Burberry Group PLC

LSE:BRBY

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Burberry First Quarter Trading Update Call. My name is Emma, and I will be the operator for your call this morning. [Operator Instructions] I will now hand you over to Julie Brown, Chief Operating and Financial Officer. Please go ahead.

[Julie Brown, CFO, COO & Director]

Good morning, and welcome to Burberry's first quarter conference call. Slides are available to accompany this presentation on the IR section of our website. In today's presentation, I'll spend the first few minutes running through our retail performance in the quarter, sharing the progress we've made against our strategy and then close with guidance. With me this morning is Annabel Gleeson, our Head of Investor Relations, and we will be happy to take your questions at the end. Turning to Slide 1. This quarter, Riccardo-designed products became a meaningful proportion of our offer building from 10% to 15% of the assortment at Q4 to around 50% by the period end. The customer response to the new product has been very positive. We saw strong double-digit percentage growth across runway, summer and autumn '19 collections compared to equivalent collections in the prior year. Sales from the new product were ahead of the prior year in all regions with Chinese and Japanese customers delivering the strongest trends. Consumers reacted positively to the new aesthetic and the new Burberry house codes. Men's and women's benefited from the outfitting initiative with strong growth in tops and bottoms. And in accessories, we continue to build out our product architecture and increased emphasis on solid leather bag collection. Whilst the new product is performing well, lines of previous collections continued to weigh on the overall performance of the business resulting in comparable store sales growth of 4%. Turning to the second slide, by region. Asia Pacific led the growth delivering a high single-digit improvement year-on-year. Mainland China grew mid-teens as customers responded positively to the new product line, and the country benefited from some repatriation spend towards Mainland China. By nationality, Chinese spending globally was up high single digits and marked sequential improvement on the low single-digit trend in the prior year. In Japan, we continue to expand our retail footprint gaining concessions in Hankyu and Isetan. On a comp basis, Japanese sales were up mid-single digits, but including the benefit of new space, Japan grew mid-teens as our new product resonated well with fashion-forward consumers. Elsewhere in Asia, Korea grew low single digits whilst Hong Kong was lower year-on-year impacted by the protest. EMEIA grew low single digits with a mixed performance across country. The U.K. and Italy both delivered good growth whilst France was softer year-on-year. And the Middle East remained challenging impacted by the macro situation. And finally, the Americas was flat year-on-year. The U.S. grew low single digits but was offset by Canada, which was impacted by a later markdown period. Turning to Slide 3. This slide shows the major components of retail sales, and again, you can see the 4% growth in comparable store sales. Space was minus 2% in this quarter, and we still anticipate space being flat for the full year. During Q1, we continued to invest in our store network, opening 9 stores, including 3 large new stores in China, IFC and IAPM in Shanghai and China World in Beijing; and 2 additional concessions in Japan. Offsetting these openings were 12 closures, including 4 from the previously announced rationalization program. We also continued our store refurbishment program, which included completing store refreshes in Canton Road and the Ocean Centre in Hong Kong. In aggregate, 23 of our stores are now aligned to the new creative vision, and we remain on track for 80 stores to be complete by the end of the year. In total, retail revenue was up 2% at constant exchange rate, and finally, currency had a 2% benefit this quarter resulted in reporting sales of GBP 498 million, up 4% year-on-year. Now before I turn to guidance, I wanted to talk you through some of the brand highlights in the quarter on Slide 4. We engaged frequently with consumers through our monthly B Series drop and the newly relaunched monogram capsule, which continued our investment in the Thomas Burberry print of the new house code. The monogram collection resonated strongly with consumers, particularly with Chinese millennials. We supported its launch with high-impact activation, including pop-up stores and department store window takeovers. This was highly successful in driving brand heat reaching 120 million consumers globally, and social post of the monogram product drove higher-than-average engagement rate. More widely, our traction across Instagram and WeChat continues to progress positively. We saw growth in the number of followers and double-digit gains in the engagement rate per post compared to the previous quarter. And we continue to innovate on new platforms like Tik Tok and Doujin in China and, for example, on Doujin, users generated content, which drove over 1 billion views by taking our monogram challenge. In addition, key influencers continue to organically endorse Burberry product, and our editorial return on investment was higher than an already strong Q4. Turning to Slide 5. I wanted to talk about the top line dynamics for the remaining quarters this year. Over the coming months, the new product will build from around 50% now to around 3/4 of our offer by the end of the financial year. In terms of comparable store sales growth, mainline is expected to accelerate as the new product builds through the year. However, we anticipate this will be partially offset in the second half by reduced markdown inventory compared with the prior year. Now turning to the outlook on Slide 6. With this top line dynamic in mind, we maintained our guidance of broadly stable revenue and adjusted operating margin at CER in full year 2020. As previously announced, we anticipate a more pronounced weighting of adjusted operating profit in half 2 relative to half 1 than the prior year. Cumulative cost savings of GBP 120 million will be delivered by the end of the year, and our CapEx program is on track. And finally, turning to currency. We now expect a GBP 15 million benefit to adjusted operating profit and a GBP 45 million benefit to revenue as a result to the further weakening of sterling against major currencies. And this compares with prior guidance of a headwind to GBP 7 million at operating profit. Turning to the final slide. In summary, this was a good quarter in our multiyear journey to transform Burberry. We continue to build out the proportion of Riccardo's product in stores. We continued our journey of aligning distribution to a luxury positioning and our new creative vision, and we launched our monogram capsule and improved brand heat and consumer engagement sequentially. The implementation of our strategy is on track, and we maintain our full year financial guidance. And with that, we're happy to take any questions.

[Operator]

[Operator Instructions] The first question is from the line of Elena Mariani from Morgan Stanley.

[Elena Mariani, Executive Director of Luxury Goods and Brands]

Annabel and Julie, a few questions from me, please. The first one is on the underlying moving parts of your like-for-like in the quarter. So I guess 50% of your retail sales are now growing strong double-digit, and what about the rest? So how much is older collections and carryovers? And how much of this remaining 50% was discounted and perhaps going through outlets? I'm trying to better assess whether part of your comp was driven by higher discounting activity or whether the level of discounting was exactly in line versus last year. And then the second question, you seem to manage expectations on the like-for-like in the upcoming quarters, suggesting it might not be progressing in a linear way. Could you help us understand why this might be the case? If the new collection is growing high double-digit and then it's going to represent 60% to 70% of sales by the end of the next quarter, in theory, you should see like-for-like progressing positively given also that the overall like-for-like comp base gets easier in the second half. And then perhaps one final question on the gross margin guidance. You haven't changed it and you're still talking about higher profits in the second half of the year versus the first half, but how should we tie in your gross margin guidance versus what you're expecting in your top line? Should we see the higher gross margin decline in the first half, the reflection of higher discounting and then in the second half, there should be less gross margin downside because you're going to discount less? So if you could help us understand this better, it will be great.

[Julie Brown, CFO, COO & Director]

Okay. Thanks, Elena. Just to inventory the questions, so the first one relating to the underlying like-for-like in the first quarter. The strength has really come from Riccardo's collections in the first quarter, and as we mentioned Summer '19, the pre-collection for autumn and the runway have performed very strongly, so we delivered a strong double-digit performance. It's not being driven by the discounting. Obviously, outlets were always a proportion of our sales, we don't disclose the amount. But the success this quarter has been driven really by the strong response to the new product. Within the number, as we mentioned, the older lines, previous collections and the replenishment business is going to a softer period and facing declines. What we're doing now in this next phase is we'll be rebuilding some of the main Burberry icon to support that replenishment business going forward, but the focus today has just been on establishing the new collections and establishing Riccardo as the great designer this year. In terms of the like-for-like progression, so Riccardo's product as a percentage of our sales at the end of this quarter was 50%, as we mentioned. We expect it to be around 60% to 65% by September and 75% by the end of the year. So in terms of overall, what we're flagging in terms of the forecasting through the quarters is the main sale period for Burberry and major luxury brands, post the main seasons, so we have the sale period in Q1 and also in Q3, with Q3 being the most significant. And what we're flagging is that this year, we will have reduced inventory going into markdown in Q3. And so basically for the purposes of modeling, we're guiding towards the comp in Q3 in aggregate across all channels in all likelihood being lower than Q1 due to this factor. In terms of the gross margin guidance, the major thing that we highlighted is the investment that we're making in products. So it started last year with the investment in design and the new product, and so the gross margin was under pressure in the second half of last year already from this feature. And we, therefore, anticipate greater degree of pressure in the first half of this year for the same reason. What we come to the second half of this year, that impact will be more muted because we're lapping an already investment period in half 2 of the prior year. So absolutely no change to the guidance on gross margin. We're anticipating a headwind of around 100 basis points, largely due to product investment, and we expect a more pronounced effects of this in the first half basically as we guided.

[Elena Mariani, Executive Director of Luxury Goods and Brands]

And 2 very small follow-ups. The first one is that -- so if I understood correctly, then we should expect like-for-like to sequentially improve in Q2 versus Q1 given that we're going to have more products from Riccardo in stores, and then we might see a bit of deceleration in Q3 and then a reacceleration in the fourth quarter. This is the sort of trend we should expect.

[Julie Brown, CFO, COO & Director]

Yes. Yes.

[Elena Mariani, Executive Director of Luxury Goods and Brands]

Okay. And then last point, on the gross margin, so by next fiscal year then, we should start to see an improvement instead because you're done with your investments in new products and so you would expect to see a positive effect on the gross margin coming from perhaps the growth of leather goods and of new products in general. Should we model it this way?

[Julie Brown, CFO, COO & Director]

I think we'll give further guidance in May when we come to the gross margin, specifically, heavily depends on the product mix. And in the first few years, we are investing in the leather franchise. We are elevating the leather that we're using and the designs that we're using. But because we want the value to be perceptible, and that's our #1 objective, we're not putting the prices up commensurately in the early stages of implementing the strategy. So I would see recovery in gross margin as we gain scale in this area, but it won't happen immediately. So we'd encourage you to model that gross margin headwind for a period of time until we guide it away.

[Operator]

The next question is from the line of Thomas Chauvet with Citigroup.

[Thomas Vincent Chauvet]

Julie, Annabel, I have 2 questions, please. The first one on the Riccardo's strong double-digit LFL. Would you be able to single out some categories, collections or price points that did particularly well? As you mentioned, Julie, the replenishment business is still weak. I understand Tisci hasn't refreshed the heritage trench coat, that's a significant part of your selling profit. Why is that? And when can we expect him to modernize perhaps this important category? And secondly, on Greater China, you mentioned the benefit from repatriation of demand into the Mainland, driving that mid-teens LFL. With regards to Hong Kong, what are your teams saying on the ground? Are they concerned about the situation, about the future traffic? Do you have already a contingency plan in place on this profitable market in terms of, I don't know, staffing levels, store closures, rents for negotiation? I think you took some action in 2015 after the student protest of the autumn 2014 in Hong Kong?

[Julie Brown, CFO, COO & Director]

Okay. Thank you. So Riccardo's products, as we mentioned, is growing strong double-digit across the 2 collections down the runway that we've launched. We've actually seen positive trends in all regions. We continue to build out the solid leather bag architecture, and we're seeing the new product resonate very strongly, in particular, with the Asian population and very strongly with the Chinese. Wholesale is also seeing a significantly higher sell-through than previous collection, and the sell-in of the main market recently with wholesale was very encouraging. In terms of specific product categories, the apparel range has gone very well. So women's and men's apparel have seen a double-digit growth, and what we see is across -- Riccardo has the persona of the man and the boys, the woman and the girls, and we've seen a success across all of those categories, including the younger generation, which has been very positive. Just moving on to the second part of your question relating to the heritage trench. Riccardo oversaw that at the time we were launching it, but it only had a modest impact. He will be turning his attention to some of the iconic Burberry styles as we approach this next year. But his first focus, as we sure everybody understands, has been on the main collection and on the runway. China, you're absolutely right. We've seen a mid-teen growth in Mainland China, a very positive response from the Chinese consumer. And what we've also seen, because I think government supported local consumption, we've seen a repatriation of spend away from some of the other Asian countries towards China, which, overall, I mean, the key metric we look at is the Chinese, the nationality. And here, again, we're very pleased with the trend because we were on a low single-digit growth last year, and we've just delivered a high single-digit growth in China or the Chinese globally. So we're happy with that. Coming on to Hong Kong, clearly, we keep the situation under very close review. We did see an impact due to the protest. We saw an impact on Alexandra House on Pacific Place, and we closed -- we monitored the situation and decided to make closures to the stores to protect our employees. So they were closed in total for about 5 days. So it has had an impact on Hong Kong performance in the quarter, not that material at the group level, but we have to keep the situation under close review. No change really to the rents. It happened a few years ago because of the downsize in the business with the economic cycle, but no really major change to the rent today.

[Operator]

The next question is from the line of John Guy with MainFirst.

[John William George Guy, Managing Director]

Julie, Annabel, just -- well, following on from Thomas' points there. I'm looking at the performance of the non-Tisci products, and during the first quarter, you mentioned that replenishment and all collections were in decline. Could you maybe sort of flesh out a little bit in terms of looking at the replenishment versus the older collections and maybe quantify that. The second point is, I think, the average penetration of Riccardo's products over the quarter was around 35%, appreciated you ended at 50%. Can you give us the scale of the performance of Riccardo Tisci's sales within the accessories category during the quarter? And can you make also some sort of, I guess, a little bit more detailed comment around the performance of the refurbished stores against the non-refurbished stores?

[Julie Brown, CFO, COO & Director]

Okay. With regard to non-Riccardo product, we've got a number of categories within there. We've got the replan lines, we've got the older collection. It's quite normal to expect to see a decline in older collections as fashions change. Replan, as I mentioned on the call, we are in the process of rebuilding the Burberry replan icon, and that will be the next phase of our transition that Riccardo will turn his attention to. So at this stage in our transition, we completely expected this to be the level of performance. In terms of the average penetration of 35%, yes, that's about right. We do see variability in that percentage across the store network. We put prioritization on the flagship stores and the stores in the major cities so they tend to operate on a higher percentage. But basically, yes, it was 35%, 50% by the end, and we anticipate that moving to around 60% to 65% by September and absolutely in line with guidance, 75% by the end of the year. And that's what drove the success in the quarter. Just in terms of the categories and the scale of Riccardo's products, as we mentioned, the leather franchise and accessories or leather bags within that franchise, we anticipate there's been a longer journey partly because we are elevating the product in this category, investing in solid leather shapes, investing in high-quality leather, investing in new designs and fabrication. And therefore, we anticipated this category being under some pressure in these initial stages than we've guided today within our guidance. We don't guide specifically by category on what's Riccardo's and what isn't, but it's not dissimilar to the overall shape that we've got. And then in terms of the store refurbishment, we are really pleased with how this is progressing. As you know, we've got an ambitious plan of store refurbishments. We plan to reach 80 by the end of March 2020. And the reason we're focused on this is because what we see is when we have 3 ingredients together, we see an inflection in the performance, and one is a refurbished store, two is a larger proportion of Riccardo's products in the store and three is a retail excellence program having run through raising the capability level of our team. And when we see the 3 together, we see an improvement. We track it rigorously as part of our KPI dashboard internally, but we don't disclose the performance of the stores externally, but we do see a good return on our investment.

[John William George Guy, Managing Director]

Just maybe following up on that. I mean over the course of the quarter, for the entire quarter, looking at the sales densities, they seem to have gone up by about a mid-single-digit rate over the quarter, but that I would expect to be probably running at a double-digit pace for those refurbished stores. Would you be able to sort of confirm that that's the kind of sense that you see based on those 3 magic ingredients you just mentioned.

[Julie Brown, CFO, COO & Director]

We do overall see an improvement in the productivity of those stores when we've got the 3 factors in play, but we don't disclose sales densities as you know, John.

[Operator]

The next question is from the line of Anne-Laure Bismuth with HSBC.

[Anne-Laure Bismuth]

Anne-Laure Bismuth from HSBC. I have 2 questions, please. So on your plan also, 80-store refurbishment plan for this year, is there any particular phasing for the next 3 quarters? And regarding the store openings, so you opened 9 stores in Q1, 3 in China. Can you give us -- can you remind me of what is the plan for this year please in terms of overall openings and the store openings in China?

[Julie Brown, CFO, COO & Director]

Okay. So in terms of the phasing of the stores, we would anticipate the second half to have a higher degree of store refurbishment. This is in our plan at the moment. We've done now 23 to date, and we'd expect to pick up in the second half largely as the team has gone through the planning stage and they can move more towards execution. We're still on track for delivering 80 by the end of the year. In terms of the store openings this year, the plan going forward.

[Annabel Gleeson, Director of Investor Relations]

So we don't guide specifically on the number of stores, but what we've said is that, obviously, space for the full year contribution to retail sales will be broadly stable with minus 1 in the first half and plus 1 in the second half.

[Operator]

The next question is from the line of Melanie Flouquet with JPMorgan.

[Melanie Anne Flouquet, Head of European Luxury Goods and General Retail]

So first one is I was wondering whether you can help us understand a bit better the markdowns impact. So the fact that you are aiming to reduce the markdowns activity and have already done so in quarter 1, I believe, a little bit. So maybe you can share with us, I don't know whether you can, but directionally, we know what sort of percentage in total where the markdowns and when you aim to get it over the course of the next year and 2 years in your business? That would be my first question. The second is on handbags. When did you expect that the pressure on the former collection stops and we start seeing the most recent preference positive momentum filtering into your numbers? I know you said it was a longer journey, but when is that inflection point in your mind? My third question is on European local consumers. We find this, well, the U.K. was particularly strong helped by tourism inflows, so the European consumer just to still be pretty weak in this turnaround. What are you aiming to do to revitalize this market? In particular, I appreciate Americas, well, maybe take longer because there are some image issues that are stronger in the U.S., but I was interested in the European market. And my last question is, sorry, can you share with us how is Hong Kong is for you in percentage terms and what was actually the performance in this quarter?

[Julie Brown, CFO, COO & Director]

Yes. Sure. Okay. So first of all, in terms of the markdown impact. To start with, our strategy has been really clear about removing nonluxury distribution from our network, and this has been focused initially on wholesale with some outlet closures. Simultaneously, our objective is to drive full priced mainline and digital growth, and therefore, we expect, over the years, the strategy to have a reduced element of markdown. Last year, we did have -- we were able to go through a creative transition, and in the third quarter, in particular, we were managing those inventory levels accordingly. This year, what we're trying to do is be as open and transparent as possible and assist with the guidance around the compose of the courses. And because the main sale period in our industry is appearing in the third quarter predominantly, we're really flagging to use it. We'll have reduced levels of inventory going into markdown in Q3. And just for the purposes of modeling, we're anticipating that the Q3 comp in aggregate will probably be lower than Q1 due to this factor. Over the next 1 to 2 years, we'd expect this sort of trend to continue with more focus on mainline and digital full price. If we move out to the question about the handbags and the collection becoming positive, we've always said that in terms of leather, we are building out the architecture, we're using much more solid leather shape as opposed to canvass-type materials, and we definitely focus on the value being perceptible to the consumer, hence, one of the pressures on the gross margin. We have got the headwinds for some of the older-style bags and some of the previous collections, and we'd anticipate that remaining a headwind probably during the course of this year but expect to see some signs of improvement in the next financial year. But clearly, we'll keep you updated on the progress. In terms of the tourism flow in Europe and how we intend to revitalize Europe. In terms of our brand and the image of our brand, when we did a brand work a couple of years ago now, our brand was the strongest in Asia. And as you mentioned, Melanie, we had a weaker positioning in the U.S. wholesale presence in non-luxury, and what we've seen is the traction. The first traction is coming through Asia. We've also seen an improvement in European performance, you mentioned about Europe. So in terms of Europe overall, last year, we're below single digit. We've had a slight improvement in this quarter, and we've had a more marked improvement coming through in the U.K., partly impacted by tourists. The revitalization of Europe is very much part of the revitalization of the Burberry brand holistically. So the use of social media, the use of influencers, the collections, the B Series, the monogram collection recently are all designed to reignite heat around the Burberry brand, and that has been successful. As you know, we've seen a double-digit increase in the levels of engagement around this, and Europe is very much part of that activation campaign. The store refurbishment program runs globally with a focus also on Europe. So we do expect to gain traction, although I think, inherently, it is a more difficult market than, say, Asia at the moment. In terms of Hong Kong, Hong Kong is 6% of our sales and the performances in Hong Kong has generally been somewhat mixed largely because we have tourist flows going through Hong Kong, and we've recently had the impact of the protest that we mentioned -- in answer to John's questions earlier, and we have had some store closures relating to those protest. As we mentioned, 5 days in total. So yes, Hong Kong is I think reasonable, I would say, it's reasonable, but it's still slightly in decline in this quarter.

[Operator]

[Operator Instructions] The next question is from the line of Roger Fujimori with RBC Capital Markets.

[Rogerio Fujimori, Analyst]

Could you please -- 2 questions, please. Could you talk about the ASP trend in Q1 with the greater visibility of Riccardo's new collections? My second question is on e-commerce. I appreciate, not disclosed, but if you could give qualitative idea of how online retail growth in Q1 '20 compared to online growth in Q1 '19 or Q4 '18? And if you could talk about the performance of Burberry.cn would be helpful. And my third question is just if you could talk a little bit about what do you see in terms of U.S. luxury market trends in the June quarter versus the March quarter?

[Julie Brown, CFO, COO & Director]

Yes. Sure. So first of all, in terms of the ASP trend, we've seen Q1 driven largely by mix. So product mix and certain categories have done it extremely well. As we mentioned, apparel across men's and women's and little volume. So it come from those sources. No major changes to like-for-like prices, but obviously there has been a change to the product range, which has affected the mix performance. In terms of e-commerce, the performance in this has been led by China, and we've seen strong double-digit growth targeted -- through targeted innovation such as social gifting on WeChat that we did. We launched WeChat mini-program on Chinese Valentine's Day as one example of what we've done. We've continued the success in generating inspiration to the B Series, and the monogram program was very successful in terms of exclusive products being available on Instagram and WeChat. And as you probably know, we received a prestigious Webby award in April '19 for the best social content within fashion and beauty. Recent innovation also on the Chinese platform with the use of Doujin where we had the monogram challenge, and again, that was reaching 1 billion views from users generating their own content. I think we've been really successful in that space. In China, the digital performance has been very strong equally across burberry.com and all third-party providers. So both have been performing extremely well. In terms of the U.S. luxury trend, we have certainly seen a softness in tourist flows into the U.S., and particularly when we look at airline flight bookings, et cetera, from the Chinese, we've seen a weakening of tourist flows from the Chinese. It's largely a domestic market, and we actually saw -- when we look at U.S. alone, not America, we actually saw an improvement from Q4 to Q1. So we were slightly negative in Q4, and we delivered a low single-digit growth in Q1. So we are starting to see an improved traction in the U.S. market.

[Operator]

The next question is from the line of Peter Testa with One Investment.

[Peter Testa, Analyst]

I had 3 short questions, please, like one at a time. When you get to the end of the year, you have about 25% that is not on Riccardo Tisci product. Can you give a sense as whether there's any particular category concentration of what will remain at that point?

[Julie Brown, CFO, COO & Director]

Yes. Sure. It's really the need for Riccardo to develop the replan lines so that we have new icons of the future. It's really just building across those categories. I mean they may be more focused there on the trench range, but it's broadly across the categories.

[Peter Testa, Analyst]

Okay. And as Riccardo's product, say, it takes up a larger proportion of a range, is there a point or a threshold of Riccardo Tisci density that pulls through the balance of the range probably because maybe then what's left is a little more simple but also just a general category is pulled by his products, so people buy the balance of the category as well. Do you see thresholds points there?

[Julie Brown, CFO, COO & Director]

We haven't seen that particularly. I think no. I think we haven't seen that.

[Peter Testa, Analyst]

Okay. So if you crosses, say, 60%, 70%, it doesn't -- you don't see necessarily a pull, say, the simple black shirt or the trouser matching the top or the sort of thing?

[Julie Brown, CFO, COO & Director]

Not at this stage. We've -- his collections have been quite distinct from the previous replan line and the previous collections. So no, we haven't seen the sort of pull-through factor at this stage. But I think as his collections build, there could be a halo effect from that, but I don't think it will be worth calling it out at this stage.

[Peter Testa, Analyst]

Fine. And then the last question is just on the gross margin. You've talked about the investment made last year and primarily in leather and shoes impacting gross margin rolling across -- annualizing through the first half of this year and then the base effect balance is off. I was wondering, on the other side, if you could give any comment about how Riccardo Tisci-designed product, which is not so much affected by this, has an impact on gross margin through content or just through the heat and newness, maybe pulling better price performance, better ASP performance mix you highlighted earlier, does that have a -- and is that having an opposite or different effect on gross margin?

[Julie Brown, CFO, COO & Director]

Yes. At this stage, what we see is that Riccardo product across-the-board at this stage and particularly in the leather range is at the lower gross margin due to the investments we're making and the value being perceptible to consumers and in particularly, new consumers. So there is increased investment in design fabrication in order to elevate that product, and at this stage, we're being very careful about moving the price accordingly. So you've got this gross margin impact coming from the new range. As you say, the second half, that becomes more muted as we annualize that.

[Peter Testa, Analyst]

Okay. But the first -- second half last year, you had little Tisci product that's more leather. So is that then in the second half being the higher Tisci product being basically set off by lower markdown?

[Julie Brown, CFO, COO & Director]

We did have an impact, even though Riccardo's product was launching in the final month. The design charges are going through the P&L ahead of that, so we did have quite an impact on the gross margin in the second half of last year. As you say, the markdown does have an impact, so that will give us some gain in the second half of this year also. Yes.

[Operator]

The next question is from the line of Charmaine Yap with Redburn.

[Charmaine Yap, Analyst]

Two questions, please. The first one, I wanted to clarify on your markdown strategy. Does it mean, Julie, that you will be protecting all of Tisci's product from going into markdown and particularly, the leather bags?

[Julie Brown, CFO, COO & Director]

I mean we're going to take pragmatic decisions around it. We're not isolating any particular part of the range. We're just saying that we will have reduced inventory. We've had improved sell-throughs this year compared with last year at the range. I mean we just expect to have reduced inventory. But we're not going into the specifics of what we're marking down or what we're not.

[Charmaine Yap, Analyst]

Okay. And also my second question will be, can you share some of the changes that you've done in terms of your store refurbishments other than the optical changes to the aesthetic? For example, are you deploying last part of density, maybe reallocating staff differently or reallocation of space. Is there anything you can share there, please?

[Julie Brown, CFO, COO & Director]

Yes. Of course. So what we're doing is Riccardo's design, the new look of the stores using a range of colors as you've probably seen, such as the honey and the pistachio. As family there, the pistachio from the English rose, the honey from the trench. We have given more space allocation to the leather range. So you've probably seen if you've been into some of our main stores. The focus on leather is usually on the floor as you walk in. And we're also using furniture that allows the consumers to test the bag, which is often what they want to do, not to see it on a shelving on the wall, but actually there, put on a table and test it. So we've organized stores accordingly relating to that. We've also thought through the zones in the store in terms of the red zones and blue zones and making sure that the product is in the right location for the consumers. So ease for the consumer. We've also done a huge amount of work on the back of house making it easier for the retail associate to ensure a more streamlined service to the consumer, reorganizing storerooms and in particular in Asia that's been quite a major project and also driven, as you know, the retail excellence program, which is designed to give our consumers a more elevated experience when they come into a Burberry store.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Julie Brown for any closing remarks.

[Julie Brown, CFO, COO & Director]

Okay. Well, thank you very much for joining this morning's call. Our next update is on the 14th of November with our half-year results, and we look forward to speaking to you then, if not before. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may disconnect. Goodbye.