Hugo Boss AG

XETRA:BOSS

Earnings Call Transcript 2021-Q1

[Operator]

Dear ladies and gentlemen, welcome to the HUGO BOSS First Quarter 2021 Results Conference Call. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Christian Stoehr, Vice President, Investor Relations, who will lead you through this conference. Please go ahead, sir.

[Christian Stoehr]

Yes. Thanks very much, and good morning, ladies and gentlemen. Welcome to our first quarter 2021 financial results presentation. Today's conference call will be hosted by Yves Muller, CFO of HUGO BOSS and spokesperson of the Managing Board. Before we get started, allow me to recall that all revenue-related growth rates will be discussed on a currency adjusted basis, unless otherwise specified. [Operator Instructions] So let's get started. And over to you, Yves.

[Yves Muller, CFO & Member of Managing Board]

Thank you, Christian. And good morning, ladies and gentlemen, and thank you very much for your interest. In the next 20 minutes, I will elaborate in detail on our operational and financial performance during the first 3 months of fiscal year 2021. I will also outline our broader expectation for the remainder of the year and for Q2 in particular, notwithstanding that the environment we are operating in remains uncertain for some areas of our business. From our quarterly statement earlier this morning, I'm sure you have noticed that we have seen a solid and promising start to the year, both from a top line and bottom line perspective. This is even more worth mentioning as we had to cope with the ongoing implications on the pandemic during the first quarter, especially when it comes to our home territory, Europe. Therefore, let me start by reviewing some of the key developments we have observed around our top line in Q1. Starting with a quick look at our store closing rate. With an average of around 25% of our global store network being affected by temporary closures in the first 3 months of 2021, the lasting implications of the pandemic continued to put a strain on our brick-and-mortar business. This was particularly true for Europe, by far our largest regions, where the store closing rate remained elevated at a level of almost 50%. Unsurprisingly, the performance of key markets, such as the U.K., France and Germany, remained muted in the context of persisting lockdowns. Against this background, I'm all the more encouraged by the further progress we have made in those markets where stores have already reopened and where we are witnessing gradual improvements in the overall retail environment and consumer spending, supported by a strong rebound in local demand. First and foremost, this includes a number of markets in Asia Pacific, such as Mainland China, Australia and Taiwan, but also in the Americas region, and here, in particular, our important U.S. business, as well as Latin America. In addition, markets like as Russia and the United Arab Emirates are also progressing strongly with their overall business recovery following the COVID-19 restrictions. I am also pleased to report that momentum has further accelerated along our strategic initiatives. In particular, growth in our online channel has strongly accelerated, with revenues up 72% in Q1, and our casualwear offerings for both brands, BOSS and HUGO, have meanwhile returned to growth. As a consequence, we were able to limit the overall sales decline to only 8%, with group sales amounting to EUR 497 million in the first quarter. While this represents a further noticeable pickup in our overall business recovery as compared to previous quarters, let me be also be clear that the first quarter benefited to some extent from wholesale delivery shifts related to our spring/summer 2021 collections, something I will elaborate in more details in just a few minutes. Before we do this, let's take a closer look to -- at our geographies. Starting with Europe, where the lasting implications of the pandemic continued to weigh on our business, resulting in an overall sales decline of 17% in Q1. In addition to far-reaching temporary store closures, persisting social distancing measures and travel restrictions continued to limit the region's overall recovery. This was particularly visible for markets such as the U.K. and Germany, which both recorded mid-double-digit sales declines in own retail, reflecting the majority of our brick-and-mortar stores being closed throughout much of Q1, while France and the Benelux countries were able to limit their sales decline in own retail to the low double-digit range, I am pleased to report that several markets in Eastern Europe returned to growth in the first quarter. This was particularly true for our business in Russia, with comp store sales up mid-double-digits. Finally, we also enjoyed very strong momentum in the Middle East, as reflected by low to mid double-digit comp store sales growth. Moving over to our European wholesale business, which was up 6% in the first quarter. Now as I already mentioned a minute ago, this development mainly reflects the robust order intake for our spring/summer 2021 collections, which were delivered to partners during the course of Q1, as well as shifts in the delivery of these collections. Let's now move over to the Americas, where the gradual business recovery, which started in the middle of 2020, has seen a further continuation also in the first quarter of 2021. Thanks to strong sequential improvements in our U.S. business as well in Latin America, the region's overall sales decline was limited to minus 11% in Q1. Also, in the U.S. market, sales declined by 11% only, and thus considerably less than in previous quarters. This development was driven by a noticeably pickup in local demand, reflecting a robust rebound in consumer sentiment. And while our stores in and around important metropolitan areas such as New York City, Chicago, L.A. and San Francisco were still impacted by the lack of international tourism and the ongoing absence of commuting to and from work, a rebound in local spending helped many of our destinations in states such as Florida and Texas, but also in smaller urban shopping centers to return to growth. Let's complete the pictures of the Americas with a brief look at Canada and Latin America. Revenues in Canada was still down by a low to mid-double-digit percentage rates in Q1, reflecting lasting store closures in the wake of the pandemic, in particular in the province of Ontario. On the other hand, sales in Latin America returned to pre-COVID-19 levels, led by a strong recovery of our business in Brazil and Mexico. In Asia Pacific too, we successfully continued our gradual business recovery, with revenues up 39% in the first quarter. This development was primarily driven by Mainland China, where sales growth further accelerated to 98%, reflecting ongoing robust local demand and the successful execution of Chinese New Year in February. Compared to the first quarter of 2019, revenues in Mainland China were up 29%. Apart from Mainland China, also some of the region's smaller markets saw sequential improvements. While Japan limited sales declined to the mid-single-digit range, markets such as Australia, South Korea and Taiwan even returned to double-digit growth, supported by a strong pickup in local demand across all store formats. In other markets such as Hong Kong or Singapore, the ongoing lack of international tourism continued to weigh on the overall business recovery. Let's now turn to our sales channels. Starting with our own online business, which recorded its 14th consecutive quarter of strong double-digit growth. With sales up 72%, momentum further accelerated in Q1, driven by strong double-digit improvements at both hugoboss.com as well as at multi-brand websites operated in the concession model. The former benefited from strong double-digit increases in both traffic and conversion as well as the further geographical expansion of our flagship hugoboss.com over the last 12 months. In the first quarter only, our digital offerings were expanded into 12 additional markets, including South Korea, Russia and the United Arab Emirates, thereby increasing our global online reach to 59 markets. As we are committed to fully exploiting the tremendous potential of dot-com in the years to come, further rolling out our digital offerings across the globe remains on top of our agenda. In this context, the next wave of new markets to be entered into is already scheduled for later this year. The strong acceleration in online sales growth partly compensated for lower revenues in brick-and-mortar retail, which were attributable to a negative implications of the pandemic and the corresponding store closures in particular. Overall, revenues in own retail declined 14% in Q1 as compared to minus 24% recorded back in Q4. Wholesale, on the other side, returned to growth, up 1% in the first 3 months of the year, supported by the aforementioned order intake for spring/summer 2021. In addition, our wholesale business benefited from shifts in the delivery of these collections from the second quarter into the first quarter, aimed at ensuring product availability after the lifting of lockdowns. Now excluding these delivery shift effects, wholesale revenues would have declined at a low teens rate in Q1, and thus broadly similar to the overall performance recorded in own retail. And speaking about wholesale, I would like to point out that we expect rather more normalized delivery patterns for the remainder of the year. That said, it will be quite difficult to compare this year delivery schedule with the prior year period given the severe disruption we were facing in 2020 following global lockdowns throughout most of the year. Also, our license business recovered during the first quarter. With revenues up 5%, we recorded a solid rebound in revenues generated from the sale of watches and eyewear. On the other hand, our fragrance business still remained below the prior year level, as it continued to suffer from the lasting lockdowns in Europe as well as an overall soft travel retail business. Moving over to our performance by brand, where the positive momentum around our casual business continued in Q1. Overall, casualwear sales, which, as you know, account for around 50% of group revenues, returned to mid-single-digit growth in the first quarter. Sales for the BOSS brand were down 8% in total, with revenues for BOSS casualwear up at low single-digits. The latter benefited in particular from robust demand across all leisurewear categories, as well as the strong sell-through of our 2 latest capsule collections, co-designed with the NBA and the sportswear brand, Russell Athletic. Also at HUGO, our casualwear business recorded sequential improvements, with sales up double digits in Q1, thereby partly compensating for decline in formalwear sales. Overall, sales for HUGO still remains 6% below the prior year level. Now before moving over to the bottom line, let me shed some light on our Russell Athletic and NBA collaborations, with both kicked off very successfully during the first quarter. There is no doubt that collaborations like these will not only help us in driving brand desirability, but they will also further strengthen our positioning and credibility within the important casualwear segment. Starting with BOSS meets Russell Athletic, which was officially launched via a digital event at the end of March. A diverse range of high-profile celebrities and influencers, ranging from American model, Bella Hadid and Ashley Graham, to German NBA player, Dennis Schroder, created tremendous excitement and awareness for the street style inspired capsule, in particular, on relevant social media channels. For example, on Instagram, we saw a sharp increase in brand awareness and engagement, with more than 10 million total campaign impressions and a strong engagement rate of over 10%, resulting in more than 1 million interaction with our BOSS brand as part of the campaign. Speaking of engagement, our partnership with Russell Athletic and our strong focus on street style also helped us to gain relevance and drive interaction with younger generations such as Gen Z and millennials. In particular, in digital, we have witnessed a growing number of young customers making their first purchase ever at hugoboss.com. As a result, several styles and sizes were sold out within only a few hours as demand for the logo-inspired hoodies, sweaters, shirts and pants exceeded even our own high expectations. To conclude on our Russell partnership, also from a commercial perspective, the core curated collection has quickly proven to be a great success. Through our digital-first approach and our strong focus on dot-com and social media, sell-through rates in online have been 3x higher as compared to other collections since the official start on March 24. In mid-February, we also launched our first BOSS x NBA capsule in the Americas, with particular emphasis on our U.S. market. With more than 10 weeks on the shelves, feedback has been extremely positive across all channels, with sell-through rates almost 3x higher than usual. Also here, the collection has been particularly well received by younger customers, in particular with more than 50% of all customer aged 35 years and below. Feedback was also promising from key U.S. department stores, which also recorded strong customer demand for the street style inspired pieces, following a very successful activation at the point of sale and close collaboration with our partners. Our collaborations with both the NBA and Russell Athletic will play a crucial role also in the coming months, as we are committed to further growing and strengthening our casualwear business. In this context, I'm excited that the second wave of new product drafts is already in the pipeline and ready to hit the shelves during the second half of this year. Now ladies and gentlemen, this concludes my comments on the top line development. So let's take a closer look at the remaining P&L items for Q1. Starting with the gross margin, which totaled 60.4% in the first quarter. The decline of 250 basis points is mainly related to ongoing elevated markdown activity, in particular, in those markets that are still being impacted by the pandemic. In addition to less favorable channel mix, reflecting the outperformance of wholesale over retail, as well as higher freight costs, weighed on the gross margin development. Moving over to the operating expenses, which declined by 17% in Q1. In light of the persisting negative implication of COVID-19 on key European markets in particular, we continued with our tight cost management approach. In this context, we once again put particular strong emphasis on reducing selling and distribution expenses, down 20% in Q1. This development was largely driven by additional rent and payroll savings in own retail, with the magnitude of both effects being quite comparable. We also managed to cut back 10% on general admin costs, reflecting ongoing tight overhead cost controls, which led to lower personnel expenses. Overall, the implemented cost savings compensated for the decline in sales and gross margin. As a result, and despite the negative implications of the pandemic, I am very pleased to report that we were able to record an operating profit also in the first quarter with EBIT amounting to plus EUR 1 million compared to minus EUR 14 million in the prior year period. Now I have already mentioned the positive impact that delivery shifts had on our top line development in the first quarter. For the sake of transparency, it's only fair to say that this effect also supported our bottom line development in Q1 to some extent. Let's now turn to the balance sheet. Starting with trade net working capital, which declined by 7% versus the prior year. An increase in trade receivables, mainly reflecting the growth of our wholesale business in the first quarter, was more than compensated by higher trade payables. At the time -- at the same time, our inventories remained stable year-over-year, first and foremost, due to the ongoing tight inventory management in the wake of the pandemic. Moving over to capital expenditure, where we continued our rather prudent approach in the context of the pandemic also in Q1. Consequently, investments totaled EUR 16 million and were thus slightly below the prior year level. As in previous quarters, investments were primarily related to our global store network as well as our worldwide IT platforms. As a result, free cash flow totaled minus EUR 30 million in Q1, which compares to minus EUR 86 million recorded in the prior year period. And to finish on our financial position, net financial liabilities decreased 5% to EUR 221 million when excluding lease liabilities in the context of IFRS 16. Now ladies and gentlemen, before opening the floor to your questions, allow me to briefly comment on our expectations for the remainder of the year. Despite ongoing short-term uncertainties related to extended lockdowns in key European markets, we remain confident that the global retail environment will continue to gradually improve, supported by the further progress of global vaccination campaigns and the gradual lifting of lockdowns and restrictions on public life. We also remain confident that our business will continue to recover noticeably, especially in the second half of the year. While the further recovery will be led by Asia Pacific and the Americas, momentum in Europe is also expected to accelerate strongly in the coming quarters. To date, we have already experienced local demand picking up in those markets where lockdowns and restrictions have been eased. The prime example in this regard is our important U.K. market, where stores reopened in mid-April and where local demand has seen a robust uptick since then. This has enabled several of our more than 100 retail points of sale in the U.K. to exceed pre-pandemic sales levels in the past weeks. While underlying local demand remains strong for our casualwear business, we have also started to witness some first pent-up demand around smart tailoring product categories. Now make no mistake, while several markets are clearly showing some encouraging signs of a turnaround, in the short term, our retail business in markets such as Germany, France and Canada continues to be impacted by ongoing lockdowns and corresponding store closures. Since the beginning of the second quarter, we continue to be confronted with a global store closing rate of more than 20%, something we could not foresee when we spoke back in March. In addition, we must not forget that the delivery shift that I alluded to earlier will also weigh on our wholesale performance to some extent in Q2. All this being said, and assuming that no lockdowns or substantial extension of current lockdowns beyond what is already known will be implemented, we are very confident that sales in the second quarter will almost double those of the prior year period, which, as you all know, was severely impacted by the global spread of COVID-19. In terms of our bottom line expectations for the second quarter, we remain confident that we will be able to generate a positive EBIT also in Q2. While our EBIT should continue to benefit from the further business recovery and ongoing tight cost management, the lasting lockdowns in some European markets as well as the wholesale delivery shift will most likely limit our bottom line potential in Q2 to some extent. Finally, ladies and gentlemen, let me remind you that in less than 4 weeks from now, our managing Board will be complete. As I'm sure you are all aware, Daniel Grieder will take over his role as the new CEO of HUGO BOSS on June 1. Together with Daniel, the entire managing Board is looking forward to entering a new era for our company. Both our brands, BOSS and HUGO, offer tremendous potential for long-term growth. And we are fully committed to exploiting this great potential together with all HUGO BOSS employees worldwide in the years to come. In this context, we will provide you with a strategic update on our journey for the next several years during the second half of 2021. And with this, I'm now happy to take your questions.

[Operator]

[Operator Instructions] And your first question is coming in from Chiara Battistini from JPMorgan.

[Chiara Battistini, Co]

I have 3, please. The first one is maybe on your guidance on Q2 and the outlook of almost doubling sales in the quarter. How should we be reading this almost doubling sales? Is it like, I don't know, 95% to 100%, if you like, 80% to 100%? So can we narrow down a little bit how to think about this outlook, please? My second question is on the order book for autumn/winter. Your comments on the spring/summer, very encouraging. So I was wondering, as you are collecting just for the autumn/winter, if you could give us an update on what the theme from the -- from your retail partners for the second half of the year. And possibly, any color by region from that point of view would be also very helpful. And finally, I was wondering if you could give us any color or any comments on what you've been seeing of late in China since the end of March when -- how the situation with the cotton sourcing emerged, please.

[Yves Muller, CFO & Member of Managing Board]

Yes, Chiara. Thank you very much for your questions. So I noted 3 questions overall. So you were saying, give me some more color regarding our, let's call it, Q2 net sales guidance. Yes, we clearly say almost double. So this means that you should take the last year's performance and take it times 2. And almost double means that with times 2, we see this as a kind of ceiling and almost means that we are close to this. And whatever your fantasy gives us, this will come with this. Of course, please be aware that we still have ongoing uncertainties, especially in Europe with the extended lockdown. That's the reason why we are a little bit bogged there, but this is, I think, the best guidance we could give for Q2. Regarding the order book, back in March, we already have all these -- we're close to finalize our fall/winter collection. That was the collection that's going on to the sales floor beginning in July. And we reported back in March that we were very satisfied with the order intake. That was above our own expectations, was back on pre-COVID levels, and right now, we are selling actually our smaller pre-spring collections, and I think it's too early to make any comments on the pre-spring collections. But what I can say overall is, I mean these things that we do on the product side, on the collection side, and you have seen our wholesale business picking up as well in Q1. You see that there's interest in our business partners, especially when it comes to these collaborations. So we see really positive movements regarding that our collections resonate well with our partners. And finally, your question was related to China. We have seen a performance in China. If you take Q1, I think we were saying we doubled our net sales in Q1. I think we all know that, of course, Q1 2020 was clearly affected by the pandemic. But the performance was plus 29% versus 2019. And I can assure you, if I look at my numbers for the month of April, that we are clearly keeping this momentum in China.

[Chiara Battistini, Co]

Great. Very clear. And maybe just if I can follow up on wholesale. Any color -- any different performance, I guess, in Europe versus the U.S. that you're seeing at the moment? Or are you seeing similar momentum in both regions, please?

[Yves Muller, CFO & Member of Managing Board]

Yes. We -- I mean the wholesale business in APAC is fairly small. But if you take the big regions, Europe and U.S., we saw a similar development. So both regions are picking up.

[Operator]

The next question is coming from Jurgen Kolb from Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

Three questions maybe. First of all, on the number of stores, if -- I noticed that the number of factory outlet stores keeps on going up and has reached now, if I collect -- calculate that correctly, about 17.7%, so almost 18% of your total store base also in Asia. I would have expected maybe to see some more store openings as this has been the plan, if I'm not mistaken. So I was wondering maybe if you could share with us additional thoughts on the number of store openings from a general perspective, and specifically, on Asia, and obviously, with respect to the factory outlets. And secondly, you mentioned very strong performance, the online business. Maybe some additional indications, not necessarily precise numbers, but just in terms of conversion rates and customer retention and new customers, what you've seen there would be helpful. And in this way, obviously, is it possible to give us a kind of adjusted growth excluding the 12 new countries? And the last one, NBA and the Russell capsules have done marvelly -- super apparently. I was just wondering if you could share some thoughts on the next wave of collections in the second half that you're planning to launch. Is that going to be the same volume, the same size or even bigger maybe? And maybe going into 2022, since you've been so successful with NBA and Russell, what's in the making? Are you having any additional ideas? You want to keep on this capsule strategy, maybe with bigger volumes in -- since you've been so successful so far. These are the 3 questions.

[Yves Muller, CFO & Member of Managing Board]

Yes. Thank you very much for your questions and thank you very much for your interest. So first of all, touching the overall numbers of stores you were pointing out in general. What I can say, yes, in general, what we want to do is, clearly, the -- strategically, the numbers of stores will remain more or less stable. But clearly, there will be a kind of geographical shift from Europe, brick-and-mortar business in U.S., brick-and-mortar business to Asia, in particular Mainland China. So in the next quarters and years to come, you will see that the number of stores, shop-in-shop outlets will decrease in the European and American areas, and we will grow in Asia, in particular in Mainland China, which will make that, overall, the number of stores will remain stable. And actually, the short-time increase with the outlets you're referring to in specific comes from actually that we -- because of the pandemic, that we were entering into short-term temp outlet deals, and they were somehow recorded in our numbers. So that was the driver actually of the increase in the outlet. The second question was related to the online performance. So first of all, I think it's important to know that the dot-com business and concession business accounts for 60% and 40%, respectively. So 60% is hugoboss.com. Point one. And we have seen very, very strong like-for-like performances above all business. They were above 50% in the like-for-like countries and in the concession partners. So very strong business. And actually, that was coming from traffic and conversion rate both. So that was actually kind of amplifier. The traffic was up double digit and the conversion rate was up double digit as well. So this gives us -- that was the major driver actually of the business performance. And actually, on top of this, what was very encouraging is that even the average basket was increasing because we were doing more full-price sales than discounted sales in comparison to prior year period. And we perceive this to be actually a strong underlying for both brands, BOSS and HUGO. And actually, the 12 new countries that we entered to was at the end of March, so they didn't have any big financial impact for the Q1 results, but it's just more to come. And I think this is what we always said. We said we will -- we have to lay big emphasis on our online business in the next months to come. And perhaps one additional remark I want to make here as well, because I think the wholesale performance in Q1 was somehow surprising overall, this plus 1%, of course, there have been several effects. One was actually a very robust, strong order intake for the spring/summer collection, which we perceive as good. Secondly, we're pointing out, of course, there were these kind of delivery shift effects from Q2 and Q1. We are saying that this effect has an impact of around EUR 20 million to EUR 25 million. Actually, these products were requested by our customers from the wholesale part because they were saying, please send us the products because we don't know. Once the lockdown is released, we want to have a kind of readiness to sell our products. So they want to be -- want to have those products on the POS or on the warehouse. So we did this, and that was this kind of -- this is the reason behind this kind of delivery shift. But what I'm saying this is that, actually, we have seen similar growth rates as well in the wholesale business from the digital part. So we have -- in the wholesale area, we have a lot of customers like breuninger.com, like ASOS, ABOUT YOU, Nordstrom, where we've seen the similar growth rates we have disclosed for online. So very good growth rates in the wholesale sector, driving our business there. And if you take the wholesale digital part together with the online retail part, we account for 23% of our sales that we recorded in Q1 were coming from digital sales. So we see overall big improvement here how we manage our business, not only in online retail, but we come now to dimensions where we are less vulnerable to lockdown situations because we are expanding our business in digital sales in both areas, wholesale and retail. And your final question was related to NBA and Russell. Yes, we will have a second capsule coming for Russell and NBA. We will see this. I mean, from the retail side, we expect that this will grow. And on the wholesale side, we are just about to sell these products. And actually, for the -- when it comes to the NBA, we also -- the first NBA capsule, which we launched back in February, was limited to the U.S. and is now expanding also to European countries because we see that especially younger customers are very keen on buying NBA products as well in the European market. So this will be even somehow bigger. And '22 is already too early to call. Let's surprise you with some new or new exciting collaborations.

[Jurgen Kolb, Analyst]

And it would be fair to assume that the second wave of Russell and NBA is going to be bigger than the first wave?

[Yves Muller, CFO & Member of Managing Board]

I think it's fair to assume.

[Operator]

The next question is coming from Thomas Chauvet from Citi.

[Thomas Vincent Chauvet, Managing Director]

I have 2 question on gross margin and a follow-up on your comments about the guidance. Firstly, on gross margin. Can you comment more broadly about BOSS, HUGO and casualwear and formalwear? In the past, you said that BOSS and HUGO casualwear and formalwear had more or less the same gross margin. Now could you update us on how you think this will evolve? You've done pricing adjustment at HUGO a few years back. You seem to have much better production volumes in casualwear than formalwear today, especially as your new CEO, Daniel Grieder, is likely to make a further push into casualwear. How do you see the evolution of these 2 categories and the 2 brands? Secondly, still on gross margin and the promotional environment, which impacted you in Q1. I understand the impact of the pandemic on promo in Europe and the U.S. Now can you speak more broadly about whether you're seeing a more aggressive promotional environment for BOSS in China for BOSS or for your peers? We saw obviously consumer behavior shifting towards online sales, aggressive social media marketing. How do you expect markdown in China to evolve, also back to the point about the increase in outlets in Asia. And just a follow-up on your comments about turnover doubling year-on-year in Q2, if that would imply sales 20% below Q2 '19 levels in constant FX, if I'm not mistaken. So not too dissimilar from Q1 actually from the 2-year stack in Q1. If the U.K. is already above '19 level, and I guess some of the markets reopening, isn't that doubling way too conservative?

[Yves Muller, CFO & Member of Managing Board]

Thank you very much for your questions. So referring to the gross margin, and I think it's more kind of strategic questions referring to casualwear versus formalwear. I think the big driver here is actually, yes, the product groups itself. It's less the brand because BOSS and HUGO, they have more or less similar margins. But clearly, the margin, the gross margin for casualwear is usually higher in comparison to formalwear, which gives us strategically a kind of tailwind once the casualwear share would grow going further. Then you had a question regarding the promotional environment in China. Actually, as a matter of fact, the Chinese market in our case is for us, for our brand, the less -- the least promotional market in our universe. And we have seen no -- actually, no big deviations into prior quarters. So I cannot confirm what we -- you were saying that there was predominantly full-price sales. The discount rates were fairly low. And with this doubling of sales, I think be aware, overall, that we are still operating with a lot of uncertainties. As you know, I mean, the full April was still in lockdown for big markets like at France, be it the Netherlands, be it Germany. So I think we have to be prudent and conservative here on this side. And I think there are good reasons for this. It's not only that. One thing is to have the pandemic in terms of new infections under control, it's as well all the political decisions that comes to how they handle this kind of pandemic is very unforeseeable. And that's the reason why we are guiding like we're saying.

[Thomas Vincent Chauvet, Managing Director]

And just on the casualwear gross margin. When you do collaboration with the NBA or with Russell Athletics, would all the costs be in some kind of marketing expenses? So your gross margin would be no different, whether this is a BOSS casualwear product or Russell Athletic product from an accounting reporting standpoint?

[Yves Muller, CFO & Member of Managing Board]

It depends. So actually, if you run into a collaboration, you might have some license payments that these effects -- these things affect your cases. But once you create a lot of buzz, like we did it now with the collaborations, of course, these are marketing spendings. Actually, by the way, although we decreased our operating expenses by 17% in comparison to prior year, the marketing spendings were on the same level like last year. So we did not cut any marketing spendings in order to support our brands.

[Operator]

The next question is coming from Elena Mariani from Morgan Stanley.

[Elena Mariani]

I'm going to start with OpEx. As usual, you're showing an incredible cost control ability, and I was personally impressed by what you showed in Q1. And I appreciate that for the rest of the year, you're not giving a precise outlook. But maybe on these items and the main cost line items, you might have a view on what to expect. So if the business picks up over the coming quarters and we're going to go through a progressive ramp-up also in the number of store reopenings, how should we expect the OpEx inflation to follow based on this progressive top line pick up? You've already answered about marketing. Perhaps could you remind us what's the percentage of sales, which has remained stable versus last year, and maybe also the percentage of sales of rentals and how we should expect them to develop? And then the second question is about the gross margin. Is it possible for you to be a little bit more precise about the moving parts? So for the first quarter, you've mentioned that you've had markdown activity, increasing freight costs and the negative channel mix. What was the magnitude of these effects? And how should we expect them for the coming quarters? I would imagine that in Q2, we would probably see a reversal given that wholesale is going to be less strong. And then if I may, just a small follow-up on what you've mentioned about current trading. So you said that you've seen the business picking up in those markets that have reopened, such as the U.K. And can you be a bit more precise about the type of pickup you're seeing there? And maybe also give a word to the U.S. market, which remains difficult. And would you expect that to move up to positive territory relatively soon? Or maybe are you already in positive territory?

[Yves Muller, CFO & Member of Managing Board]

Yes. Thank you very much for your questions. So there were several questions, I have to say. So first of all, OpEx and the prospects for the year. I think overall, what we have to do is, given the uncertainties in the pandemic and having still some countries which were not open, we will still remain under tight cost control. That's for sure. I think we have now shown it for the last 3 quarters. And clearly, this will remain. On the other side, I mean, those markets which open, we try to support those markets with marketing activities, and we see that this is really picking up. And that's the reason why we kept actually the marketing spending on the same absolute amount like on -- in Q1 2020. And just to be very precise, it was not related to a percentage of net sales, what I just said. So the overall underlying logic is to invest into the brand to support the brands going forward. So entering into a kind of variable costs and being very strict on fixed costs when it comes to rental expenses, when it comes to personnel costs and other overhead structure. So this is the underlying logic that we are having. And regarding the assessment of our store portfolio as well in Europe and in the U.S. Of course, like we always say, we try to rightsize stores in particular. And this will have ongoing -- an ongoing positive effect on our fixed cost structure going forward. So coming to the second questions, regarding your gross margin, the moving parts. So we were having a decline of 250 basis points. And 50% of this discrete decline was related to markdowns, 25% was related to freight cost and another 25% were related to channel mix effects, the wholesale exceeding retail net sales. And what we were saying is regarding the margin as a kind of proxy for '21, overall, we are saying that we will go in between the margins 2019, 2020. I think this is a good proxy overall. And you were alluding to the Q2 as well regarding gross margin expectations. I think it's worth highlighting that we had a big inventory devaluation back in Q2 2020, which we see will not come back in 2021 as well. So there might be kind of reversal effect here as well for 2021 numbers. And regarding the market pickup, especially in the U.K., what you really can see here is, once the lockdown is over, like the situation in the U.K., there was a kind of long-lasting lockdown. People really have -- they enjoy shopping. They enjoy going out. They are not afraid because the vaccination has reached a certain level where the people feel much more secure. So the consumer sentiment is much better in comparison back in Q3 2020 where there were the first releases of the lockdown situation. So I think this situation is different because of a higher consumer sentiment and people want to enjoy life. And what we can see is that we have already noticed some pent-up demand here as well in some categories like smart casually, smart casual products, even in the formalwear sector where people have fun to meet again. So this is actually, from my point of view, a very positive note. And we have seen this now in several countries, and we hope that this will be true for other major countries like Germany, France and Benelux, which have just -- which will reopen or have just opened like the Netherlands and Belgium.

[Elena Mariani]

Great. Just one very small follow-up on the cost line items because you have not mentioned D&A. We've noticed that there was a drop in Q1 of about EUR 16 million. What is behind that drop? Because annualized that would be around EUR 60 million, EUR 65 million. So it would be great if you could comment.

[Yves Muller, CFO & Member of Managing Board]

Yes. The decrease is related to the fact is because of the impairments that we did in 2020. That was point one. And actually, the CapEx in 2020 and now in the first quarter have been fairly low. So this is the major driver of the D&A being on a lower level.

[Elena Mariani]

So it would be fair to annualize this drop? Okay. Sorry.

[Christian Stoehr]

Yes. I think you've answered the question, Elena, right? So thank you. And if there's any open topics, let me know. We can follow up afterwards, okay?

[Operator]

The next question is coming from Antoine Belge from Exane BNP Paribas.

[Antoine Belge, Research Analyst]

Yes. It's Antoine Belge at Exane BNP Paribas. I'll be a good citizen and ask 2 question with 0 follow-ups. So my first question is with regards to the arrival of Daniel Grieder. I know that he had a non-compete. But in terms of recruitments, a key -- maybe key addition to the team. And is it possible to say a few words about recruitments that have been made or could be announced pretty soon? And my second question relates to the fact that you're mentioning that this -- the collaboration like Russell Athletics are attracting younger consumer. Do you have any evidence that there is also a sort of halo effect, i.e., that this younger consumer, they also tend to buy not only the collaboration product, but also that they tend also to buy the rest of the product range?

[Yves Muller, CFO & Member of Managing Board]

Yes. Antoine, thank you very much for your questions. So regarding the arrival of Daniel, of course, he has a non-compete and that's the reason he starts on 1st of June. And so far, he has, of course, not been active. So with the new management team, it's up to Daniel to decide beginning on 1st of June. And the additions that we have recently to our team regarding the marketing function and the women's wear functions, they were recruited by the existing managing Board, including Oliver Timm as well. So we had here a very -- I think we had -- we have hired 2 high-caliber person. And I'm very confident that we will make progress on the marketing and women's wear side as well. And regarding the collaborations, Russell and NBA, yes, clearly, we can confirm that there is a halo effect. Like I said during my speech, there are a lot of customers that have not been in contact with the BOSS brand and they were on our side. And we could -- like I said, the sell-throughs were 3x higher. And of course, they put much more products into their basket as well. So clearly, that we perceive as a clear positive sign.

[Operator]

Your next question is coming from Thierry Cota from Societe Generale.

[Thierry Cota, Equity Analyst]

Congratulations for these good numbers. I will have 2 follow-up questions. First, on the 17% SMD drop seen in Q1, can you tell is what proportion is temporary and linked to the store closures, and how much will be kept going forward? Can we assume that a good half at least would be sort of temporary? Or is it higher? And my second question would be the comments you made around casualwear and full-price sales online. I'm trying to think about the 17% like-for-like sales decline of Q1. Can you give us the mix effect? I'm wondering whether more casualwear leads to a negative impact or whether the higher ESPC online is enough to offset it.

[Yves Muller, CFO & Member of Managing Board]

Thierry, could you repeat your second question because I didn't get? Could you repeat?

[Thierry Cota, Equity Analyst]

Well, I hope it's an interesting question. I'm not making something about nothing. But you discussed casualwear development and outperformance. And you mentioned also -- which I believe would have a negative mix on the like-for-like sales trend. And at the same time, and well, at another moment in the call, you mentioned that there were more full-price sales online. So I was wondering if on the 17% like-for-like sales decline in retail that you published for Q1, what was the contribution of mix? If it was negative, if it was more or less neutral, or if it actually became positive.

[Yves Muller, CFO & Member of Managing Board]

I think Christian has to answer the question.

[Christian Stoehr]

I'll take it offline.

[Yves Muller, CFO & Member of Managing Board]

I don't know. Okay. So perhaps I'll start with the first one. So you were asking the question regarding the 17% decline in costs. I think it's very, very difficult to judge, but I would -- I would see the temporary sales decline exceeding a little bit this kind of 10 percentage points range. So it's more than half of this which are temporary. And your second question goes to Christian perhaps.

[Christian Stoehr]

Yes, Thierry. I mean, interesting way to look at it. But no, I don't think that there was a material negative impact from mix and because of the fact that casualwear has now grown faster than formalwear, I don't see a reason where that should be coming from. Actually, if you look at some of the most recent casualwear launches that we had during the quarter, I mean, there was a -- the -- those has sold 100% price at the end of the day, right? I'm not saying that -- I don't want to make these comparisons too big, yes? But I think, overall, I don't think that just by seeing casualwear growing faster than formalwear, that this will immediately lead to a negative mix effect from a full price perspective. That is not what we've recorded internally, and that's why at least neutral, I would say, here.

[Operator]

The next question is coming from Volker Bosse from Baader Bank.

[Volker Bosse, Co]

Volker Bosse, Baader Bank. And congratulations on the very solid figures. I would have a question on the rental costs, which you mentioned. Have you already been able to renegotiate store rents also on a sustainable basis already? I heard from other retailers, they speak about 10% to 25% rental cost reduction potentials for inner city locations. Would you agree in that? And how do you look at this potential? A second question would be regarding online sales. You mentioned 59 dot-com online countries or stores are now onstream. Where we'll be at the end of fiscal year '21 or end of '22? Just to get an idea about the rollout plan in regards to countries to come? And a small one on CapEx for the full year. What do you have in your guidance or big plans?

[Yves Muller, CFO & Member of Managing Board]

So thank you very much, Volker. Thank you very much for your questions. Regarding rental costs. So clearly, what we have already said like -- since I'm the head at HUGO BOSS, we always look in optimizing our brick-and-mortar business. And we try to renegotiate every store that comes to our table once the contract expires. And actually, it really depends on the locations. There are some locations which are really running and where you even have some increased rents. But there are -- because of the pandemic and because of, as we all know, brick-and-mortar really suffering, rents are coming down. And I think it has been always our interest in getting the rent to sales ratio down by several things. It's not just only the negotiation. It's also the structural size. As you know, there are a lot of oversized stores, especially in Europe and in the Americas, with 2 or 3 sales floors operating. So we try to get it to one sales floor, decreasing it. So it's several effects that we see here to get the rents down. But I can assure you, yes, we get good rent deals. And we try to exploit the situation from a retailer point of view to renegotiate every contract. And going further, we should expect that the rent to sales are coming down. But of course, there are 2 things with it. One is the rent and the other thing is the sales. So there are 2 parts. And of course, what we intend to do is to flexibilize the business, to get into shorter deals, to get -- to have the possibilities to get out of contracts, to somehow flexibilize the whole expenditure. And then the next question was related to online sales. We are now, like you were rightly saying, in 59 countries. Yes, we will explore more countries. I think there are at around 20 more countries to come at the end of this year. But I can say, with these 59 countries, we are now the most relevant parts. Be aware that those markets we do with global ER, in some cases, in English. So -- but at least we have a certain presence in those markets with online, and you can buy us. And I think it's very good. And we have seen good numbers in somehow expanding our online footprint. And regarding CapEx, yes, I think where -- we do not do any guidance regarding the CapEx, but I think it will be -- we will have to observe this because the uncertainties still are very high, but we try to keep the CapEx under control. So I think you should expect them on the last year's level, more or less. But on the other side, we see still a lot of efficiencies that we can do in the shop format that we are using in order to get the euros per square meter spent down without reducing the quality of our -- with our stores.

[Operator]

The next question is coming from Rogerio Fujimori from Stifel.

[Rogerio Fujimori, Director & Analyst]

I have to -- the first one is on the gross margin outlook. I think in a previous call, you've mentioned that the expectation would be for gross margins this year to be between 2020 and 2019 levels. Is this still the case? And my second question is a follow-up on China. I think it was very encouraging to hear about the strong April trends. My question is just about the situation with your brand ambassadors in China and your thoughts on social media share of voice these days to sustain the strong top line momentum in H2.

[Yves Muller, CFO & Member of Managing Board]

Yes. Thank you very much, Rogerio, for your questions. Regarding the -- your first question in gross margin, I can confirm that our gross margin is expected to be between 2019 and 2020 levels. And regarding China, yes, we are looking for new brand ambassadors. We are working with a kind of public relations agency there in order to get new brand ambassadors. I think this is very important that we have a local Chinese person that somehow transport our brand values to the Chinese customer.

[Operator]

The next question is coming from Mr. Salis from Hauck & Aufhäuser.

[Hans Christian Salis, Equity Analyst]

Christian from Hauck. Two questions from my side left. Again, on the OpEx level. So as already mentioned, you were able to keep tight cost control really in Q1. Selling and distribution expenses down 20%. Also, G&A down 9%. So how much of this is really sustainable? And could it be that this really implies some structural upside for your operating margin in the midterm? And then secondly, again, on the midterm and particularly on formalwear. So it would be very interesting to get your thoughts on this. So how do we think about the segment from a midterm perspective? So do you expect any sustainable negative effect on your general revenue level from the working-from-home trend in the midterm? And then also, when do you expect to return to the 2019 revenue level again?

[Yves Muller, CFO & Member of Managing Board]

Okay. Christian, thank you very much for your questions. So perhaps with your last -- I'll start with your last questions regarding net sales level. I think this is one thing that we will be elaborating on our Capital Market Day. So I have to ask for your patience there regarding all our net sales ambitions going forward. Regarding OpEx, like I said, yes, I think tight cost control. I think there are a lot of different effects. And clearly, I would say that around 2 quarter -- 2/3 are temporary effects and 1/3 are somehow sustainable effects going forward regarding our OpEx. And regarding formalwear, clearly, what we have seen now, I think there has been -- we will see -- once the lockdown is released, we -- once social distancing matters will fade away, I think we will see some pent-up demand as well in formalwear. And actually, even pre-COVID, we have seen in our business, if you do it rightly, if you play the right moments, with performance materials coming up with innovations, you have the good possibility to grow the formalwear market as well. From our perspective, of course, on the other side, we see that in casualwear, the dynamic is much higher. So -- but on both sides, we are confident and optimistic to grow.

[Christian Stoehr]

Great. Well, thank you, Yves, for your detailed answers. Ladies and gentlemen, this completes our conference call for today. Thank you for your participation, as always. And if there's any further questions, please do not hesitate to contact any member of the IR team. And with that, thank you very much for your participation, and bye-bye.

[Yves Muller, CFO & Member of Managing Board]

Bye-bye. Thank you.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded.