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So good morning, everybody. Welcome to our fantastic flagship store here in Regent Street. We've actually bought you here for a tactical reason because the store opens at 11:00, just about the time we finish. I'd highly recommend the scarf that's there just around the corner where we can just initial things for you and great gifting, but there's plenty more things to entice you to spend.
So we're expecting a very high level of sales today. So thank you for coming.
So I'm really looking forward to talking to you about our new strategy. But first of all, we're going to -- Julie is going to go through our half year results. Then I'll comment on my strategy, and then we'll be delighted to take your questions at the end. Thank you very much.
Thank you. Thank you, Jonathan, and good morning to everyone. So since this will be my last person results presentation with Burberry, I'd just like to thank you for all the support and the challenge that you've provided to me over the last 6 years and also during a period of significant change for the company. It's been an absolute pleasure to work with you and be part of this amazing team. So in headline terms our Q2 comparable store sales growth accelerated to 11% driven by strength in the majority of regions and a good recovery in Mainland China.
Leather goods and outerwear demonstrated a strong underlying growth, up 15% and 13%, respectively, in the second quarter. In terms of profitability, adjusted operating margins were slightly up at constant rates driven by a strong underlying performance partially offset by inflationary pressure and also investments in customer-facing activities.
Adjusted EPS growth was excellent up 15% at constant rates and 32% reported.
The balance sheet and cash flows remained strong, with an interim dividend declared today up 42% compared with last year. And we also made good progress across our ESG agenda.
So moving on to the abbreviated income statement. And as usual, I will refer to changes at constant rates. We are pleased with the performance in the half. Revenue came in at GBP 1.3 billion, a 5% increase, and adjusted operating profit was GBP 238 million, increasing by 6%.
Overall, we saw a stable gross margin as inflationary pressure was absorbed by the business. And adjusted diluted earnings per share increased 15%. This benefited from increased interest income, a lower tax rate and reduced shares in issue following the buyback program.
Free cash flow remains strong at GBP 88 million in the half, slightly down on last year due to the decision to accelerate the build of inventory ahead of festive and also higher capital expenditure as we prioritize investment in our new store concept. Foreign exchange is a substantial tailwind in half 1, taking our revenue growth to 11% and adjusted EPS to 32%. The adjusted operating margin benefited 10 basis points from underlying business improvement despite the considerable disruption in China. And our margin closed at 17.7% at reported rates, including a 140 basis point benefit from currency.
So moving on now to our regional retail performance. As mentioned, Q2 comp accelerated to 11% growth rate, bringing to 5% for the half. So the first 2 quarters of the year have been impacted by a lockdowns in China. And therefore, if we look at the underlying group performance excluding China, then Q1, we increased 16% and Q2 15%. So a good underlying performance especially given the tougher comparator in EMEA in the last quarter.
So turning to EMEIA. We continue to show strong growth with 34% increase in the half and 25% in the quarter. This was primarily driven by an increase in tourists that doubled in the mix to 40% in half 1. Particularly with Americans and Middle Eastern customers, these were the main drivers, and the local business was broadly stable.
The Americas fell 3% in the half and in the quarter. Higher AUR categories continue to do well, led by the female consumer and especially leather goods, but this was offset by pressure in entry price categories. Globally, the U.S. customer remains broadly stable this quarter given Americans transitioned to buying Burberry in EMEIA.
So taking a step back, the Americas is up more than 30% in terms of retail comp against prepandemic levels. Asia-Pac fell 4% in the half with Q2 accelerating to 11% driven by the recovery of domestic spend in Mainland China and the strong performance in other Asian regions.
Mainland China was broadly stable in the second quarter despite localized lockdowns in September. And this reflected good growth in menswear and a higher mix of our elite customers.
South Korea saw a strong rebound to 11% in Q2, a period of normalized growth largely unaffected by COVID. In South Korea, we saw the strongest market versus prepandemic levels, rising over 70% in the second quarter.
South Asia Pacific and Japan delivered a strong performance in half 1 with growth over the 40% and 25%, respectively.
As mentioned, comparable store sales growth increased 5% in the period. We saw 1% contribution from the space, leading to retail growth of 6% at constant rates. Wholesale increased 1%. However, within this, we've got 2 parts. Americas and EMEIA, excluding Russia, were up double digits. The adverse movements in wholesale were entirely due to halting shipments to Russia and also the impact of COVID-related lockdowns on Asian Travel Retail. Licensing continues to show good traction, rising 8%.
Overall, as mentioned, our revenue was up 5% at constant rates and 11% reported.
Adjusted operating profit rose from GBP 196 million to GBP 207 million in the half with improved underlying trading of GBP 39 million partially offset by investments in marketing, client activations and stores as well as the impact of inflation. We are pleased that gross margins remain stable year-on-year despite a 70 basis point headwind from inflation. This was offset with efficiencies with price, with channel mix, giving us the confidence that we can maintain a 70% gross margin over time.
OpEx growth was 4% at constant rates, and this was well controlled with increases targeted towards our customer-facing areas. And currently, it was a major contributor, as mentioned, bringing our reported adjusted operating margin to 17.7%. We also delivered GBP 88 million of free cash flow. And this was a conversion rate of 88% -- 68%. Working capital was adverse in half 1 impacted by our decision to accelerate the inventory build in preparation for festive, together with receivable movements because of the timing of wholesale shipments. Capital expenditure was GBP 53 million mainly focused on investments in the new store concept and in IT.
We closed the period with net cash of GBP 643 million following the payment of the final dividend and the buyback program. The latter reached GBP 180 million in half 1 with GBP 400 million to be completed by the end of the year in line with our guidance. And following this, the balance sheet remains strong. We have net debt to adjusted EBITDA of 0.6x, including our lease debt. We're still at the lower end of our target range of 0.5 to 1x with the increase from last year due primarily to the dividend on the buyback program.
So moving now on to the main operational initiatives in the half and starting with brand. In September, we debuted our spring/summer '23 collection, celebrating the British sea side. The show, which was Riccardo's last for Burberry, we streamed across local and global platforms where watched 1.5 million times. In product, leather goods saw good momentum with comparable store sales increasing 15% in Q2 and 11% in half 1. This was supported by the expansion of our Lola handbag range with 80 pop-ups launched in the period. The Lola is now our bestseller, along with the introduction of the Frances shape for Autumn/Winter '22. Our leather goods also grew well ahead of the group average.
Outerwear saw a comp growth of 13% in the second quarter, a good recovery from Q1 with strong performance across both men's and women's. We continued to invest in our customer experience. And as part of our new outerwear campaign, we launched over 40 pop-ups as well as impactful visual merchandising displays and outdoor experiences for top clients. We also continue to roll out the new store concept and completed 22 stores in half 1 with Taipei 101 and Bal Harbour in Miami. We remain on track to complete 65 stores in the new concept this year.
So moving on to our ESG agenda. Regarding product, we continue to make progress on our commitment to ensure our key raw materials will be certified or fully traceable by '25. 95% of our lever is now from tanneries with environmental and social certification.
In relation to planet, in August, Burberry became the first luxury fashion brand and one of the first company's global to receive approval from the science-based target initiative for our net zero emissions target. And regarding people, to support our colleagues, we brought forward the new U.K. real Living Wage pay rates by more than 6 months. And finally, in the communities, at the beginning of November, we announced 2 new Burberry Foundation Partners, International Youth Foundation and U.K.-based OnSide, the first step in taking the foundation's new youth empowerment program global.
We'll also be engaging employees in all regions in a global festive volunteering competition where proceeds will go to FareShare and National Food charity.
And now on to the current year. Overall we maintain our near-term guidance to full year '24. We are mindful of the challenging macro environment and its potential impact on trading, particularly COVID-19 related disruption in Mainland China and recessionary risks in Europe and in Americas.
Broadly speaking, there are very few changes to the outlook comments we made in July. We are still expecting retail space and wholesale to be broadly stable for the year. Wholesale is impacted by halting shipments to Russia as well as a cautious outlook for Asian Travel Retail.
The effective tax rate is expected to be around 22%, and capital expenditure is expected to be around GBP 170 million at the lower end of our previous guidance as we benefit from efficiencies in the new store concept rollout.
I would also like to mention for modeling purposes that we are back to a 52-week year in full year '23. Our models should, therefore, be adjusted to this impact in the second half. And finally, currency is now expected to be a revenue tailwind of around GBP 170 million and profit of GBP 70 million.
In terms of concluding this presentation, we have created a strong platform for revenue growth with significant channel rationalization and a reorientation of the business to a full-price company. The cost base has been targeted towards commercial areas of the business with cost savings reinvested and margin accretion coming from top line acceleration. The capital allocation framework in place now for the last 5 years continues to guide our deployment of cash in the business, our returns to shareholders and the maintenance of a strong balance sheet. We expect to maintain a strong level of cash conversion throughout our plan.
I'll now hand over to Jonathan to take you through the plans as we develop the next phase of Burberry. Thank you.
Thank you, Julie. So since joining Burberry, I've had a great opportunity to get to know the business. I've visited many of our stores. I've seen our manufacturing facilities both here and in Italy, and of course, I've met many of our teams. I've been really blown away by the passion and energy that we have in the business.
There's 3 things that have become very clear to me. The first is Burberry's extraordinary heritage and the 166 legacy that we have. I never realized that we had such an incredible archive. Yesterday, somebody called and we just purchased an incredible dress from the 1970s. And if you think about it, these things are things that our designers can use. They can dial up on it. It's an incredible resource that we can have. Very few brands in luxury have this, and it allows us to create an emotional connection with consumers.
The second is our Britishness. We're the only luxury brand of our scale that can claim this. It's a unique attribute and that will enable us to stand out in a highly competitive market.
And the third, which is the very strong platform that Burberry has for growth. Burberry has always had very strong fundamentals. And unlike other brands, consumers know us for multiple product categories from apparel to accessories, and this breadth will give us room for scale. We have a very well-established network of stores in key luxury locations that I've been impressed with, that does not require further expansion.
We have a strong digital legacy and a digital
[Audio Gap]
the next phase is about realizing our potential as the modern British luxury brand. And I think all these 3 words are very important to what we stand for. This is going to be about building on the strong foundations that we have and leveraging what makes Burberry special.
We'll take the richness of our heritage and our unique attributes and reinterpreting them with a modern vision and aesthetic, and we have an opportunity to really harness the power of the brand, which will drive us growth.
So our focus on the next phase is about -- is on revenue growth and acceleration. In the medium term, we would target revenue of GBP 4 billion, which is in line with our existing guidance of high single digit revenue CAGR. But I really believe we can go further than this. In the long term, Burberry has the potential to be a GBP 5 billion revenue brand, and our ambition is to get there. This will drive significant operating leverage, increasing our margin to over 20%.
As I've said, we have a very strong platform that we can build on. But for me, this is more about than just the evolution. In each area of the business, I believe that
[Audio Gap]
for example, in brand, the elevation has been clear over the past few years, and it's been very impressive. Now we need to focus on improving brand clarity, broadening our brand appeal and leveraging on our unique Britishness. And similarly, in distribution, we've done great work on the network, and in the next phase, we will accelerate our refurbished room plan and drive e-commerce growth.
But ultimately, in our luxury fashion business, it's products that matters and this is where I see we have the biggest opportunity. We've made good progress in leather goods, but I believe we can do even more in this category to complete the assortment and drive stronger desirability. In addition, we have untapped opportunities in key categories particularly shoes, women's ready-to-wear and outerwear, which I'll talk about later.
So in the next phase, our focus is on 3 areas: brand, product and distribution. We will harness the power of the brand. We will bring all product categories to growth and, therefore, potential, and we will strengthen distribution.
So I'm going to start with the brand. And before joining Burberry, I think I've mentioned this before, I've really recognized and acknowledged the brand evolution journey that took place. And now that I'm here, there is no doubt to me that Burberry is firmly anchored in luxury. And this chart here from our research shows that there has been a dramatic increase in the share of our consumers who now see the brand as luxury.
Going forward, there is an opportunity for us to be clear about what we stand for and appeal to a broader set of luxury consumers. I believe our brand messaging at times could be a lot more powerful. And at times, it's felt a little bit niche. And the best example here for me, and I'm sure a lot of you are aware of this, is when you land into Heathrow, we've got this incredible buyout of the landing hall, and you see all Burberry advertising everywhere. And it kind of brings -- I'm so proud to work for the brand that has this. It's really impressive.
But then when I look at it, I don't think it gives us strong enough pull to the brand and stores like that we have here. And I actually get a few people calling me and calling me and saying, "Well, it's very impressive, but we really -- I didn't quite understand it." We've already worked on that. I think when you fly in next time, you'll see our incredible festive campaign, and you'll see a lot more clarity and a lot more pull, I believe, in the coming months with these campaigns and activations.
I believe our brand messaging could be a lot more powerful. For example, we have -- so now we can move on to -- as we move into next year, we'll be making our campaigns and brand renovations more relevant, more coherent and more connected to who we are and what we offer.
One of the key ways that we can improve our brand clarity is refocusing on our Britishness. As I said earlier, it's right at the hand of product and brand. And It's who we are and where we make our iconic products. Our heritage trench coats are made and woven in Yorkshire, and even the fabric, as you know, is woven in the U.K. Our beautiful woolen scarves are made in Scotland. We have a relationship with our supplier here for 122 years. And again, the research tells us that this is what our customers associate us with, and we will make much more of this unique attribute and our brand storytelling, and we have a really compelling story to tell.
In the next phase, we will strengthen our connection with Britishness through products, cultural partnerships, working with British talent and finding ways for our brand to be more visible in the home market. London and the U.K., as you know, has some of the best creative talent in the world. We have an opportunity to really celebrate this more, and we'll create a platform for the best British creativity across all fields.
So Daniel Lee will play a key part in this next phase. I'm so pleased that he is now with us as our new Creative Director. When we first met, to me, it was really clear that he had a very strong understanding of the brand and the Burberry's heritage and the opportunity to dial up on Britishness in a modern way. We share the same vision of how we can achieve this across brand and product, building on what we have today. We will bring to life modern British luxury as a desirable and relatable lifestyle.
But one of Daniel's key unique talents is his product sensibility. He has a strong record, as you know, in creating best sellers, particularly in accessories. He has an incredible vision of how this is going to be executed with a full 360 approach. And I've been really impressed with what he's been able to do in the 2 months that he has been with us already. And I'm really excited to see how this will evolve in the coming months.
Burberry has -- always had an ability, I think, to create a strong and powerful brand messaging through marketing and consumer activations with a high level of impact. As you can see here, is our recent Lola pop-up that we did in Hangzhou, China, and it's a great example. We had an incredible reach and created a brilliant visibility and buzz. We had 43 million reach from posts from VIPs and influencers and a 24 million reach from the press coverage that we had. There are very few brands that can do this, I think, at this scale and achieve the level of impact and visibility that Burberry does.
To build on this going forward, we will put product front and center in all of our communications and place a bigger emphasis on Hero products. We'll be clearer about who the Burberry men and women are. We have a particular opportunity in womenswear, which I'll talk about later. And we will continue to come up with innovative and disruptive campaigns.
Another significant area of opportunity is our customer. And the objective here is to accelerate the way in which we acquire and retain new clients. This is a new area of focus for us, and it will drive significant commercial results. We actually have a great starting point and our customer base is well balanced across genders and ages. And our retail teams have done a great job in developing a stronger local business post COVID, and this has been achieved across all regions and something that we will continue to build on. But looking ahead, we will strengthen and deepen the relationship with our consumers by creating a compelling and engaging proposition from products to purchase. We will drive loyalty and retention and increase our customer lifetime value.
And this, of course, starts with acquiring customers at a pace. Since joining, I've set aggressive targets to grow our database. And this year already, we have already expanded it by 20% versus last year. To support this plan, we're prepared to make the necessary investment. We've been increasing our marketing and consumer-facing spend in the next few years, especially to support the launch of the new creative vision. As revenue scales, consumer-facing spending as a percentage of sales will stabilize at high single-digit levels. And I'm confident that this level of investment will still allow us to deliver operating leverage and, therefore, improve our operating margin.
So now on to product. We have a very strong product base with well-managed inventories and a good balance between carryover and newness. Our ambition now is to grow accessories to more than 50% of our business. We have a good foundation in leather goods, but we can make this category even bigger and significantly grow our shoe business. One of the key differences here will be Daniel. As I mentioned, he's a product-focused designer with a rare talent for accessories and an excellent track record of creating bestsellers in these categories. But it's not just accessories. We've also identified opportunities across other key categories, which will help accelerate our growth.
We've set clear goals against each category in the medium term, to double leather goods, more than double shoe sales, double women's ready-to-wear and grow outerwear by 1.5x versus today. So starting with leather goods, it remains a crucial ambition of -- element of our luxury positioning. And our ambition is to roughly double this business. We are starting from a good foundation, and we've had good traction so far this year. Sales and leather goods were up double-digit driven by our Lola family which is just over here and also our Frances is back there. And I think the offer and the base that we have is very strong. With a new stronger offer, I'm confident this goal is achievable.
Daniel has the creative vision to bring an even greater level of desirability to the offer. He has already visited our manufacturing base in Italy and has been impressed by our capabilities that we have there as much as I have been. We've been looking to him to extend his strong record of creating highly desirable icons in women's bags. And additionally, we will expand smaller leather goods and take advantage of the clear opportunity we have in men's.
So shoes has been a huge growth category, as you know, in the industry, but it's a relatively small share of Burberry's business. Our ambition is to more than double our sales of shoes. And again, this is something I'm comfortable we can achieve. I've done this in my previous roles, and the platform is there. We have a great space allocation in our stores, and we'll be able to leverage quickly on this to drive incremental sales.
To capture this opportunity, we will build -- we've been building the offer to cover both formal and casual wear. We will strengthen our existing sneaker business, and we see an opportunity that I think we have in the outdoor categories that people naturally associate Burberry with. And again, shoes is an area where Daniel has a strong track record and the talent to create
[Audio Gap]
So women's ready-to-wear is another category where I see a lot of opportunity. The current offer is not as strong and balanced as it could be. And at times, the offer in our stores does not reflect what you see on the runway. I want to rebalance this and double sales. The first thing we need to do here is to really develop a distinctive aesthetic for Burberry Womenswear. Based on this, we'll create an everyday luxury wardrobe that is relatable and wearable and we will rebalance the assortment, particularly in underrepresented categories like dresses. And then we will make sure that this new offer is properly represented in depth across our store network.
And I've mentioned women's here, but to be clear, we will have a similar approach with men's ready-to-wear. And we will continue to evolve this business to take advantage of the industry momentum in this category. As you know, outerwear is already a strong part of our business. Globally, we're perceived as a luxury -- as a leader in luxury outerwear. We have a real strength in this category, supported by iconic products that customers love. And I've actually been really impressed with our performance, and we intend to really build on this.
We would do this in 2 ways: by reinforcing and protecting our Hero products, which are already loved by our customers, such as our iconic trench; and developing other outerwear categories such as quilts and downs, where we've also seen good growth recently. This is a key opportunity for us and something that we want to own.
We've done some really strong stand-alone outerwear campaigns, such as the recently launched nightwear creatures campaign. And we want to build on this and already Daniel has shot his first campaign, which is our first dedicated Rainwear campaign in 4 years, and we will launch this in January.
So moving on to distribution. We will continue to focus on elevation and execution across all channels and regions. We've set new targets for the medium term to convert all of our stores to the new store concept by FY '26 to significantly improve our store productivity and reach sales of GBP 25,000 a square meter and in e-commerce to double sales and achieve a 15% retail penetration.
In terms of retail, I've been really -- I've been to many of our stores, and I believe we are in a very good place overall. We have the right number of stores. They're in excellent locations. And the ones that we have refurbished are performing well in the new store concept.
Our focus on the next phase is on transforming our productivity and accelerating refurbishments. Today, our stores are still a mix of concepts. Just as an example, I was in Las Vegas in July, and we have 3 stores in Las Vegas. One of them is in the Forum Shops in Caesars Palace, great store, great location, but it's in the old store concept.
And then you travel 5 minutes away to Crystals mall and there's a brand-new Burberry store in the new store concept. This creates a little bit of confusion, and I think people will really be excited to see a much stronger consistency when they travel around our stores, not just nationally but globally. We need to step up our investments to accelerate the conversion of our network and present a consistent brand image and experience for our customers.
As I mentioned, I've been really impressed by the new store concept. I think the design is compelling. There's a great customer journey, and it feels very natural. And the layout showcases product very well in a contemporary way. And I'd also like to highlight here that some of the old store concepts were obviously built around showing more ready-to-wear. So as we adapt that concept to the new store concept, we'll get a much better balance between all of our categories.
We believe that the concept is strong, but we will also bring in some additional touches and enhancements that will feel very organic but in line with our new creative vision. Our goal is to reach GBP 25,000 a square meter in the medium term. This is more than a 50% improvement on our productivity today, but it is still below best in class. We have a clear plan to achieve this. Success in accessories will automatically give us a high level of productivity. And in addition, we will maximize opportunities to drive traffic and conversion through small leather goods, belt and small accessories, for example. And we will improve our clienteling, retail excellence and the omnichannel journeys, and I'm confident that we can achieve this target.
We will cover all of our stores to the new store concept by the end of FY '26, and we're committed to investing behind this plan.
In terms of wholesale, great work has been done in the last 5 years, and we have a very well managed and elevated wholesale distribution network. I was quite curious when I went to America because I know that, that was a callout that we needed to work on some of our positioning. This was over 5 years ago. So I was quite curious to see what I saw, and I was very impressed with the stores that we have there in key locations and most of them actually are in the new store concept. I think the wholesale transformation has been very well managed.
On top of that, our partners are really excited about Daniel, and the anticipation is building for his first collections next year. We intend to capitalize this -- on this, and we see opportunities to develop a stronger presence in key wholesale doors, particularly to attract new customers as we grow our business in accessories and womenswear.
In the medium term, we expect our wholesale penetration to decrease over time to 15% of our full price sales as our growth outpaces wholesale.
As you know, Burberry has a strong reputation for being a digital-first company. We can achieve a strong level of productivity and also greater integration into the retail network through stronger omnichannel capabilities. We have a significant opportunity to improve our e-commerce performance. Following the removal of markdowns, we are underpenetrated in this channel relative to most -- to some peers. Our target is for e-commerce to represent 15% of our sales in the medium term and around 20% in the long term.
And again, I think new product is what will drive more traffic to our e-commerce platforms. We also have a comprehensive plan to improve conversion and drive performance. We will refresh our sites in line with the new brand aesthetic and place a greater focus on product desirability and innovation, and we've already started working on this. We will ensure we have a compelling product assortment for our website, and we will also invest in strengthening our local teams, especially in China and the U.S., which are our key digital markets. And we will also improve the customer experience.
We have an opportunity to deepen our relationship with our community through innovation, which we're strong at; building on successful initiatives like you might have seen recently with our collaboration with Minecraft, which was our first 360-degree gaming initiative. Since first teasing the collaboration, we've generated a huge level of interest from our consumers. And we have over 160,000 sign-ups already, which is an unprecedented number driven by a single activation. And we've also had a huge amount of downloads onto the game.
So moving on to into our core markets. Our goal is to accelerate momentum while maintaining a well-balanced portfolio. In Americas, we have great brand awareness, and the network is there. But compared to Asia, we're behind in terms of our refurbishments, as I mentioned. So we're going to accelerate our store refurbishments here.
In EMEIA, we've recently developed our business with locals post COVID and already have sales as tourists started to come back, which is great. But similar to the Americas, we need to speed up our refurbishment program to be in good shape when the tourist flows fully resume.
In Asia, we have a significant opportunity to further scale our business. China is a very important market for us. We have a very well-established network here with some recently opened stores in impressive locations such as Plaza 66 in Shanghai. Our stores in China consistently rank among the top 7 by revenue in key luxury malls. We will continue to focus on the market, ready to capture growth when the region fully reopens.
Finally, I believe we have a clear opportunity to grow our business in Japan, which is relatively smaller at the moment, and our focus on accessories will support us gaining market share in this region.
So I talked in detail about what we're going to do about brand, product and distribution. How we do it will be just as important, and execution is the key. We are already working on initiatives to ensure seamless execution to our plan, including improving our product development capabilities, ensuring a better connection between design and merchandising and simplifying our key processes to ensure adherence to the critical path and drive cost efficiency.
I'm going to provide more detail on this at our prelims in May.
With responsibility, it will remain at the heart of everything that we do. Again, I've been really impressed with Burberry's purpose and values and committed to making a positive difference. I believe that we have an opportunity to make more of this in our communications and our product initiatives. Customers want to know these things, and it's really part of what connects them to the brand.
We will continue to deliver on our bold sustainability commitments. We will also ensure our people are supported and inspire to deliver, and we will continue to positively impact our communities.
So in summary, we have a very strong platform for growth. We have a clear plan to achieve this, focusing on brand, product and distribution, and it will be supported by a relentless focus on execution. We have a very talented designer, and we have a very passionate teams, and there is a real energy and excitement at the moment around the business.
In the medium term, we will target revenue of GBP 4 billion, in line with our existing guidance of high single digit revenue CAGR. And in the long term, once brand and product initiatives are firmly in place, we can and should be a GBP 5 billion revenue brand. Obviously, there is currently some uncertainty in the external environment. However, with our plan and good execution, I believe that we can still grow and accelerate and achieve our ambitions.
These are the targets we will measure success by in the medium term, and I'm going to update you on that as we progress. And as I've said, we're prepared to invest behind this plan.
We're really writing the next chapter of Burberry's story. I'm confident that we can deliver on this plan to drive revenue growth and acceleration and realize Burberry's potential as the modern British luxury brand is very exciting. And thank you very much, and we'd be delighted to take your questions now. Thank you.
Okay. Thank you. Most have -- the one thing that I didn't actually practice was trying to recognize people from this distance. So apologies if I don't recognize everybody. I'll take Antoine first, then I'll go to Louise. Thank you.
Yes. It's Antoine Belge of BNG Paribas Exane. So I assume we are limited to 2 questions. So the first one is short term, the second one more longer term. So short term, the organic growth was 5% in H1. You didn't reiterate the high single digits for the year. So should we assume that this target of high single digit is no longer valid for the current year and maybe explain what are the current trends in China? You were flattish in the quarter, but apparently, some of your peers mentioned that it worsened in September and October. And any comment about the rest of the world so far?
And the second question longer term. So GBP 4 billion and then GBP 5 billion, is it possible to have a sense of what medium-term means in terms of years and longer term? And on the 20% plus, plus, plus, I mean I don't know I'm just throwing numbers here, GBP 4 billion with -- I don't know mid-20s be a good proxy and then GBP 5 billion high 20s or any sort of like new trend.
Thank you. So I'll take the comment on China and the current trends there. As you know, we had a challenging first quarter. The second quarter, we had a good recovery, and we ended up flat. It's still challenging for us. As you know, there's -- the foot flows in the malls are not as good as they could be. We did see a slight change coming through September or October. But again, we're confident that things will hopefully open up and improve in the coming months.
In terms of the timing, we see medium term as 3 to 5 years. And I felt driving this strategy, it was also really important for not just for you but also for our employees to see the ambition that the company should have without a time line. And Julie, I don't know if you want to comment in the short term.
Yes. So just in terms of the guidance, clearly, we've -- the underlying business is growing strongly. So as we mentioned, if you strip out China, which has been the most disrupted by COVID, then we've actually delivered 16% in the first quarter growth and 15% in the second. That gives us the confidence, together with the strategic direction we're going in, to be able to grow the business strongly in high single digits.
The caveat we've put on the outlook statement was simply because of the disruption in China. We saw a good recovery in the second quarter. However, in October, it got slightly worse again. More recently, they have relaxed some of the quarantine rules and have also reduced the degree of mass testing in China. So it's interesting. There's not so much store closures that are causing the disruption, but the testing actually causes people to be reluctant to go out, and that's what's causing a little bit of turbulence.
But with that underpinning it, we believe that come the following year and full year '24, we should see a recovery of China. This is the view that, gradually, we'll have a more pragmatic approach to it. And therefore, we see the high single-digit growth rate coming through because that's how the business is performing on an underlying basis.
I think in terms of the question on the margins, we're fully committed to delivering around the 20% margin next year, which was our promise to the market. We're fully committed to delivering that. And we can accommodate, I think, removing the markdown, et cetera, the gross margin being stable. We can accommodate the rises we've been having in marketing and visual merchandising within that number. So we see has been around 20% next year.
And then the idea is that because we've got the cost base under control, we're focusing on the commercial activations, the commercial front end on the store rollout. You get leverage coming through the P&L, not surely dropping through to the operating margin. And that's what drives above the 20% margin accretion as you go through into the next phase of the strategy.
All right. Just maybe a follow-up. So what you're indicating is that there is no special sort of like timing of the margin expansion, I don't know, more subdued in the first years and an acceleration in the outer years.
I mean, we think it will naturally evolve. I mean as I mentioned earlier, I think the platform has been there. We have also a very good base of carryover product. So I think in my opinion, obviously, we're going to invest a little bit more in marketing here. We don't see that will have a huge impact on the margin. And we think it will just organically lift up as we improve our productivity.
And to Louise.
It's Louise Singlehurst from Goldman Sachs. If I could start with Jonathan first, please. Just in terms of the broader -- the bigger picture in terms of the goal and the ambition setting, is this more about the growth of Burberry? Or is it looking at the categories versus peers and where you think you're going to be in the market. And I suppose if I was to pick on one area to have a largely power brand, what's the confidence in terms of driving 50% of the business coming from accessories?
And just related to that, does accessories give you more opportunities to drive the brand heat a more frequent or higher frequency basis? And are we likely to see any new product from Daniel Lee ahead of July, I guess, given the timing of the fashion calendar?
Yes. No, great question. I mean I think as I've sort of touched on right at the beginning, we have an opportunity because we have a strong ready-to-wear business. I think this is a great position of strength for us. Yes, I'm very lucky also that the journey and the work started with accessories 4 years ago. I think it's really important to call out what our accessory offer was before that. It was very, very weak. And now I'm -- looking around what you can see here, we're in a good place with our accessories already. I believe we can really, really develop on that. I think we can really accelerate on it. This is one of the key decisions bringing of Daniel in because his talent on this is unquestioned. We already have a high level of expectation. In fact, last night, I left and I saw our Head of leather goods. And I said, yes, how is it going. Can you take everybody? She's like, I'm so excited that the designers are excited.
So I'm confident that we're going to have a much more -- even more compelling offer than we have today, which we will launch in February. So I'm very excited about that. And yes, for me, we are -- of the business that we're in is product, and we're retailers. And all of this, this isn't just me but all of us see opportunities across all of our product categories. And accessories, I really think we can accelerate. I called out shoes here. This was one of the first things I noticed and one of the first meetings that we had on shoes. I've learned very quickly people talk about what you say in the meetings, and it quickly got around that Jonathan sees this huge opportunity in shoes. So it's really, really exciting because we've got the strong ready-to-wear offer, and we can accelerate the accessories.
And with regards to seeing, yes, we have our first show in February. But that's not to say, we're confident that we can continue. We've had 11% growth this quarter on our bags, and we will -- we believe that we can continue that momentum as well.
My second question is for Julie, if I may. Just in terms of -- just back to the margins. Can you just talk about the opportunity within the gross margin, I guess coming back on the accessories expansion? I presume the bulk of the margin uplift now comes from pure operational leverage with the store productivity. But is there scope as well in there for the gross margin? And I would like to take this opportunity to say thank you very much for taking my questions over the last few years. So I thank you there.
Thanks, Louise. It's been an absolute pleasure to work with you all. It really has. So in terms of the gross margin, I think as you know, one of the pressures on the gross margin is coming through inflation. And so even just in this first half, we had 70 basis points of headwind coming just from inflation. This was freight, logistics, et cetera. So actually, I think we -- and credit to the team and the combination of commercial, finance, merchandising, we've been able to hold that gross margin stable against these considerable headwinds. There's also a headwind whenever we've got lockdowns in China. There's a major headwind coming through there on the gross margin and the operating margin.
So I think we've actually done well to maintain it because we see inflationary pressures going forward on cost of goods in the region of high single digits. Actually, the business has got to drive efficiency and also look at the pricing of categories to be able to hold that gross margin stable in view of the macro situation that we're dealing with.
So I would say holding the gross margin stable but at the same time leveraging through the top line into the operating margin is the key to success. And as Jonathan has mentioned, as you know, we've done a lot of work on rationalizing the cost base. We've put more money into commercial-facing investments such as marketing, visual merchandising, the store network. The idea is now with the high single-digit growth rate on the top line, you can leverage that operating cost base.
And store productivity is one of the reasons we've called this out is the 25,000 per square foot, that is the major unlock as the operating margin leverage using -- because we've got a really good store footprint, as Jonathan mentioned, A lot of work has been done on the store front. we're in exactly the right locations now. Once they are refurbished and we've got a more homogeneous representation of the brand, it will drive the retail productivity, and that drives the operating margin. That's the biggest ticket.
And there's no margin reset for next year in terms of everything that we see in the guidance looking forth. That was obviously one of the investor queries going into today that we might have to see elevated investment for the top line for 4 month. Is that not the message?
No, because we've actually allowed and you probably saw from the chart on the marketing spend. We've accelerated the marketing spend already, and simultaneously, we're moving the margins upwards. And so therefore, you can see we can actually leverage the margin and deliver a higher level of marketing and visual merchandising spend, which is what we're doing.
Okay. Maybe we'll get down the line actually now, Rog, and Chiara and Zuzanna.
This is Roger Fujimori from Stifel. I have 2 questions with a new lease products, I think arrive in stores next summer. I just want to confirm that in terms of managing the transition of collections if we should expect a relatively smoother transition versus the last one with trenches a few years ago.
And the second from -- I think from your presentation in terms of 70% gross margin being sustainable and everything we've heard in terms of price value equation versus competition after elevating AUR so much, the quality of the wholesale network and the outlet footprint, are you happy with the current situation and no further rationalization needed or investment needed on those fronts?
Yes. In terms of the product transition, and this is something actually I've been -- we all felt and we still feel that the platform that we have here is strong and something that we can build on. I believe, previously, there probably was more of a flipping and the changing of the new inventories. We do not intend for this to happen. And I've been very impressed by Daniel's maturity. Looking through the collections that we have, the carryover that we have, we've gone through it together with our teams, and he's got a very good outlook on that, recognizes it, sees that it's a base that we can build on. And this is something that we can organically change and improve as the seasons progress.
So in terms of that, we're not expecting -- we're expecting this to accelerate growth. In terms of the gap that we're obviously going to have between now and his first collection sitting in the store, I mentioned earlier, we've shot -- we've already shot our new campaign that we'll show you in the early new year. This was shot by Daniel with the existing product that we have with our great trenches. And I think that shows -- I think that actually tells something. To be honest with you, I think it's a great thing to do. And this is going to be a really strong brand campaign.
And I think that will get people -- it's almost anticipated because people are going to see that. They're going to see -- I promise you, you're going to see an incredible strong brand image that will relate to everything I've taught through there. I think this is going to get people really starting to see they're already excited here be more excited that. Then we'll have our show. And I believe we have the right offer today that we can continue to sort of drive that through. So I'm confident about that.
In terms of the margins, I think we've been managing the margins very well, the gross margins. We're also looking not just working on price increases where we have the opportunity to increase price increases, but it's been done and well managed. I also see some opportunities on cost of goods as well, which we can develop on. But at the same time, we're looking to elevate the product and elevate the quality further as well. But this is -- yes, this is something that I think is going to be very enjoyable for us to work on.
Concerning the outlets, I mentioned this last time. I think we have the right number of outlets. We're not out of line with many of our peers. I think the network is very well managed. As you know, we are now not marking down our inventories. So we need a channel to work through our discontinued product, and it's working well. And obviously, as our full price business grows, that will achieve the mix of our sales on outlet versus our full price business. But I'm actually pretty pleased with the way it's managed, the quality of the outlet network and the offer that's in there as well. I think it's an important channel for us.
Chiara.
Chiara Battistini from JPMorgan . The first one is on your stores and the sales density target of 25,000. Can you just remind us what the starting point is today on that and how you're thinking about footfall versus conversion versus basket going forward to get to the 25,000 per square meter.
And the second question on Daniel Lee, you mentioned that you've been very impressed by how much he's already done since joining in the last couple of months. So has he been mainly working on the product or also looking at the stores, providing comments on this refurbishment program, the marketing campaign? To what extent he's been exposed also to these activities?
And just on the product, just to make sure we're clear, the leather goods offering, the current leather goods offering is the starting point on which is going to evolve, but not revolutionize at least in the first couple of years.
Yes. Great questions. as densities are concerned, we're not going to share with you our current densities, I think people are pretty much aware of what they are. We're making good progress in the last 2 years. Our densities have been improving. I think you're -- also where some of our stores are quite big. But if you go to Asia, for example, and in many of our stores, we actually have very strong densities. So we have the stores with density of GBP 40,000 a square meter.
So we are already driving productivity. We will -- as I mentioned earlier, I'm very happy with the size of the network. And going forward, we'll be sure that the openings of our -- any new stores that we have are in the sizes that they need to be. We feel confident about the productivity increasing because of the improved offer, because of the better focus on retail quality and standards that we have in the company now.
This, to me, has been one of the most impressive things I've seen since I've been here. I think the quality of our retail teams, some of them you'll meet today when you're buying your scarves, the quality of our retail teams are very close, if not best in class, in my opinion. And we're -- they're very focused on productivity. They're very focused on clienteling, which I think has been good work that's been done, particularly in the last few years.
So as far as the densities that will be driven by the better offer, the improved qualities in our retail teams, the improved focus on network size in terms of store sizes. And obviously, we believe we've made these moves to create brand heat and to create and drive extra traffic to our stores as well. So there's a number of combinations here that give us the confidence that we can achieve this.
In terms of Daniel's focus to date, again, a very unique talent. And since announcing him, it's been made him clearer to me that this is very exciting because our wholesale partners have reached out to us super excited. Our Head of Korea was in a meeting with the landlord in Korea, which also is a very strong and important market for us. I didn't call it out, but our Korea business is incredible. And she was in a meeting with one of the landlords when it was announced, and the guy was jumping off the seats with anticipation. So everybody is really, really pleased about that.
But he's also had -- he's also got a very strong -- I touched that 360 vision. And I think this is really important in today's kind of modern luxury retailing, where it's not just about product in the stores, it's about how we're communicating them. I think if you look at some of the work he's done, it's building on high desirability in terms of products and product messaging and then activations around that.
We weren't -- we're not going to be doing new store concepts. He's been in the stores for -- I know that when he went to the Sloane Street store, he was in there for 2.5 hours with our teams going through it and making just really good callouts about what can be done. But it's not about changing the concept. It's about evolving it, making it feel more in line with the progress that we're getting. So he's really involved in that.
And I mentioned earlier on the -- we shouldn't underplay the importance of branding because when we get that branding right, that is also a really important and -- I don't often use the word call, but I believe that when people see us, when you're playing into Heathrow going forward you're going to go, that is a core brand. That is a core British brand, and that's going to drive this store. And again, he has a very strong touch on that.
And then lastly, on the leather goods, we have the platform here. He's seen it. He likes it. He thinks that it's a platform that we can develop on. And we believe that we're going to get an even exciting offer to layer up on top of that. So it will be a development of our existing offer.
Zuzanna, next.
Zuzanna Pusz from UBS. I have 3 short ones. So maybe just a follow-up on the store concept. I don't know, would you be able to perhaps guide to CapEx in the midterm. And I think previous years, part of the midterm plan, I think the CapEx was meant to be around, I think, GBP 250 million or so per annum. But I don't think it's ever actually reached that level. It was sort of consistently lower every year. So maybe if you could give us some sort of at least an idea around the level we should expect. That's my first question.
Second question is specifically on the sort of ramp-up of SKUs from Daniel Lee and stores we should expect over time? Is there any -- I know it's probably difficult at this stage. It's still early but if you could give us some idea, first quarter, what percentage of SKUs would come from the new collections and how this would progress over time?
And finally, just a follow-up. First of all, I wanted to say many thanks on behalf of everyone for disclosing the online penetration and sales densities. It's very helpful. It's been always our dream. If I could only add one dream to the list that will be marketing as a percentage of sales. And -- but just to clarify, will you be disclosing this every year? Or -- just so that we can sort of manage our expectations?
Okay. Well, Julie will start on the CapEx, and I'll go back to the interesting question on the digital penetration.
Yes. So -- in terms of the CapEx, there is a step-up. The store -- the first of all, the stores, we've been running stores is around 110. We're going to move the store spend to about 120 because we want to accelerate them to finish them all by full year '26, basically. So that's the idea of the stores. In terms of the IT spend, it's fairly consistent. That includes digital capabilities. On top of that, we're also accelerating ESG over this period. And then finally, the final piece is in office refurbishment. So we're going to refurbish the Horseferry House building in line with the plan that we've been developing now for a little period of time.
So there will be the GBP 200 million, I think, as Jonathan mentioned, I would expect as the Horseferry House finishes, which is probably going to be a 2, 2.5-year program, then it will start to come back. But stores, we anticipate staying at around GBP 110 million for a number of years as we push the new store concept through the network.
Great. On the SKU question, as you know, our business, we've got a very good blend of this business because carryover and permanent product replenishment, it's -- when you've got a strong business there, it's very good for margin protection. It's very good for iconic product and things that we can build on. The trench offer that you see here is incredible, handmade in the U.K. So it's got some really great product that, of course, we need to keep and develop and do more storytelling with. So that's 50% of our business.
As we then work with Daniel , you're talking, obviously, the newness side on that, the seasonal side will be around about the 50% mark. And we also believe now that it's important for us. And this is something also that we've learned is making sure that you're getting another help for this productivity goal that we have is not overbuying in terms of ranging of SKUs but actually reducing. And we've been doing this over time, so reducing the SKUs, getting the debt there, believing in the product that you're buying and you're putting into your stores, making sure you've got a greater consistency across the regions, another area that we're working on. And that will help us have a stronger, more consistent messaging but also help -- I believe it will help us drive the extra level of productivity.
But certainly from -- I think it will be a nice blend and a nice balance. And again, just to be clear, Daniel is very impressed with the core product base that we have. And it was something that he mentioned to me very early on about this just iconic product we have and probably that we have an opportunity to talk about it more, and I touched on the trench campaign that we're about to be having going forward.
In terms of e-commerce, I mentioned earlier, we are strong digitally. We have good capabilities. We have great teams. But I think it's a really important metric to have. And it is a metric, as you know, that other brands share. We won't be sharing it quarterly. But as I mentioned earlier, annually, we will be coming back and showing you how we're tracking against these goals that we're putting in place.
Next I'll go to Thomas. He's near the mic, and then we'll go to the other side as I've been a bit biased over there.
Jonathan, Julie, Thomas Chauvet from Citi. Two questions. The first one, going back to the long-term EBIT margin target of 20% plus, plus, whether that means mid-20s, high 20s, time will tell. But is that just driven by OpEx leverage, Julie? Are you saying the gross margin of Burberry will be in 5 years still at 70% to drive that, whatever high 20s-percent EBIT margin? I would have thought the rebalancing towards leather goods, accessories is a much bigger scalable business there would help the channel mix changes towards more retail, more e-commerce deemphasizing wholesale would have driven gross margin.
As you know well, Jonathan, in the industry brands that have 30% or close to 30% EBIT margin have well above 70% gross margin. That's my first question. And should I go over the second?
Okay.
And then on the second is the capital allocation framework. Obviously, as Julie is leaving, you've joined the firm, there has been a few management changes at Burberry. Do you feel that the capital allocation framework should change between organic investments, dividend, buybacks, potential for acquisition? In particular, is GBP 400 million, the new normal, perhaps for share buybacks in Burberry compared to the GBP 150 million you used to do?
And then acquisitions, do you feel you have a lot on your plate in the next 3 to 5 years on Burberry that Burberry doesn't need to utilize that cash perhaps to complement its portfolio with the [indiscernible] brand and no longer be a monobrand company. We've seen obviously in the industry a lot of monobrand company acquiring businesses in the last few years.
Can you talk about the margin?
Yes. Let's talk about the margin. So I think initially, we believe, 70% is the target. The reason for this is the pressure we're receiving through logistics, freight and as inflation also works its way through raw materials in the supply chain. So clearly, we have got an opportunity to drive further efficiencies in cost of goods and our supply chain had, we're definitely going to be able to do that.
The product, as you say, the more we move towards the leather range. Initially, as you know, we invested in the leather goods and capability, and we didn't move the prices commensurately. So initially, that was a headwind to the gross margin. We've now sort of stabilized that. Leather prices have moved upwards. So we've got a good range of gross margins now within the product categories. They're broadly in line.
I think there is an opportunity going forward certainly. As we move on this journey, there's probably further opportunity with price, we would say, as we go through. And as you say, as leather increases as a proportion that could drive further efficiencies in the supply chain and further gross margin improvement. But at this stage, because of the inflationary headwinds we're facing, we prefer to leave it at the 70%. That's the target of around 70%. But could we do more over time, over a longer period of time? I think, of course, we could.
Yes. And in terms of the capital, the model that Julie and the team have put in place, I think it works very well for us. Obviously, my callout potentially would be do we need more CapEx to increase the store refurbishments? I think our time line is about right. We actually probably couldn't do any more, we couldn't do it at a faster pace. So I'm comfortable with that. Our marketing spend, we all agree, it makes sense to step it up for the next 2 years. But again, that's in line with our peers. So I'm personally comfortable with that. So I think that's in pretty good shape as well.
On the M&A side, got a lot to do. I'm 8 months in. We've been really working hard on this new strategy. We've been working on the teams with it and think that that's very much going to be the focus of us for the coming year or so.
And on the buyback, Julie, perhaps?
Yes. I think in terms of -- the priorities we've got, first of all, organic growth in the business, organic investment in the business. The second one is, of course, a progressive dividend policy. The third one is we do have occasional inorganic investments. You saw us buying out the China interest. We also did the acquisition of Burberry manufacturers to build verticalization and capabilities, another critical important enabler for the business. You may see us doing smaller amounts there in terms of vertical capability -- vertical integration capability.
And then, of course, the balance is effectively, we would use share buybacks or special dividends because the cash generation of the business, as you know, our cash conversion typically is in the 80%, 90% range. We would anticipate it being very strong. So as long as we feel we can fund all the things that I mentioned above, we would probably engage in further share buybacks. So I think that is going to be a choice as we move forward with the strategy. But I think the capital allocation framework puts us in a good position to do that. The priority number one is the business.
I think we'll go to Carol and then Kathryn. That would be great.
Carol Mathis from Barclays. I have just 1, 2 question on the brand image. Coming back to one of your slide, you mentioned that 70% of consumers now see the brand as true luxury. Can you come back on that a bit more what drove this improvement? Was it the outlet reduction, the expansion of leather goods, anything in particular? And then going forward, how should we think about the drivers as well for the future? I don't think you have mentioned pricing that much in the presentation. But should we expect still further brand elevation and so higher pricing points in the future to still drive this improvement in the brand perception?
And I guess just one follow-up on that. Also on the store network, I think you're focusing a lot on the decent store conversion. But how about the location of your stores? Are you happy with where they are in, I don't know more so whatsoever? Are you happy with the locations? And do you feel like this is good enough to be really true luxury as you intend to be?
So in terms of, I think, the perception of the elevation strategy, I would actually -- and we haven't mentioned it today, but I would credit Ricardo for helping get this journey in place. As I mentioned earlier, 4 years ago, I was very much looking and impressed with the work that Burberry had done in terms of elevating the brand and really positioning it in terms of luxury positioning. So I think it was very well done. And clearly, it's been recognized. I may have mentioned this before, but I now recall 3 years ago being in China and just seeing Burberry's positioning where it was and its adjacency. And I think people now very clearly see the brand as being a luxury brand, which is fantastic.
In terms of pricing, I believe we are -- we're still on the elevation journey. As our customers -- and we have had a very strong growth, and a very strong focus through our retail teams on driving a high level of elite customers to our stores. And as you know, elite customers, the spend on certain thresholds are really important to luxury brands. And we've been growing that base really importantly, and the spending power there is strong, and we're able to retain them more and kind of work with them in a very dynamic way.
I think it's important with a brand like Burberry that we have -- and this has also been a trend with other brands where you have a very good mix of product. I mentioned earlier about what I call them traffic builders, so traffic builders that people can come into the stores, buy the small leather goods, the phone cases, et cetera, to bring them in, and then we can convert them up.
But at the same time -- and our leather goods has been best example here. We've been able to raise our leather goods pricing. A few years ago, we were tactical about it. As we were coming into that category, we kept our positioning fairly competitive, I would say. And in the last 18 months, we've been able to raise our leather goods prices with no resistance.
And I do think -- and I'm talking when you think about shoes, leather goods bringing in more desirability, I believe this will give us also an opportunity to continue to develop and manage our price positioning in the right way there but making sure that you've got to balance it. For me, it's all about making sure you have that balance. And I really believe about the next phase that we're going into, we will be able to cover that. We'll be able to cover a higher level of price positioning in places like leather good, especially in shoes. Our shoe business right now is mainly sneaker-focused. So as we go into the formal shoe area and the outdoor boot area, this will mean a lift in prices there. So a good opportunity there.
In terms of the store network, since we last met, I've visited many of our stores. And I have to say, I've been very impressed by our positioning, and we have to hold those positionings because they are in Los Angeles, Rodeo Drive, for example, New York, 57th Street. And then going on to -- I mentioned Korea. For me, Korea was the big callout. Everybody knows that this is a very strong market for luxury. We've had incredible growth in Korea, and our positioning there is second to none. So I've been really pleased with it.
So we will, in some areas, more in probably Southeast Asia, we will look -- and this is what we have been doing today. we haven't been able to give you too many of the results of the new store concepts because a lot of them have actually been -- because we've been relocating in some malls or going to a different mall, a better mall, which has also sort of helped this innovation journey. So I would say, overall, the satisfaction is there.
When we see an opportunity to go into -- Shanghai is the best example. In Shanghai, we were in another location. And to go into Plaza 66, that is the best. I mean, I'm sure many of you know it. And we have this incredible space in Plaza 66 in Shanghai, and that's a clear brand upgrade and in line with our Asian strategy.
And Kathryn and then Piral.
Kathryn Parker, Jefferies. So my first question is just on the path to the GBP 4 billion in sales. I understand that space growth will be largely flat. But could you talk about how you expect the mix of price mix and volumes to contribute.
And then my second question is just on personnel changes. And then I wondered if you had any other key hires to call out perhaps in the marketing team or in the country teams. And if there's any gaps in past now that you're still looking to fill or replace.
So Julie will take the path to the GBP 4 billion.
Yes. So in terms of the GBP 4 billion, we see it being a combination of the 2. I think, first of all, as Jonathan mentioned, the price is an important part of the brand elevation. And we've seen actually AUR has been a big contributor to the underlying full price growth of our business to date, and we envisage continuing on that journey. The only reason you haven't seen it coming through in the absolute sales numbers reported is because we talk the markdown out of the business, which is with over GBP 200 million business to Burberry previously. So that was a significant headwind. That's gone now.
As Jonathan mentioned is what's behind the company. So I think a combination of price and volume. But certainly -- and it's not like-for-like price. What we've been doing, and we'll continue to do is as the product elevates, as the quality of the leather changes, as the design changes, that's what commands the higher price point. So it's really a change in the product that drives it.
In terms of the personnel, I mean, I touched on it. In terms of the retail side, been very impressed with the teams there. The other callout for me is that, obviously, the key to this is having strong regional retail leadership, and we have some really strong leaders in our retail networks. And some of them, if you think of just calling it out -- forgive me for not saying it, but think of our teams in China that are incredible, very passionate about the brand but they can't leave China to get to connect with us. I've not met my lead President in China. So she's doing a fantastic job in very challenging circumstances, but really, really managing the teams in an incredible way. So this is important.
And for me, the great thing is we have the network. We have the people. When we continue to evolve that nothing here is broken by any means, we have an incredible platform. When we continue to build on it and improve it, these guys are ready. So it's very encouraging. And certainly, the motivation for the teams and the focus is already there. So it's very pleasing.
I'm going to go to Piral. Then I'm going to go to Anglo who's had a good workout today by putting her arm up and down so many times.
Piral Dadhania from RBC. Two questions and a follow-up, please. If we could just talk about handbags and leather goods. Obviously, a lot of work has been done in recent years to improve the offer, and you aim to add more layers on top of that. Could you maybe just talk about life cycle management? In years gone by, we've certainly seen Burberry come to market with a lot of newness in the leather goods category, but what's perhaps been a little bit not executed as well as the life cycle management of those handbag platforms. So Jonathan, what would you do differently to capitalize on that?
My second question is on the U.K. VAT refund disadvantage. So obviously, the U.K. government keeps changing its decision around whether to allow consumers to get a refund on their purchases. What actions are being taken as traffic is predominantly going into Continental Europe for luxury travelers to ensure you capture the right share of wallet out there?
And then the third question is a follow-up just on store size. Could you perhaps tell us what the optimal store size you see as being appropriate for the new concept for Burberry?
So thank you. On the leather goods. I mean, again, just to repeat that this is a journey that really started 4 years ago. So I think in that it was probably a little bit of test and learn. So -- but now I believe that it's actually stabilized. I mean we called out quite a bit today about our Lola group and our Lola family, big successes on that this year. We had a big marketing push on that, that was successful.
Now -- and it's really -- you can see here the TB, which is a part of our Frances bag here, which is part of our TB line. So it is quite consistent. Always in any leather goods business, people want to see refreshment. I think it's really important to make sure that the families that you have are relatively stable. Some of them now, as we've had that test and the process, they have been involved. But our leather goods business is actually quite well managed. And I think it needs to evolve but in an organic way without obviously damaging the margins. And as we build on to that, I'm quite confident that we will create stronger icons that will have a high level of life cycle. So that's the objective there.
In terms of the optimum store size, I do have a number in mind, I don't think I'll share it. But it really depends on where those locations are. I think it's great. London is a key city for us. We need to have flagships here. This is our home market. And we -- in the summer of next year, we'll be opening our New Bond Street store, which will be fantastic. But as we go into some of those areas that I mentioned before, maybe some of the cities, possibly more in America, there is an opportunity for us to make sure we've got the right size store that we can manage in the right way. But generally speaking, flagships, we need -- they need to be bigger. They need to make statements. But when you go into -- again, I mentioned Asia, you probably only need 300 to 400 square meters for stores like that, and this is really where we are at the moment.
Okay. So I'll take the VAT retail export scheme. So we were -- this was a very, very big enabler for attracting tourists to the U.K. No question. And just in terms of providing you with a little bit of context around this, we have seen a return of tourism, not like it was before COVID, but we've definitely seen a return of tourism. So U.S. tourists, for example, because of exchange rates have been coming into Europe more so. We've seen a 76% Europe versus pre-pandemic levels. But in the U.K., it's 41%, definite differential. And similarly, with Middle Eastern customers, again versus pre-pandemic, 105% in Europe but 51% in the U.K.
So we're seeing a definite difference in the move of people towards Continental Europe, which is really, really disappointing. So what we'd like to see is to work with the government, that [indiscernible] is being removed, but we'd like to work on an incentive scheme that encourages tourists back to the U.K. because it really helps with not just luxury fashion shopping but also other industries like hospitality. So we're very committed to working the government to ensure that we can do that.
And in terms of the second part of your question, we are attracting those tourists who previously did come through to the U.K. They are now going more so to Paris and Milan. Obviously, through our CRM database, we can see this happening. And therefore, stores being attractive, the branding that Jonathan has mentioned, the product line, these are big attractors to the Burberry line, and people are moving at the moment, more towards Paris and Milan than here regrettably. We'd like to change that.
And the final question from Anne-Laure.
Anne-Laure Bismuth from HSBC. I have 2 questions, please. The first one is a follow-up on the question from Antoine earlier, about this target of GBP 4 billion sales in the midterm. Given that you have provided this target to convert all the stores to new concept by end full year '26. Does that mean that, that target of reaching GBP 4 billion sales is achievable in full year '26? Another way to ask that question is that the GBP 4 billion target is where the consensus you see in 2028? If consensus decided to move this GBP 4 billion sales target in 2026, would you consider consensus to be too optimistic?
And my second question is about price increases. What is your plan for the second part of the year? Would it be possible to know the kind of magnitude you plan to increase prices? And if you are planning to increase prices in Europe given the price gap between Europe and the U.S.
Yes. So in terms of the GBP 4 billion, we're anticipating this being over a 3- to 5-year period. It's based on a full year '22 base, and it's quoted at constant exchange rates. We -- I mean, in terms of consensus, as you know, I think consensus will move as the business improves. And I think just because we had the markdown coming out of the business, that was a drag on revenue. And therefore, I think it will take a little bit of time before consensus moves.
We're not going to go for a specific date. The reason for that is not about our confidence in the business and about the future of the business and what Burberry is capable of. Absolutely not because we're very confident. It's really all about acknowledging the macro situation that we're dealing with. And in particular, you've seen the volatility caused by the COVID disruption in China, going from 1% in Q1 to 11% in Q2. It's a very difficult world, and the major determinant of that change was actually due to China swinging so much between one quarter and the other. So that's caused this to say, 3- to 5-year time horizon rather than a certain date and time. We would, though, expect consensus to move over time, definitely. And then price?
Yes. In terms of prices, we're managing them on a regular. We track -- we have great models in place where we can track where we are regionally, as we mentioned earlier. We're raising them mid-single digits where we need to be. But it's really something that's organic. We have seasonal business, 4 times a year. We really go through a complete overall. But as I mentioned earlier, I think we've been fairly happy with the way that we've been managing our price increases today.
I think we've actually run out of time now. So -- and -- okay. We'll take one more question, sorry.
Charmaine Yap from Redburn I have 2 questions, please. First, in terms of brand positioning, Jonathan. Do you feel that there's still a discrepancy between the regions? Historically, U.S. is a little bit weaker and also relating to that, the pressure on entry price points in the U.S., do you think that's a market factor? Or is it a little bit on brand-specific issues?
But also in terms of -- the second question is with regards to your commitment to operating margins. Because of the volatility in macro, for example, if sales were to slow temporarily before accelerating, are you still happy to commit your level of investments and suffer maybe short-term temporary margin pressure before recovering again?
Yes. In terms of the brand positioning, it's a very good point. I think great work has been done. I think the perception of Burberry now as a stronger luxury brand, our positioning wherever you are globally is exactly -- more or less exactly where it needs to be. So I'm happy with that.
I think one of the callouts here is, which we have mentioned is if you look at the image of the brand in terms of -- the store concepts are very modern, they're in line with where going, where we need to be. And we've done a lot more of those in the East versus the West.
So we believe that as we go into next year, we're going to be -- at the end of this financial year, we're going to be at 35% fully refurbished, continue accelerating on that. A lot of -- obviously that will come from Europe and America. And I think this will help the brand perception.
But certainly, as Julie mentioned earlier, we've seen a big upgrade in our ticket price sales in the U.S., for example. And actually, the shift and mix of our business in the U.S., ready-to-wear versus accessories is quite a -- nicely weighted towards the accessories actually. So already, people are seeing us as a leather goods business there. And then when you go into Asia, for example, it's a slightly different perception because people see us as this iconic ready-to-wear offer. And that's where we probably got more work to be done in terms of really pushing and marketing the new offer that's coming through that very excited about through the new accessories offer.
So I'm pretty happy. There's little kind of quirks in each region, but -- and this, for me, I touched on that earlier in terms of the buyers. I do see an opportunity for us to have, and we will have now much stronger consistency of what you're seeing in our stores here will be -- but we need to make regional adjustments for sure but making sure that what we're promoting, what we're talking about will be consistent across all of the regions and markets.
Okay. Yes. So in terms of if sales which is slow and then there's an acceleration in the impact on margins, I mean our assumption is that, clearly, we've experienced in this first half considerable disruption in China. Our assumption is next year that this eases and that there is a real -- of the mass testing, et cetera, and the stores being closed. So that is our fundamental assumption. With that assumption in mind, we can accommodate the increases in expenditure, the store refurbishment program rolling out, the extra depreciation together with the marketing increases we've done this year already, we can accommodate that within the aspiration of a 20% margin in full year '24.
If sales go into reverse or if you're dealing with a very difficult macro situation, then I think I would refer to what we did during COVID. I mean during COVID, we had a very difficult situation on our hands. Our sales declined high single digits, but we were actually able to hold the margin. We kept the investment in the commercial front line, but we took some additional cost outside of -- in terms of enabling our support areas in the business and actually managed the margin through that very, very turbulent period.
So if the worst comes to the worst, I think we would have a solution, and we would be able to manage the businesses we did during COVID. But at this point in time, given our assumptions, given the macro as it stands at the moment, we can do the investment and protect the margin.
Okay. Well, then I apologize for those people I didn't get around to. And but I'm around for the rest of the day with Lauren and Ryan. And so if you fire your questions across, I'm more than happy to take them. But I'll leave it over to Jonathan to finish up.
Well, thank you very much, everybody. I hope you've enjoyed it. It's been great. And I'm sure I'll see some of you after the presentation. Julie is not leaving yet. So she's still with us. She's been an incredible partner for me as well. But thank you very much, and thanks for your support.