated with the family of Bob Marley to rerecord a very relevant song called One Love. And we've donated USD 1 million to the cause, matching the same amount from public donations. Now turn to Slide 7. During the second quarter, we made 3 significant decisions. First, we ensured to keep investing sufficient marketing efforts behind the brand momentum created during the Programme NOW. Secondly, we decided to keep, in particular, store staff on the payroll and using the downtime to improve our selling skills and training and improving our knowledge about the products. Finally, we designed a comprehensive comeback plan for the day when markets would reopen. We have the financial muscle and P&L structure to increase spend across markets to build on the brand momentum and ultimately to win in the retail and gifting space. More recently, we've been preparing for the heavy trading season that's coming up. Things like social distancing guidelines or even changed consumer behavior requires us to reconsider how we can offer both the safe and excellent consumer experience. We're currently running a track of 11 ideas and collect feedback across markets to come up with global best practices. The key thoughts range from how we can better serve consumers outside the ordinary store environment, for example, virtual shopping assistance, through to temporarily expanding floor space via pop-up stores, for instance. Please turn to the final slide of this section. So where are we today? Since March, physical stores opened faster than expected with only around 10% of the stores closed by end of July. Recently, however, we have seen local COVID-19 surges and new local lockdowns, leading to small increase in closed stores. Currently, we're hovering just above 10%. As examples, we're temporarily closed in Victoria, Australia. And each week, we find new places that are going up and down. The situation is still uncertain and somewhat unpredictable, and we monitor the development closely. Turn to Slide 10 for some comments on the more fundamental development. Programme NOW was initiated in late 2018 to improve the health of Pandora. We have progressed well, but there's still work to be done. Several of the initiatives such as the data-driven media spend are now rooted in normal day-to-day operations. The rescoped Programme NOW consists of 3 tracks instead of 4. The commercial reset track has been taken out. Because promotional dependency is much lower, the inventory position and number of DVs or assortment is at a much healthier level, and we will keep it this way. From a brand perspective, the updated initiatives focus on how to make spending even more effective. And we have a special task in China, which I will come back to. Overall, I believe we have reached somewhat of an inflection point. We see early results of our initiatives, and now we'll continue to push hard on the rescoped focus areas. Next slide, please. You know that I like this slide. These are important lead metrics that measures how our brand momentum develops. Despite COVID-19, we're having laser focus on the health of the brand. We decided to decrease the media investment during the lockdowns in traditional media, but we still managed to maintain a solid momentum. As expected, key brand metrics are impacted by the situation, but they still indicate a better momentum than before the relaunch. We have already stepped up the media level again close to pre-C-19 levels. And we will continue to invest hard for the remainder of the year since we know this drives our business. Go to the next slide. The exceptionally strong online growth of 176% speaks for itself. This is an important endorsement of the work that we are doing on digital. It is also an endorsement of other brand initiatives. We are, as a brand, able to excite our consumers to take them from off-line to online. The improvement is driven by both higher traffic but also higher conversion rates. Trends continue to be healthy in all the main markets even after the physical stores have reopened. There is no doubt that online is going to be important in this last quarter of the year. We're already now increasing capacity to be able to handle significantly higher volumes than what we have been used to in the past. Go to Slide 13, please. I wanted to provide you with some quick and encouraging data of our end-of-season sale running globally from week 22 through 30. Notice that this is partly Q2 and partly Q3. The clear direction or learning, if you may, is an increase of our full-price sales compared to last year. There are 2 main drivers of this. First, our inventory position is, generally speaking, very healthy, so we didn't have a lot of DVs that actually needed to be cleared out. And our full-price products seem to resonate. Secondly, it shows our improved brand momentum. We can drive conversion rate with our brand proposition without using the promotional doping. This is important given the competitive retail environment that we're experiencing in the reopening phase. Next slide, please. The strategic reorganization has taken us one step closer to finalize the product development strategy. This is anchored with a newly established global business units under Carla. One business unit, Moments and Collaboration, focuses on the core, rejuvenating the platform and making it exciting. The second business unit oversees all other product categories and upstream platform development efforts. What we've done since the brand relaunch has mainly been focused on getting our core back in shape. The Moments platform is almost 70% of the business, so it is critical. Again, this quarter, we saw that Charms performed in line with the whole business. However, the Moments platform shall not be our only platform. In the long run, we need more legs to stand on, and this means more consistent platform building, which could, for instance, build on concepts like Pandora ME. It also means innovations within other categories, not just me-too products but long-term, well-invested concepts that can be unique and iconic in the industry. We will provide you with more information on the formal product development strategy when we're ready, but this is progressing at full speed right now. Flipping to Slide 15. One of the things that has worked well both for our revenue and our brand is the collaborations and influencer work done since our relaunch. Harry Porter, Millie Bobby Brown but also the work with our influencers and muses are injecting new energy and excitement into the brand. We've recently activated Pandora ME in early July, which has led younger and new consumers alike to the brand. Now we have entered a new partnership with Lucasfilm, which entails 11 Star Wars charms and 1 Star Wars bracelet available -- which will be available from early October. We're very excited about this collaboration. Very cool charms of Chewbacca, Yoda and the other legendary characters. The next slide will be the last from my side before I hand it over to Anders. We've all been discussing China in great details over the last year. China is the world's largest jewelry market, and Pandora has a market share of less than 1%. We're building a solid plan to change the direction. We're already in execution mode with Jacques, our new China MD, leading the journey. Fixing fundamentals start with organization and culture. This is the enabler for any turnaround. With increased capacity in the organization, we will start focusing on the functional execution where we see a lot of low-hanging fruit, low-hanging fruits in how we market our products, partners we choose for media, our merchandising approach and, finally, the online and retail experience. However, with improved operational performance, we're probably only 1/3 of the way. The critical job is to build a brand. Pandora is not very well known in China, at least not for anything unique. In that sense, we're starting from a clean slate. We will not treat China very different from any other market. Pandora is a brand built on self-expression, collectability while being affordable. Consumer research in China has confirmed that our positioning is highly distinctive and relevant. I don't expect this to be a quick fix, but I'm confident that we can get substantially bigger market share in China in the years to come. This concludes my review of Programme NOW, and I will hand it over to Anders.

[Anders Boyer-Søgaard]

Thank you, Alexander, and good morning, everyone. Please turn to Slide 17 and an update on the cost program. Since the outbreak of C-19, our approach to managing cost has obviously changed because, with lower sales in the second quarter, focus in the quarter has not just been on structural cost savings but also on short-term cost management. But this slide only shows the structural cost savings as part of the program and not the short-term C-19-related savings. And we have, of course, taken many short-term cost measures in the second quarter, but we've also continued to execute on optimizing the underlying cost structure of the business. And we have progressed quite well across all cost buckets on this slide, and therefore, we today can reconfirm our run rate target of DKK 1.4 billion by the end of 2020. And that means that we will see another around DKK 200 million also incremental cost savings in '21 compared to this year. Then please turn to Slide 19 and a short update on some of the second quarter numbers. As we already disclosed in early July, revenue and earnings were weak in the quarter. But ironically, they were, at the same time, better than what we had originally expected. And seen in the light of the circumstances of C-19, there's 3 things that we want to emphasize. First, I just want to repeat that the online sales have basically exploded to 176% growth in the second quarter. And the reason I repeat this is that it's a critical fact, so both in case of new lockdowns but also for our long-term development and ambitions on the online business. Secondly, the positive EBIT margin speaks to the resilience of our business even during a one-of-a-kind crisis like C-19. And last, cash flow was very positive and is also a testimony to the resilience of our business. And this means that we ended the quarter with a quite conservative debt level. Then please turn to the next slide and a breakdown of the revenue growth. Understanding the revenue development in the second quarter is all about C-19, as you can see on revenue bridge here that the decrease in organic growth of 38%, and that's the dark gray box, is purely a result of the decline in sell-out following the C-19 outbreak. And that's the large pink box saying minus 39%. Obviously, we can't separate hot and cold water, and we don't know what the revenue would have been without C-19, but I think it's fair to say that most of the minus 39% in that pink column we can blame on C-19. Changes in the store network and forward integrating had basically no revenue impact in the quarter. The overall second quarter revenue development is probably of less interest, I know it's of less interest, but the interesting thing is what happened during the quarter and until today. And sell-out growth did improve throughout the quarter from being about minus 70% back in March and until today where, as Alexander says, we have in the last 6 weeks been at about minus 10%. And we'll talk a little bit more about that in the guidance section in just a minute. On a more technical note, I'll comment on the small plus 1%, this box that says channel mix and other. That's the difference between the organic growth and sell-out growth because some of you might have expected there will be a larger difference due to the channel mix of the sell-out. But the reason why this is not the case is partly because we don't include sell-out data for multi-brand dealers in sell-out. And hence, as probably most of you know, they're not included in that sell-out number, the minus 39%. But they are obviously included in the organic growth, and this can then cause some differences. And secondly, some of our partners have naturally held back on their purchase orders in the second quarter in order to manage cash. And on that latter point, we have seen that trend reversing in July, where there has been quite a healthy sell-in to our partners. Then please turn to Slide 21. The main driver of the decrease in EBIT margin is clearly deleverage coming from the revenue decline, as per the first pink box here on the slide. We have managed OpEx quite effectively, I think, and ended with OpEx being 15% below last year. And in that number, we have government subsidies in there which reduced the OpEx by about DKK 110 million in the quarter. But when we see a sudden and significant revenue drop like this, we can't avoid that the bottom line is hurt in the second quarter. The second pink box from the left is what we call nonrecurring adjustment of production volumes. And this is referring to the shutdowns of our productions in Thailand, which we decided to do to manage inventory during the quarter. And that impacted cost of sales by around DKK 18 million or around 3 percentage points in the quarter, and this is a nonrecurrent effect, by the way. And excluding these nonrecurring costs, the gross margin would have been around 78% in the quarter and thereby a 2 percentage points increase compared to the second quarter of last year. Then please turn to the next slide. We thought that it will be appropriate to include a few comments on the increase in raw material prices that we have seen recently. Our exposure to silver and gold combined was around DKK 1.5 billion last year. So based on a silver price of $28 per ounce, we will see a drag of around 4 percentage points on the gross margin compared to 2019. I know that the slide here says $25. That's the parent point, but I'm using -- I was just quoting the silver price as of this morning, which was just around $28. As you probably know, we're hedging around 70% of the next 12 months use of silver. And combined with the time lag from when we use silver in production until it hits the P&L of 2 to 4 months, this means that the majority of the impact from the recent increase will not be seen until mid-'21. We're also benefiting -- we'll be benefiting a bit from the decrease in the Thai baht that we have seen during the first part of the year because half of our cost of sales is paid in Thai baht. As you can indirectly see on the slide here, the exposure to Thai baht was around DKK 2.5 billion in 2019. And there's also other opportunities for us to improve the gross margin, and that's the things that we would do despite the increase in metal prices. And that includes the cost reduction as part of Programme NOW. But there's also other potential measures like product design, which can come into play in a situation like this. But net-net, the big increase in silver and gold prices is likely to have a negative impact on the margin from mid next year if the prices continue to be at this higher level. Then please turn to the next slide, 23. In the second quarter, we were able to deliver a very strong positive cash flow despite a negative reported EBIT. And this was driven by many different cash initiatives during the crisis but also a return of excess cash or too much tax that we paid in 2019. Working capital ended at a record low, 2.8% of revenue. And inventories have been managed, and receivables decreased well in line with lower revenue in the quarter. And CapEx was also more than 40% below last year. But as we have said during the last 2 quarters, we will see that working capital will increase during the second half of the year, not least in the third quarter as we are stocking up ahead of the Q4 trading season. And this will be a drag on the cash flow in the second half. Longer term, we still see that we can manage the company with a working capital level in the high single-digit percent of revenue. Our leverage, the net interest-bearing debt to EBITDA was around 1.1 by the end of the quarter and well within our capital structure policy and far from the covenant threshold in our loan facilities. So this finishes the second quarter review, and I'll now go to Slide 25 and the guidance. Today, we are 7.5 months into the year. And there's no doubt that the -- you can say that the uncertainty is reduced compared to 3 months ago when we withdrew the guidance, but with that said, the situation continues to be highly uncertain. And despite this elevated uncertainty and in adherence with the governance rules for companies listed in Denmark, we have released a new guidance for 2020. And the guidance is based on very specific assumptions, and you can almost consider the guidance as 1 possible scenario for 2020 based on assumptions about C-19. And there's 5 really important C-19 assumptions behind the guidance, as you can see here to the right on the slide. First of all, we assume that there will be no material lockdowns like what we saw during spring. We do assume, however, that there could continue to be a few local lockdowns as we are currently seeing in Australia. Thirdly, we assume that the number of open stores will gradually increase, and plus/minus, essentially, the whole network will be opened by the end of the third quarter. And then we're assuming that the macroeconomic and consumer spending will not worsen materially compared to where we are now. And last, we are assuming that the social distancing will have a negative impact, not least in the fourth quarter in the physical stores. And based on these specific assumptions, we are guiding on the same parameters as before, and that means organic growth and the EBIT margin excluding restructuring costs. And as you can see to the left here, the organic growth in 2020 is expected to be between minus 14% and minus 20%, and the EBIT margin is expected to be in the range of between 16% and 19%. And we know that this is quite wide ranges, and we've chosen that deliberately because we would like to start wide, and then as the second half of the year progresses, we can narrow in the guidance. This also means that we may continue providing more regular updates to the market than we would do in a normal year, like what we did back in July 8 when we came with the Q2 trading update. Then moving on to Slide 26. The interesting components of the guidance is what the full year guidance implies for the second half of the year. And that's what we have shown here. And organic growth is expected to be between minus 5% and minus 15% in the second half, with an EBIT margin being between 20% and 24%. And the organic growth guidance compares to a sell-out of revenue development so far in the third quarter of around minus 10% and should be seen in the light of the current stalling of the gradual improvement that we saw until July due to the renewed C-19 impact. July revenue development was slightly better than the minus 10%, and August so far has been slightly worse. But we should stress that this is a very, very short time horizon to extrapolate too much on. And the guidance should, just repeating that, also be seen in the light of our expectation that social distancing will have a negative impact on the business in the peak season in the fourth quarter. The question is just how much. Please also note that the profitability will be skewed towards Q4, as usual, but likely even more this year than in prior years. And we would also like to emphasize that in this scenario, with this guidance, we will continue to invest in the brand in the third and the fourth quarter, and we will continue to invest in building the organization during the last 2 quarters of the year. We would also like to mention that we see a high likelihood that our partners, our wholesale partners, that they will buy the Q4 stock as late as possible given the C-19 uncertainty. And this may lead to a shift of revenue from the third quarter into the fourth quarter, causing a phasing effect that will be negative for the third quarter and equally positive for the fourth quarter. Finally, we have, as you can see to the right here, updated what we call the guidance building blocks, and we're just calling out 2 of those. As you can see here, we are narrowing the expectations for the net store closures and now expect around 50 closures net for the year. And then we are reducing our CapEx guidance again by another DKK 100 million to around DKK 0.6 billion, DKK 600 million for the year. And with this, I'll leave the word to Alexander and Slide 27.

[Alexander Lacik, President & CEO]

Thank you, Anders. Quarter 2 was a quarter which will not be forgotten from many different angles. I'm very proud of how our organization has managed through a difficult period with the highest level of integrity. The sales recovery in the quarter has been very clear. I think Pandora's business model has proved its resilience, delivering positive EBIT margin and solid positive cash flow in the quarter. We're still executing on the underlying health of the business, and Programme NOW has been rescoped to reflect this. And finally, I think we've provided what I consider a sensible financial guidance based on some very specific assumptions. On these remarks, we will now open for the Q&A session. Operator, please.

[Operator]

[Operator Instructions] Our first question comes from Lars Topholm, Carnegie.

[Lars Topholm, Co]

Yes. 2 questions from my side. I do have more, but then I'll jump into line again. So one of the tricky things is, of course, as you referred to, it's difficult to separate hot water from cold water, but we're all curious what the real underlying trend is. Given what you're seeing in August, I assume lockdowns matter, whether it's in a market where you have an e-store or where you don't have an e-store. So specifically, on the run rate, you're seeing in August of slightly worse than minus 10%. Can you maybe give some color on which countries are in lockdown now and to what extent you are able to capture revenue online in those markets? And maybe also give some color on the momentum in some of those markets that have not experienced new lockdowns like Continental Europe, maybe also some comments on U.S., if you see momentum improving there. And then a second question, which goes to your increased online share revenue. Again, in some of those markets that are more back to normal, what is the online share now compared to what it was before COVID-19? And you have, of course, now been closing down some stores. In that context, what is your experience in terms of being able to keep the customer when you close down a store? And if online is capturing a bigger share of revenue on a more permanent basis, which thoughts does that give you regarding the necessary size of your physical network?

[Alexander Lacik, President & CEO]

Yes. I can start off on your first question, Lars. I think we have to zoom out and not get bogged down too much in what's happening in the last 2 or 3 weeks because, on that basis, it's frankly impossible to understand the momentum of the business. And I would go as far back as when we started kind of turning the corner somehow in Q4 into Jan, Feb, then I think we have a big pause button. We can see quite a linear comeback from the store closures to the store reopenings. There's obviously the mix shift between on and off-line, which we'll talk more about. And then I think the way I look at it is the stalled, let's say, momentum in the first few weeks here is strictly speaking due to external factors. And then trying to dissect this is very difficult because, also if I compare to last year, the trading conditions, I mean, the environment is just different. So it's quite a tough question to give a very precise answer on. I think when we look at it, we see that the momentum that we started gearing up behind Programme NOW, I would say, as markets reopen, we start -- we kind of have the sensation that we're coming back on to that momentum. Now of course, with these flare-ups like we see in Melbourne, for instance, or Belgium recently and Hong Kong recently, it will have some short-term impact. And therefore, looking on it week-by-week, it might drive you to the wrong conclusions, quite frankly. So I think we need to stay a little bit at a high level. I don't know, Anders, if you have some more color to that.

[Anders Boyer-Søgaard]

Yes. I think it's 6 weeks so far in the third quarter, we have to be quite careful, and only a few weeks since the spikes of COVID-19 increase. But I think one thing we can say that if you look at the minus 10% for the first 6 weeks of the third quarter, that comes in a period where around 10% of the stores being closed. But we can't just say, well, that means that then the -- without those stores being closed, they would have been flat. But I think there were a couple of points there. With the stores that are -- where we see -- we have closed currently is more skewed towards market where online is less than in our key markets, Latin America, Philippines, some Eastern European markets, so there's no doubt that it has an impact that will be bigger than if it had, so to speak, been in the stores in the U.K. that was closed, where the online share of business is much bigger. So of the 10% negative sell-out in the first 6 weeks, it has an impact with 10% of the stores being closed. Then secondly, I think we should -- as we have touched upon just recently that China is an issue and was that in the second quarter as well. And then if you sort of then use that to dissect the minus 10% for the first 6 weeks, I think it will come -- get towards a point you're saying more for them. That means that for the remaining markets, which obviously includes the 7 big markets that we report on, you're getting to a better number that is not minus 10% but better than that. I think that's how far we can go.

[Lars Topholm, Co]

Are any of them growing, Anders, without being specific?

[Alexander Lacik, President & CEO]

I think -- yes, I think we can say that there are some growing and some are not, but we will not give -- sort of put any precise numbers to that.

[Lars Topholm, Co]

And then online?

[Alexander Lacik, President & CEO]

Second question, Lars, I think it's way too early to make any massive conclusions on the network. It is obviously a question which we look at closely. I think that the main decision we have made is to increase the capacity for the e-commerce. So we're essentially already in the business to handle double the volume from what we had last year. I think that's the only major decision we've made so far. It is also clear that in places where you only have e-com, our sales as a total business is lower versus where you have e-com plus store. Now what the exact equation will look like? I mean it's probably fair to say that in the future, we'll have somewhat less physical stores than we have today. How many and how fast? I think we'll just have to monitor the situation. I keep reminding people of that, our network is quite light-footed in terms of the length of our lease contracts. The CapEx per individual store is not huge, so we can be quite fleet-footed if that is required. So we'll keep coming back to this question. And when we get a bit more smarter about it, I mean, of course, we will let you know.

[Operator]

Our next question comes from Magnus Jensen, SEB.

[Magnus Thorstholm Jensen, Senior Equities Analyst]

This is Magnus here. Also 2 questions from my side. The first one goes to the second half. In your report, you stated that you had this out-of-stock situation in Q4 last year. How much of a tailwind could that be for Q4 this year? The second question is to your store concept. I mean you spent some time redeveloping your concept, but it sounds like on what you're saying, Alexander, that it has not really worked. Could you give some thoughts about what has gone wrong and also maybe what are some of the learnings you learned and what you plan on going forward with the new concept design for your concept stores? That's my 2 questions.

[Anders Boyer-Søgaard]

Magnus, it's Anders here. On the first question, I will answer that without being too specific, and it's not because I don't want to answer it on the out-of-stock situation, but there's no doubt, it had an impact last year. I mean I think we talked about that when we announced the full year numbers. And when we tried to quantify it back then, I think we said it could be a couple of percentage points that it hit us last year because of our out-of-stock situation. So give and take, some impact.

[Alexander Lacik, President & CEO]

Magnus, on the store concepts, I mean, when we set out to do this, we were expecting kind of what other specialty retailers would expect behind a refurb. You would expect, I don't know, a sales increase of, let's call it, 10 percentage points, which we have received in some places and not in others. So the picture has not really been conclusive. And before I push the button on what very likely might be one of the biggest CapEx investments I will be making when I'm running Pandora, I need more certainty. I think that's the point. We have some positive learnings about the store environment, the look and feel and -- so we can kind of -- that gets big thumbs-up from consumers in all the geographies that we've done. We have also changed the way we merchandise in the stores, and that would -- the idea behind that was to kind of drive conversion rates and basket size up. We have not really, at least not conclusively, been able to say that, that way of merchandising has led to this contribution of driving sales. So kind of from a look-and-feel standpoint, yes, we could spend the money. But from a -- purely from a return-on-investment standpoint, that looks like not the most attractive option in front of me. Next step is -- so I mean there's plenty of learnings. Of course, we have these stores up and running. We're not starting from scratch. We did plenty of consumer research, so we know which pain points we're trying to address. And it may also be that execution might differ depending on the size, location and, let's say, mission of that trip. We have some stores that are based more for tourism. We have some shops which are more kind of for the local shopper. So it might not be just one solution that's going to cater to all tastes here. There's a new team that's set up. There's a new leader of that team that comes from the retail ops side. In the past, I think maybe we had a bit too many marketeers leading that work, so we are now kind of balancing that out with some more operational thoughts. So we're trying to marry kind of the good conceptual insights and experiences together with a bit more of a hard-nosed operating mindset so that we can -- because the challenge is actually not so much when you have low traffic periods, then probably it makes -- it can work. But when you get into these big spikes, like Mother's Day, Black Friday, Christmas shopping, when the volume of customers is of a very different nature, I think the current execution doesn't really cater for that to be operationally effective, so we need to sort that out. So we hope to have some new tests running or at least some beta tests running by the end of this year, hopefully, so we have some news coming to early next year.

[Operator]

Our next question comes from Chiara Battistini, JPMorgan.

[Chiara Battistini, Co]

First one would be on the -- on your guidance for the second half of the year and basically assuming this 10% decline continuing for the rest of the year too and, at the same time, assuming actually, potentially, the situation continues to improve. Are you being conservative there in your assumptions given the lack of visibility at the moment? Or are you also factoring in the fact that the base from last year is getting buffer from the second -- from September and as you start comping your brand relaunch last year? That would be the first question. And the second question on silver. And you talked about some mitigating actions for -- to counteract the impact from the latest move of silver prices. Can you expand a little bit more on these mitigating actions? And would also -- and would those also include price increases next year?

[Anders Boyer-Søgaard]

Chiara, it's Anders here. On the guidance for the second half of the year, I think it's a very valid question. I think we have spent quite some time about how you think about the guidance in an environment like this. So the -- I think a couple of reflections. I think one is that when we look at the trading for the first 6 weeks of the third quarter and combine that with the level of uncertainty and the 10% of the stores being closed, I think it is indicating that we are still underlying, well underway in our transformation. It's as -- I think as with Lars Topholm, we used the phrasing it's difficult to separate hot and cold water, that's clear. But we think that underlying, we are seeing a good momentum. Having said that, the business environment is, needless to say, highly uncertain, and we wanted to reflect that in the guidance. So I think you should see the guidance as a reflection of the uncertainty in the market in general and not as an uncertainty about Pandora and about how we specifically perform. If the market is there, if the traffic is there on the street, I think we are confident that our revenue will follow. If the traffic is not on the street, consumer demand is not there for C-19 reasons, then we will be impacted as well. So we've decided to guide around the current performance of minus 10% as the midpoint. So we both see a potential to end the second quarter -- or second half, sorry, 5 percentage points better than where we are currently of 5% worth compared to where we are currently. And maybe one way to talk about it is say what would happen if we ended at the low point of the guidance, the minus 15% organic growth for the second half of the year. And that would be, again, mainly a consequence of external factors as we see it. First, it would be the current worsening of momentum that we see driven by C-19 surges and local lockdowns. We do not know how this will impact consumer sentiment. Obviously, that's a big unknown. And secondly, as we are going into the Q4 peak trading season, that will be impacted even more so by social distancing, that one, compared to what we already are seeing. And we're taking a lot of mitigating factors, as Alexander mentioned. But this is a new situation for us. We have not tried it before. Nobody has tried it before. And we just have to see how that plays out. And then on the, yes, sort of comparison base, the Q4, as you know, last year is a more net-net and more difficult comparison base than what we've seen so far this year. Despite the out-of-stock situation that Magnus asked about just a second ago, the net-net, the fourth quarter is a more tougher comparison base when compared to the first 3 quarters of the year. And then I think we should also -- last, long answer here, but mention that the improvement that we've seen in the revenue development during the last months and also in the third quarter, we do not know if there was some type of rebound in consumer spending just after the lockdowns and whether consumers redirected money, say, for summer holidays, et cetera, traveling towards discretionary spending. And all of that, a lot of words here, end it up with saying that we think that it's a reasonable guidance will be to guide around the current trading level. But as mentioned, it's likely that we will keep updating the market as we progress and maybe also before all the official Q3 trading statement is due in early November.

[Alexander Lacik, President & CEO]

Silver?

[Anders Boyer-Søgaard]

And then, yes, on silver, we -- the silver prices have been almost stable, you can say, for 7, 8 years compared to what's happened during recent weeks and months. And when a massive increase in prices happens like what we have seen here, of course, you have to think very creatively. And I mean we can't give you a full answer yet, but I think net-net, it's fair to assume that there will be -- even after mitigating actions, it will have an impact on the gross margin and EBIT margin going 1 year forward, assuming that the prices remain at this hopefully elevated level. But we are looking into all parameters of what drives the gross margin, including product mix, what kind of products that you're also promoting and focusing on in our campaigns. We are looking at product design, like what Pandora also did 8, 9 years ago when the silver prices were also high in 2011, I think it was. And we are also, I'd say, looking at pricing even though the way that we set prices is not a cost-plus base pricing. And I think many of us know painfully that, that has been sort of experiments with increasing prices in the past with no success. But of course, we'll have to ask ourselves the question again when we have such a massive increase in COGS as we see here.

[Chiara Battistini, Co]

Just a follow-up on this last point. For the time being, you're not seeing yourself passing on this increase to your consumers for the time being?

[Anders Boyer-Søgaard]

Yes, go ahead.

[Alexander Lacik, President & CEO]

I think, as Anders said, I mean, in the last few years, there's been a focus on the higher price point options in our assortment, which led to traffic and brand engagement to go down. So I think we've learned the lesson now as a company twice in the past so -- and we're not going to jump into that trap. As Anders says, though, I mean, if prices remain at this level or even moves beyond, of course, like any sensible business, we'll have to take a look at it. But I'm super sensitive to making sure that we remain an affordable option for people out there. So that's -- you shouldn't read into this that we're just going to pass it on, that there's going to be a lot of sweat before we get to that point.

[Operator]

Our next question comes from Fredrik Ivarsson from ABG.

[Fredrik Ivarsson, Research Analyst]

A couple ones from me as well. Starting on the 8% like-for-like in the open stores you reported, obviously, that's driven by quite a hefty growth in the e-store. Just curious on whether you'd be willing to give us a ballpark figure on how many stores that includes in that calculation. That's my first question. And the second one on online, which obviously grew quite significantly, you're talking about securing some additional online capacity. I think, Alexander, that you said doubling capacity. Does that imply that you essentially assume 100% sales growth online in Q4?

[Anders Boyer-Søgaard]

So thank you, Fredrik. We'll start with the first one. Then no, we will not provide the number of stores exactly included into this number because it is not a number that we believe that you should interpret on. Of course, you can see like in the U.K., the 12 first weeks were closed -- stores completely closed. And then in the last 2 weeks, they were open with reduced traffic. So of course, in that number, you'll have a significant like-for-like number around 100%. So we don't think this is the right number to look at if you look at the underlying business. And you should rather look at the number of stores that are closed now, 10% closed and the minus 10%, and see how those compare. I think this will be a better way of trying to check the underlying business even though this is difficult. So yes, we will refrain from commenting too much on this number as we don't think that it's meaningful, unfortunately. Alex, maybe you can comment on number two.

[Alexander Lacik, President & CEO]

I can do number two on online. So we're doing a number of things to strengthen our e-commerce business. I mean you go back, I don't know, a couple of years here, and e-commerce was like a nonfactor. Now it's most definitely a factor and actually, did help the company quite a lot during Q2. So on one hand, we are improving our ability to forecast online because, in the past, the forecasting era was you're hovering a couple of points up or down. But when the growth rate then doubles, I mean, it's just difficult to manage from a supply chain standpoint. So that's one aspect. We also know that this surge in demand drove a lot of unhappy customers, so we're also changing service providers and our own protocols to service customers better. And then on -- and then the third point is, obviously, we're going to redirect a bit more of our marketing investment towards the things we now learned over the last, let's say, 6 months that drive the e-commerce trading harder. So we'll kind of push more towards digital drivers. And then to your final question on capacity, yes, we're more than doubling the capacity. And that's -- again, when the year started, we had a conversation on whether the budget for the year should be 10% growth on e-com or 30% growth. We ended up with now 176%. So you can imagine that the supply chain was nowhere near ready to deal with this. And it's not an automated handling in the DCs. It's manual work. It's somebody going and picking small pieces together, putting it in an envelope and sending it off. So you double that volume, you need more people. That's the simple way to solve it right now. Whether we get into automation in the future, that's a different discussion. So we are just gearing up to be ready. I'm not even sure that the 100% is going to be enough, to be perfectly honest. That's the most current conversation we're having internally. Some markets, it may be sufficient; some other, it may not. So you cannot take that 100% to kind of put in your Excel spreadsheets and say that's the e-commerce growth. I don't know. It's certainly going to be a lot more than it was last year, and that's kind of how we're building it. And I just hope that the 100% capacity we're building right now is going to be sufficient.

[Operator]

Our next question comes from Anne-Laure Bismuth, HSBC.

[Anne-Laure Bismuth]

It's Anne-Laure Bismuth from HSBC. So my 2 questions are, first, I would like to come back on the online performance especially in comparison with the performance for the Q3 to date, so the minus 10%. I just wanted to know if you can share more comments about the performance in online during that Q3 to date and how we compare versus the 176% that online revenue grew in Q2. And my second question is about the partnership for the launch of the Star Wars collection on the 1st of October. What is your plan in terms of marketing? Do you plan to launch select events online? And what do you plan in terms of partnership, collaboration by year-end or next year? And what is your plan in terms of your product launches for Q4?

[Anders Boyer-Søgaard]

On the online growth for the first weeks of the third quarter, what we can say is that it's below 176%, but it will still be a number that in a normal year that will be visible, so still significant growth. But obviously, as the store openings are progressing, it comes down, but it's still well above where we would normally be. And that's also why, as Alexander said, that we're building capacity or buying this insurance premium, so to speak, building extra capacity to continue coping with that significant online growth for the rest of the year.

[Alexander Lacik, President & CEO]

Okay. In terms of the partnerships, so there's going to be -- I mean we divide now the marketing initiatives essentially in 3 size packages, not very creative. It's either small or it's medium or it's large. And then you could think of the small packages as quite limited exposure in terms of windows and media. The large packages is full-on national launch with DVD and the rest of it. And Star Wars would fall in the latter category. So that is going to be a very strong program. I mean we also have the Harry Potter from last year to cycle so -- which was very, very successful. This initiative has tested in a similar way with consumer tests that we've done before, so we have a lot of conviction that there's going to be another strong collaboration program. Then you had a question on collaborations for next year we don't talk about. Some of this is kind of in the works, so it's a bit sensitive. So we normally do not disclose the next year programs when it comes to the collabs. In terms of product launches, Star Wars is one of the kind of key things that are coming in the back half. We're also going to make a big push behind the 20-year anniversary. You know we've been drip-feeding in these top charms each month, but we're going to make a big push behind it. I think it's in September where the company then -- or the brand actually turns 20 years officially. So I think those are the main points, and then there's a few other bits and bobs, but that's probably what we're talking about in this environment.

[Operator]

Our next question comes from Frans Hoyer, Handelsbanken.

[Frans Hoyer, Analyst]

A question regarding Q2 and the full price like-for-like sales trends, if you are able to quantify that. I gather that the clearance sales were down significantly. And adjusting for that, your like-for-like in Q2 would have been better. And of course, not sure what clearance sales, how important were they in -- going into Q3 and 4, probably not much in Q4, I guess, but maybe you could talk about those issues.

[Alexander Lacik, President & CEO]

Let's see. So the numbers that we quoted in the presentation, as you said, they straddled Q2 and Q3, so it's not a clear-cut quarter assessment. If I take that period, the overall sell-out was flat, give or take, to last year. However, within that, we saw quite some shift, which is the reason I mentioned it because we had -- last year, I think we've put something like 600 DVs on the clearance in the summer, and now we put -- I think it was around 230 or 240, so significantly lower amount of DVs, which is obviously the result, on one hand, from the inventory kind of management in general that we've been much more tight on; and secondly, we made an assortment reduction during last year, if you remember, went from 1,800 DVs to 1,200 DVs. So actually, we have less c*** in the tail. So therefore, we should also expect that -- so my need for these kind of clearance sales becomes less. Now of course, I have the merchandising organization jumping up and down, being nervous about not hitting their targets because any salesman, lots of discounts makes life easier for sales, but it's not necessarily what we want to do. So therefore, I was quite pleased to see that the volume was halved on the -- what's sold through on clearance but was more than picked up or was more -- was picked up essentially by full-price sales. So from the health of the brand, that's brilliant because we're managing to convert people not on the basis of sales or clearance but on full price. And you can also do the math on -- from a margin standpoint what is obviously a lot more attractive to sell full price than clearance sales. So there's a number of different really important underlying health attributes to that period, which was the reason I mentioned it in the presentation.

[Frans Hoyer, Analyst]

Yes. No, that makes sense. You also mentioned that there is a -- well, you have -- you're addressing the product development strategy, and there is a need to supplement the Moments concept with new concepts. Could you talk a little bit about that, what it is you want to add to your -- to the spectrum, so to speak, which Moments does not offer?

[Alexander Lacik, President & CEO]

I think -- I mean if you look at my peers, my global peers in the same category globally, there's hardly any one of them that only lives off 1 major platform. Most of these companies, they have 3, 4, 5 or 6 different platforms. And these are kind of enduring platforms, so they are there for years and years and years. Similar to Moments, you kind of hit the strike with consumers, and then you just need to keep it fresh, which is I think where Pandora went wrong. Somehow there was a belief that you couldn't keep Moments fresh, which is what I think the first job we have done here is to reinject energy into Moments, and consumers are responding. So that's brilliant. We now need to complement this with a few others. And we're a little bit too early in the curve for me to disclose anything. When I have something interesting then, then you can rest assure that I will share that with you guys.

[Operator]

Our next question comes from Omar Saad from Evercore.

[Omar Regis Saad]

My first question, actually, I wanted to follow up on the last one. Maybe if you could expand a little bit on your product development. It sounds like a reorganization around the 2 different business units. Maybe a little bit of context why you're making these changes. What was broken in the product development process before? Is it something in the process itself? And then how do you think the -- how should we think about how this will affect the kind of flow of product newness going forward? And then I have a follow-up on the loyalty program.

[Alexander Lacik, President & CEO]

So you can look at this from many different ways. You can have a look at the organization, say are the people good or bad. But actually, when I came in, what, 1.5 years ago, you just look at the outcomes. And you saw that from a results standpoint, our new innovation was not helping this company to drive growth. And that became quite problematic because the whole organizational setup was geared to focus on new product innovation. So if the outcome is that you don't get any growth and the only thing the organization is kind of busy doing is trying to drive growth on that, then there's something clearly you wrong. Then there are a couple of other things which also led kind of to the reorganization that we put in place in April. But the core of this was to ensure that we have an organization that is much more working from the outside in, so meaning that we actually try to understand what consumers like or don't like or even try to second-guess what they might like. But for that, you need a different organizational setup, and that's what this kind of GBU structure is there to do. It's to essentially decipher what's going on from the outside with the help of both [ coal and quantum ] methods and turn that into insights. From that, kind of filter that through a product strategy so that we kind of stay within the confines of what we think Pandora should be working on. And then that eventually then drops into the product development people and the creatives on that side of the fence. In the past, you could probably characterize this by that this first filter wasn't even here. We didn't do any of that work. So it was much more about kind of the product development organization trying to sort out those questions. And arguably, they're good at creative, but they're not particularly analytical. So that's kind of what we've added is a bit more science to the art. And then hopefully, that combination of science and art is what's going to lead to better predictability in the numbers that we generate. And also that we deliver products that people are actually interested in. And I think you can see some of the early inklings of this. Looking at Pandora ME, for instance, I think that is based on some quite profound consumer insights which has delivered some interesting results for us. And we can do a lot more in that space, to give one example. Did that answer your question?

[Omar Regis Saad]

This is very -- yes, this is very helpful context. Along those lines, if you think about the loyalty program using data, adding science, as you mentioned, to the art, what role is the data and your loyalty program in terms of giving your consumer insights, is that a big piece of it? Or are you doing other studies using consultants? And is there a way to kind of ramp up that data analytics and in terms of the product development process and those connections you have with consumers?

[Alexander Lacik, President & CEO]

So there are a couple of different steps. So one is when you're trying to just identify opportunities, okay? Loyalty means that you've already kind of got them in the fold, and now I'm trying to figure out how more to do good things. There are actually 2 quite different aspects of the whole puzzle. So on the first piece, when it comes to generating new insights in terms of where to go with our product innovation, I think here we're using more, let's call it, traditional methods to start with. They are tested and -- tried and tested methods of how we approach this. Maybe not in the jewel industry but outside, I mean, the FMCG world that I come from, this is like bread and butter. So we're just trying to take some of these methods, align them to kind of the type of environment we're operating in and then start running it. On the other hand, then when it comes to data, I mean, we announced, I think, a few months back that we are investing heavily in creating a data hub here in Copenhagen. So in the past, we had small pockets of resources around the globe. I've knocked all of that down, with the exception of China because there's a different ecosystem there, and then pulled all those resources into Copenhagen to create a tech hub here. And these guys, they live and breathe of data. And that data we will use in terms of being better merchants, in terms of kind of the loyalty aspects that you were poking on. And eventually, I hope we'll also crack a method on how we can scrape those insights and use that for product development. There are quite a few companies that are sort of mastering this today. So -- and we have still some ways to go kind of finalize the building of the tech hub. But I think in the future, you should expect that we will propel some of our insights through the data that we gather. I mean we have amazing touch points. We touch -- I'm not sure that this is unique visitors, but we have roughly 500 million visitors to our stores, either off- or online. And today, we actually only use a fraction of that data to drive this business, which is crazy if you think about it. We should really be able to be super precise on what we do. But we come from a history of being quite analog, so this is not just to put the tech in. We also need the culture and the people that know how to maneuver in this new environment. But that's kind of the direction that Pandora is taking. So we want to lead in the tech space as a company.

[Operator]

Our next question comes from Silky Agarwal, Citi.

[Silky Agarwal, Assistant VP & Senior Associate]

I have 2 questions, please. So the first one, on the level of marketing investments in second half, I understand that it would be up year-on-year. What is the level of spending you're talking here in your base case revenue scenario? And the second one, on gross margin, I'll come back to it.

[Anders Boyer-Søgaard]

On the level of marketing spend in the second half, I'm not saying that this year will be above last year, but in percentage, probably yes, in percent of revenue. But in absolute terms, I think you should more think about it as in line with last year. But remember last year, going into Q3 and not least Q4, we're already upping our spending at that point in time.

[Alexander Lacik, President & CEO]

Yes. And the only other thing I would add to that is that media rates have changed somewhat this year due to COVID as well. So even if we spend DKK 100 million, you might actually get a bit more bang for the buck this year. Now these varies country by country. It varies by the media mix you have, of course. But that is something I'm driving very hard because, as I said in the presentation, COVID is a problem, but with problems, also comes opportunities which you need to run hard after. And that's one of them that we're trying to chase.

[Silky Agarwal, Assistant VP & Senior Associate]

Great. Then the second one, on the gross margin, I understand that the second quarter gross margin was around 78% if I strip out the COVID-19-related restructuring charges. Given the impact from silver prices will not be felt in second half, do you think that's a sustainable level for second half?

[Anders Boyer-Søgaard]

On the gross margin going into the second half, we will be -- and I'm also looking at Mr. Treasury here, Michael. But we will be comping -- having a higher silver price in Q3 and Q4 in the COGS than what we had last year. I think if you go back to the -- I'm just thinking loudly, going back to the guidance when we made in February originally, we said that we would have a headwind from silver prices and the Thai baht of around 1.5 percentage points, and that's mainly coming in the second half of the year. But that -- again, that's not coming from the recent price increases but from what happened previously. So in other words of answering your question more directly, I think there will be some headwind on the gross margin in the next couple of quarters comparing to the underlying gross margin in the second quarter.

[Operator]

Our next question comes from Lars Topholm from Carnegie.

[Lars Topholm, Co]

Yes, just a follow-up question regarding the lease costs. So I assume the current climate gives an opportunity to renegotiate leases. I wonder to what extent you're doing that, what impact it has short term, but also if it has any long-term implications that are meaningful when looking at your sales and distribution costs going forward.

[Anders Boyer-Søgaard]

Maybe I can start. As part of the reorganization that was designed and implemented, we also established a global network management unit. And we have -- and there was a new Senior Vice President, a new role, with a gentleman who joined us there on -- just before the summer holidays. So that -- and the gentleman who has come into that role, he's done similar work in the past. And I think long story short, that's clearly an opportunity to take a different approach to our leases, both from I think how they are structured, how do we think about what -- some of the fine print of the clauses in terms of agreement but also rent levels. And then, of course, with what happens currently in the world and in retail for other companies as an opportunity to reduce that, and that is a part of it. If we looked at Slide, what is that, 17 in our cost savings program, there's some white space in the Harvey ball on retail expenses there that -- and part of that is clearly on opportunities to lower our rent across the world. It will take time, some you can renegotiate before the lease expire and some probably better off waiting until the lease expires. It will come step-by-step. But as Alexander said, fortunately, we're not locked into 10-year leases. But on the average, it's fairly short-term leases, so that gives us an opportunity to sort of step-by-step to realize those savings. I'm not putting a number on yet, but there's definitely an upside. We're spending around just shy of DKK 2 billion per year on leases.

[Alexander Lacik, President & CEO]

Yes. I think that one of the observations this team -- the new team had was that they probably think we should try to get into shorter leases even than we have currently, so we have that flexibility, also coming back to your earlier question, Lars, on how we're going to adjust the network. So if we sit in too long leases, then that, of course, makes us less flexible. So that might be worth for us in some locations to consider. I think we'll take a much harder stance as well in the lease negotiations. We might even ditch some locations in the negotiations in order to make sure that we actually get some more relief than what we have experienced with some people today, yes. So...

[Operator]

Our next question comes from Piral Dadhania, RBC.

[Piral Dadhania, Director of Premium Brands]

So I was just wondering if you could help us understand the sort of mood amongst franchisee partners. Obviously, they had significant store closures through the second quarter period with no e-commerce offset. So as you think about the structural shift of revenues from an off-line environment to an online environment, how does that change the dynamic and the relationship between Pandora and the business and then the franchisee operators of physical stores? Any insight there would be most helpful. And then secondly, just around some of the comments you made on current trading, which you say is running at minus 10%. Very encouraging to hear that improvement through the last few months. But are you seeing any big differences between your physical retail concept stores and wholesale or franchisee-operated concept stores or even just across channels more regularly, excluding e-commerce? Just curious about whether any particular channel is under or overperforming as we go into the third quarter.

[Alexander Lacik, President & CEO]

I'll start with your second question. So what we saw was when kind of the environments opened up, our stores performed better in the first couple of months even. And we kind of write that to the fact that we did not send our staff away. So they were still on the payroll, largely speaking, whereas a lot of the franchisees obviously furloughed or terminated their people. So it took them longer to kind of get the teams back on, whilst we value the fact that we have very experienced people in our stores. It takes quite some time to train people in this particular -- it's not a very transactional way of selling that we do on Pandora. So that seem to have paid off quite nicely. Now when we sit here today, broadly speaking, our partners perform at the same level as us. So they -- it just took them a while to catch up. In terms of the franchise sentiment, I mean, clearly, the cost structure of a franchisee versus a Pandora is very, very different. I mean we carry a heavier fixed cost burden versus these guys. They have the lease which, to a large degree, many of them, like many retailers, didn't pay initially. They sent their staff home. So -- and we then also look at our receivables. They are paying the bills to us, which would suggest that at least they still stand. Quite a few of them have had decent balance sheets, from what we have gathered. So right now, I'm not getting a lot of phone calls, and in fact, I'm not getting a single phone call from franchise partners that are struggling. That's not to say that they aren't, but it hasn't reached that type of level. And most of these people were shut down for 6 to 8 weeks, so it looks like there is resilience to cover that type of a period at least. I don't know, Anders, if you have some additional perspective.

[Anders Boyer-Søgaard]

I think just repeating, I think it's important not to look at the second quarter numbers and taking that as an interpretation that, structurally, that the partners is performing worse. So just repeating, in the third quarter so far, the stores have been performing the same no matter who operates them, whether it's us or our partners. And again, looking at our cash flow in the quarter, you can also see that despite the significant hit that we've all had in the second quarter, for the partners even more so because they're operating physical stores only, then our receivables have been brought down quite nicely. So as Alexander said, that they have had cash and decent balance sheets. But then -- and then last, I think in the prepared notes in the beginning of the call here, we also said that we have seen very nice sell-in coming into July, in the start of Q3 here. And again, that's a pull from the partners and not something we are pushing in, but a pull from the partners, seeing that we have good brand momentum, saw the good brand momentum in Jan, Feb, obviously, but also seeing that we're actually doing better and doing quite well here coming out of the crisis in the second quarter.

[Alexander Lacik, President & CEO]

Right. And just the final technical addition to explaining the numbers in Q2 was that the first markets that opened were China and Germany, and these are clear O&O markets, whereas the later or the sort of franchisee markets, Italy and the U.K., has opened relatively late in the quarter.

[Operator]

Our next question comes from Chiara Battistini from JPMorgan.

[Chiara Battistini, Co]

Just a quick follow-up question. On your e-commerce performance in Q2, I was just wondering, and also according to the data that you see, do you think that your e-commerce performance was boosted or was supported by maybe retaking market share within the gifting market, within the gifting, yes, options? And also given that maybe in other categories, the purchasing was less viable in a way. So I was wondering if you took market share within gifting and how you see this evolving as the lockdowns have been lifted.And actually, just a clarification also on your comments now on the sell-in in July being strong. Just wondering, was this sell-in in July actually ahead of the sell-out? Or was it in line with the sell-out you could see?

[Alexander Lacik, President & CEO]

On your first question whether we took market share gains in gifting, I just wish I had that data. We -- that would be incredibly difficult -- first of all, it's difficult to gauge e-commerce share performance to begin with. I mean Amazon doesn't reveal it. Tmall, you can scrape it. But other than that, we have our own DTC, and of course, we don't share our DTC performance with anybody. So in fact, there is no database which would help answer your question. So I think I will only say that I wish I did, but I don't have any facts to back it up. So -- and we can't build the business on wishes, so that I can't. The second question maybe I'll direct to Michael.

[Michael Bjergby]

Yes, okay. No, so whether the sell-in was higher than sell-out, I think what -- how you can see it in the numbers was that the organic growth was sort of clearly better than the sell-out growth, yes, so as we would expect.

[Chiara Battistini, Co]

Sorry, that the organic growth was better than the sell-out growth?

[Michael Bjergby]

Yes, exactly.

[Operator]

Thank you. There appears to be no further questions, so I'll hand back to our speakers for any other remarks.

[Alexander Lacik, President & CEO]

Well, first of all, thank you for joining us. As I said in my closing remarks, Q2 was truly strange. I know that a lot of your questions really are trying to decipher what is the underlying momentum of this brand especially given the fact that we came out of -- or are in the midst of a turnaround. We're doing our best to try to kind of lay the land, but I'm -- hopefully, things normalize and stabilize a bit, and then we can be a bit more precise on the momentum. We have some indicators that I've mentioned that the brand seems to be healthy, and of course, everybody has taken a toll in Q2. But our sense is that we've come strong out of the gates in pretty much every market, except China, as we've talked about. So I think we kind of look to the future with some energy and passion and belief that the Programme NOW is going to continue yielding. And I think on that note, we'll close the call. Thank you for listening.

[Anders Boyer-Søgaard]

Thank you.

[Michael Bjergby]

Thank you.

[Operator]

Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.