Hugo Boss AG

XETRA:BOSS

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to HUGO BOSS Second Quarter Results 2019 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 1st of August, 2019. I will now hand the conference over to our Head of Investor Relations. Mr. Christian Stoehr. Thank you. Please go ahead, sir.

[Christian Stoehr, Head of Investor Relations]

Thank you, and good afternoon, ladies and gentlemen. My name is Christian Stoehr, as you know, and I'm heading up the Investor Relations activities at HUGO BOSS. And I would like to welcome you to our 2019 second quarter financial results presentation. As always, today's conference call will be hosted by Yves Muller, CFO of HUGO BOSS. [Operator Instructions] So let's get started, and over to you, Yves.

[Yves Müller, CFO & Member of Managing Board]

Yes. Thanks, Christian, and good afternoon, ladies and gentlemen. Welcome to our second quarter results conference call. In the next 30 minutes, I will present to you our most recent financial and operational performance and take a closer look at our initiatives for the remainder of 2019, before opening the floor to your questions.So I'm pleased to report that despite an overall challenging market environment, we were able to deliver both top and bottom line improvements in Q2. Thus, delivering on what we had promised back in May. Importantly, group sales experienced a slight acceleration, up 2% currency adjusted. In euro terms, sales grew 3% to EUR 675 million as currency effects provided a 1% tailwind to revenues. I am particularly encouraged by the fact that all our 4 strategic growth drivers make further progress in the second quarter. Our own online business continued to grow disproportionately in Q2, recording its 7th consecutive quarter of double-digit growth. Retail productivity grew 3%, supported by many initiatives to optimize our physical store network.Asia Pacific continued to outperform from a regional perspective, as sales growth accelerated in Q2, led by ongoing strong momentum in Mainland China. And last but not least, HUGO sales grew 3%, supported by double-digit increases in the important casual wear business. So let's take a look at the regions and starting with Asia Pacific, where sales grew a strong 8% currency adjusted. The increase in Q2 was once again driven by our strategic growth market in China, where our momentum accelerated in Q2 as reflected by double-digit comp-store sales improvements. In particular, Mainland China saw ongoing strong momentum in the quarter, benefiting from the repatriation of local demand. This said, I'm also encouraged by how our brand's activation initiatives and various execution measures are resonating with our customers, both in brick-and-mortar retail as well as through our online partnerships with Tmall and JD.As expected, the performance in Hong Kong and Macau was somewhat weaker in Q2. While this is -- development is partly related to the aforementioned repatriation of Chinese spend as well as political uncertainties, both markets were also impacted by store optimization measures. The latter resulted in several store renovations aimed at further enhancing the profitability of our store network in these markets.Coming to our largest region, Europe, where sales increased 2% on a currency-adjusted and reported basis. With sales up 6%, France saw a strong recovery in Q2, following a rather difficult start to the year. Here, the development was supported by a robust comp store sales improvements as the negative implications from the yellow vest movement have started to fade in the second quarter.Looking at Europe's other markets. Sales in the U.K. were up a solid 2% despite ongoing political uncertainties. In Germany, sales were down 5%, broadly in line with the overall market environment, which remained rather unfavorable in Q2. And although a number of macroeconomic indicators are not overly supported at the moment, we are confident that the second half of 2019 will show a sequential improvement. In this context, the remainder of the year will not only be supported by a fairly low comparison base, in particular, in Q3, but also benefit from the upcoming opening of our new outlet in Metzingen scheduled for late September. This brings me to the Americas, where our revenues declined 3% on the currency-adjusted basis, reflecting sales declines in both the U.S. and Canada. While this development reflects a slight improvement compared to the first quarter, the performance in Q2 was still below our expectations. In particular, the important U.S. market, where sales were down 5%, currency-adjusted, continues to face a number of challenges during the quarter. Notably, the nonrecurrence of positive effects related to the U.S. tax reform, lower tour spend as a result of ongoing trade tensions as well as the general promotional market environment put a strain on our business. The decline in tourist spend also weighed on our second quarter performance in Canada.Latin America, in turn, continued to enjoy a robust momentum, up high single digits in Q2, led by particularly strong performance in Mexico and Brazil. As a result of the weaker-than-expected performance in the Americas and in the light of the current market dynamics, we now expect the Americas to experience a slight decline in 2019.This said, we continue to expect an improvement in our performance in the Americas during the second half of 2019.Moving over to our channels. Own retail sales grew 3% on a currency-adjusted basis, reflecting a 2% increase in comp-store sales as well as 1% contribution from space. While comp-store sales remained stable in the Americas, they were up the low single-digit rate in Europe and increased even at a low double-digit rate in Asia Pacific. Taking a closer look at the like-for-like performance in the quarter, let me point out that our brick-and-mortar business saw a broadly similar growth rate compared to the first quarter. Slight deceleration in total comp store sales growth compared to Q1 is, therefore, mainly attributable to our online business, where the clear focus in Q2 was on further improving the quality of our business by tightly managing markdowns. While those initiatives, unsurprisingly, weighed on the top line performance in the second quarter, they, in turn, had a positive impact on profitability. Altogether, on a currency-adjusted basis, online sales were up 16% in Q2, benefiting from ongoing strong momentum in the concession business. Let me also spend a minute on our non like-for-like business, which, as I mentioned before, had a positive impact on retail sales in Q2. The optimization of our store network, including store renovations, relocations or rightsizing has become the fundamental part of our strategy. This, in turn, means that the share of our non like-for-like business has become increasingly important over the time and will continue to do so in the foreseeable future. Another contributor to our -- to the non like-for-like growth is the further expansion of our online concession business, which, as you know, is a key element of our digital strategy. Already today, non like-for-like represents a good 1/3 of our total retail sales and is likely to grow even further in the upcoming years. The rollout of our new BOSS store concept continues to be an important component when it comes to the ongoing optimization of our store network. In the second quarter, we renovated and upgraded a total of 8 stores, bringing the total number of stores offering the new atmosphere to a total of 52 spot stores worldwide.Besides the further rollout of the new BOSS store concept in Q2, we also opened 3 new HUGO stores in Tokyo, Singapore, Moscow, making it to a total of 26 HUGO freestanding stores globally. And as mentioned before, we will continue to grow HUGO store network consistently, yes, also diligently in the years to come. Turning to the wholesale channel, where sales remained stable on a currency-adjusted basis. While currency adjusted revenues in Europe and Asia Pacific increased 1% and 50%, respectively, sales in the Americas were below the prior year level, largely reflecting the ongoing challenges that department stores were facing. Similar to previous quarter, Q2 saw ongoing strong momentum with either online marketplaces or online platforms of leading department stores, while stationary retailers continue to suffer from ongoing traffic declines.Finally, our license business grew 8% in Q2 driven by significant improvements in Fragrances and Eyewear. The former continued the positive trend from Q1, supported by successful product launches for both BOSS and HUGO, and we are confident that the positive performance of our Fragrance business will continue during the remainder of the year driven by new product launches that are planned for Q3 and Q4.Let me conclude my remarks on the top line with the review of the performance by brand. Starting with BOSS, where revenues increased 2% on a currency-adjusted basis as a result of low single-digit improvements in both business and casualwear. While our casualwear business continued to benefit from the ongoing trend towards casualization, importantly, our businesswear offering returned to growth in the second quarter. The latter is not only proof positive that business were remains relevant for the BOSS customer, but also that the innovative concepts, such as mix and match or broken suit, provides a robust foundation for future growth. In Q2, we also made further progress when it comes to enhancing the personalization of our product offering as we introduced BOSS Made for Me as a new tailoring service. It also -- it allows our customers to personalize and customize different elements of a suit, including fabrics, linings and buttons. In addition, for a truly personal touch, individual details, such as the name, chosen words or a date can be stitched in the inside label of the garment. Beyond suits, as of today, the customers can also personalize their own sneakers with the BOSS Made for Me service. And we are planning to extend this concept to outerwear jacket during the upcoming fall/winter season. On the marketing side, in Q2, BOSS celebrated the latest addition to its existing lineup of brand ambassadors, as Taiwanese and Canadian Actor, Mark Chao, has become the new face for BOSS in Asia Pacific. In this role as an official brand ambassador, Mark Chao will not only become a key face for future marketing campaigns but also be closely involved in the creative process of specific collections going forward.In this context, Mark together with our Chief Brand Officer Ingo Wilts has already co-created a limited BOSS x Mark Chao collection, which has been available online in the selected BOSS stores as well as via a WeChat mini-program as of April 2019. Moving over to HUGO, where the positive trend from previous quarters continued in Q2 as reflected by a 3% increase on a currency-adjusted basis. In line with the brand positioning in the Contemporary Fashion segment, sales and casualwear continue to grow disproportionately and were up by a double-digit rate driven by ongoing strong momentum around HUGO's local-inspired product offering.And to further raise, HUGO's brand awareness in the Contemporary Fashion segment in May, we introduced British singer and artist Liam Payne as HUGO's future brand ambassador, the first partnership of this kind for HUGO.Part of this collaboration, Liam will not only take center stage in future marketing campaigns but equally importantly, will become the face of exclusive HUGO x Liam Payne collections, inspired by the singer's personal style.Together, with a live appearance from Liam, some of these new styles were showcased digitally at an event during Berlin Fashion week, after which they were immediately made available online, exclusively on Instagram first followed by hugo.com as well as in selected HUGO stores. And although early days, initial results following a good 3 weeks of trading has been rather promising, with sell-through rates twice as high and online revenues clearly outperforming brick-and-mortar sales.Ladies and gentlemen, let's take a look at the remaining P&L items. Starting with the gross margin, which saw a decline of 100 basis points in Q2 to 66.0%. It is crucial to understand that this development is largely due to the nonrecurrence of inventory valuation effects that benefits our gross margin development back in Q2 2018. The nonrecurrence of these positive effects has now weighed on the gross margin development in the second quarter of 2019. Importantly, this inventory valuation effect is purely timing-related and will reverse in Q3 already. To complete the picture on the gross margin, negative currency effects, although to a lesser extent compared to Q1, put some pressure on the gross margin in Q2. These negative effects, combined, more than offset a slight tailwind from favorable channel mix. All other effects, including the effect from markdown management, were broadly neutral in the second quarter.In terms of operating expenses, I am pleased to report that we managed our costs tightly in Q2 as reflected by a very moderate increase of only 2% in the quarter, despite a slightly negative impact from currency effects. As a percentage of sales, operating expenses declined a strong 90 basis points. In detail, selling and distribution expenses increased only 3% as we are starting to realize the first positive effects from our various initiatives to optimize our store network, resulting in improvement of pay-to-sales and rent-to-sales ratios.Marketing expenses declined slightly in Q2, mainly due to timing shift effect between the first and the second quarter. And last, but not least, administration expenses were also below the prior year level as tight overhead cost management overcompensated continued investment in the digitization of the business model. As a result of this strong operating leverage achieved in Q2, EBIT returned to growth and increased 3% in the quarter. The group's net income ended the second quarter 1% below last year as negative currency effects resulted in an increase in the financial results. Let's now turn to the balance sheet. Starting with inventories, where we have made further progress in bringing inventories down to a normalized level. At the end of June 2019, inventory growth amounted to 3% currency-adjusted, a further 6 percentage points improvement compared to March 2019. As we will continue to show highest discipline in managing inventories, we have committed to further reducing inventory growth during the course of H2, just as we have done over the past few quarters. Mainly due to the increase in inventories, but also reflecting temporarily higher trade receivables, trade net working capital was up 6% on a currency-adjusted basis. This, however, is expected to reverse in Q3 already. Before taking a look at our initiatives for the remainder of 2019, let's quickly review our free cash flow development. Investments increased 45% in the second quarter or by EUR 15 million to a total of EUR 48 million at the end of June 2019, largely driven by the step-up in-store renovations as well as ongoing investments in IT and digitization. As a result of the increase in CapEx and trade working capital, free cash flow declined 9% or by EUR 7 million to EUR 72 million. As we project a significant step-up in EBIT growth during the second half of 2019 and further improvements around trade networking capital, we remain confident to reach our guided free cash flow range for the full year of between EUR 210 million and EUR 260 million. With this, ladies and gentlemen, let's change perspective and look ahead at our expectation for the remainder of the 2019 fiscal year. We remain confident of achieving our full year top and bottom line guidance, as communicated in early March and reconfirm today as we forecast sales and earnings momentum to accelerate during the second half of 2019.At the same time, we now expect both sales and EBIT to reach the lower end of the respective guidance ranges of a middle single-digit and high single-digit increase. In doing so, we take into account the persisting challenges in the U.S. market, in particular. From a top line perspective, the acceleration in sales will be largely driven by our retail business, for which, we forecast mid- to high single-digit growth for the full year. Besides the anticipated acceleration of comp-store sales growth, we also project important stimuli from the non like-for-like business. Regarding the latter, 3 factors will be decisive for the second half of 2019. Firstly, we have fully committed to further expanding the concession model within our online business. New e-concessions and those we initiated back in 2018, will clearly contribute to strong double-digit growth in our online business also in H2. As you all know, our Zalando partnership will play a key role in this regard, as we are not only about to rollout the concession model with Zalando to further European markets, but also start converting our BOSS casual and athleisurewear business to the concession model starting in Q3.Secondly, we will continue to expand our dotcom business to new geographies. In this context, Q3 will see the go-live of hugoboss.com in additional markets such as Denmark, Sweden, Finland and Ireland, markets that will be fulfilled via our existing distribution center close to our headquarters in Metzingen.And last but not least, we will continue with our initiatives to optimize our store network. In the second half of 2019, a number of important BOSS stores will be upgraded to the new store concept and reopened on time before the important pre-Christmas season. Starting with our biggest flagship store worldwide on the Champs-Élysées, where the renovation of our BOSS store is in full swing. Besides Champs-Élysées, major store renovations for the second half includes some strategically important stores in key U.S. cities such as Chicago, San Francisco and Miami.And in Asia Pacific, we're about to finish the renovation of our Macao stores as well as that of our biggest store in Singapore. Beyond the distribution side, we are looking at a well-stocked product and marketing pipeline, which will ensure we create a further bus around the BOSS and HUGO brands in the second half of 2019. Let me, therefore, share with you some highlights on our product and marketing calendar for the upcoming months. We are particularly excited that in the second half of 2019, BOSS will take center stage twice at 2 of the world's most important fashion shows in Milan and Shanghai. While we are very excited that BOSS will enter the fashion metropolis Milan in September to showcase the upcoming Spring/Summer 2020 collection, we are equally thrilled that in October BOSS will, for the first time in history, also present itself at Shanghai Fashion Week.Showcasing the prefall 2020 collection in Shanghai at the beginning of Q4 clearly underlines the importance of the Chinese markets for BOSS. Both shows will be broadcasted live via boss.com and will also be accompanied by a dedicated social media campaigns. Talking of social media, let me shed some light on our current Global 360-degree marketing campaign to promote our iconic BOSS suit business. We have the hashtag, #suitschallenge, our BOSS brand activates influencers and athletes globally to make the toughest challenge in a suit while being impeccably dressed in a head-to-toe by BOSS. The suit challenge is not only creating a tremendous buzz in social media, but it's also helping us to further drive brand desirability.As of today, the suit challenge has already generated more than 200 million impressions on social media with a particular emphasis on Instagram. Another important building block for growing brand desirability is our ongoing focus on exclusive collaborations. In this context, the upcoming fall/winter 2019 season will see the second drop of the unique collaboration between BOSS and Porsche, which is soon about to hit boss.com and in selected BOSS stores worldwide. The capsule collection will consist of 12 men's wear styles, reflecting the high claim to design, innovation and performance that both brands, BOSS and Porsche, share. Inspired by the latest Porsche Panamera E-Hybrid, our design team has developed a collection that stands out for its economic lines and iconic details. Let me conclude today's presentation with a detailed look at our full year bottom line expectations. Regarding our EBIT outlook for the full year, we are confident that H2 will see a strong acceleration in earnings growth and forecast double-digit improvements in EBIT for both Q3 and Q4. Beyond the anticipated acceleration in top line growth, there are 2 factors, in particular, that would contribute to the anticipated bottom line improvements in the coming quarters. Firstly, we expect a strong improvement in the gross margin in the remaining 2 quarters. This development will be supported by easing currency headwinds, a reversal of the negative inventory valuation effect as well as positive effect from a more favorable channel mix. And Q3 will most likely represent a peak in this regard, simply due to the relatively low comparable basis.Secondly, our efficiency program introduced to you back in November last year is expected to result in further operating leverage during the second half of the year. In particular, we expect the tailwind resulting from our improvement in retail efficiency to continue in the upcoming quarters. In addition, administration costs should also continue to develop at disproportionately low rates. With this, ladies and gentlemen, I'm now happy to take your questions.

[Operator]

[Operator Instructions] We'll now take our first question. It comes from the line of Antoine Belge from HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine Belge, HSBC. Three questions. First of all, I think you mentioned that there should be other initiatives such as the one that you have with Zalando in terms of, we moving to a concession business. So is it possible now for you to be a bit more vocal about other names? And maybe in terms of figure, what it could represent, especially on an impact for 2020? Second question relates to online, which was a bit slower during the quarter at around 16%. I understand that it is probably linked to the discounting pair being a bit -- starting a bit later and with less discounts. So is it something that you drove yourself? And also, do you expect a rebound in the second half of the year for online? And finally, with regards to your guidance, to what extent are you taking into account that we already had quite a few very warm months, and I think a lot of the guidance is linked to having a strong Q3 on a weak Q3 last year. So yes, I mean, any sort of internal thinking you have had around the global warming and your guidance?

[Yves Müller, CFO & Member of Managing Board]

Yes. Thank you very much, Antoine. So your first question was related to the online concession business to give further names. And so in the second quarter, we converted several other partners, for example, David Jones in Australia, we converted Lamoda in Russia, and we converted Stockmann in Finland and in the Baltics. And in the second half of the year, what we have in our pipeline, big department stores from Southern Europe, like Galeries Lafayette and El Corte Inglés. So these are the names that I can give you today, others are in the pipeline. Your second question was related to the online performance, the Q2 and where we achieved 16%? Yes. I can confirm your hypothesis that we took the deliberate decisions on our own to start the sales period later. And that was deliberately done by ourselves. And this gives us -- because the overall intention was to maximize our full-price business regarding online, which is very -- strategically very crucial for us. And clearly, we have -- we can steered on our own in the upcoming Q3 and Q4, whatever we like, how much marketing and how much discount we want to grant in the upcoming times. And your final question was regarding warm weather and Global Warming? I think our guidance takes every macroeconomic effects, some uncertainties into account. And we are confident overall to achieve our guidance.

[Antoine Belge, Global of Consumer and Retail Research]

Okay. Maybe just a follow up on that. Obviously, July was quite warm, especially in Europe. So the start to the quarter is -- I mean, is embedded into the guidance of the rebound in the second half?

[Yves Müller, CFO & Member of Managing Board]

I mean we took the weather conditions into account into our guidance. And it's actually too early to call about the Q3. And as you know, actually, we don't comment on current trading in July.

[Operator]

Our next question comes from the line of Jurgen Kolb from Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

Two questions. First one on brand HUGO, 3% growth in Q2, that's a slight slowdown from Q1. Is that the run rate do you feel comfortable with? And, in this respect, and when it comes to HUGO I believe, already a big chunk or at least some parts of the collections are fully digitalized already. And I was wondering if you could share with us how this specific part of HUGO is actually selling through? And then secondly, on the womenswear. Obviously, down 6%, quite weak in the second quarter, it's now getting to a point where maybe you have to ask yourself if you want to keep that collection really going. Is that really a core business for you going forward? Maybe you could share some thoughts with us on this particular collection? And basically, what drove this decline in Q2?

[Yves Müller, CFO & Member of Managing Board]

So regarding HUGO, you were pointing out that there is a slight deceleration. Overall, we are saying that we want to outgrow HUGO overall in terms of our group net sales. And actually, this is what we did with HUGO, I think we are very picky when it comes to now new freestanding stores. We do it very deliberately to grow the HUGO brand. And since we have now established a kind of distribution. We now start with the marketing campaigns. As you know, we just started with Liam, with the Berlin Fashion show in July, so this is not reflected in our numbers so far. The other question regarding digital, yes, we constantly increase our capsules and the products that are digitally produced, in order to be much closer to the trends. I think this is the most important effect. So it has an effect that we are much closer to the current trends, especially, when it comes to casualwear when we do this. And so we are increasing the -- we are about to increase this time over time. And by the end of this year, the HUGO, if I take the products, we have -- 10% are completely digitally developed from samples -- from prototyping samples and sold via digital showroom. And there are some different stages. If you to take the supply chain. We have already -- everything is sold by a digital showroom already. And then you talk about samples. So there's more to be developed -- digitally developed for samples, and then less for prototyping because this combines the whole process. So we are proceeding with HUGO, and we are determined to improve this and to increase the number of digitally produced products in 2020. Regarding womenswear, it's our clear statement that womenswear is an integral part of HUGO BOSS. And it's not margin dilutive. It's a EUR 300 million business. And therefore, it scales. So it's clearly in the center of our business. On the other hand, as we have already pointed out, we are in the retail space, very much driven by sales productivity. And if there is a small corner in a freestanding store, we might get -- we might exchange this by a BOSS casualwear or athleisurewear in order to improve the sales productivity. This has happened a lot in 2018, and this is the major driver, actually, why we see declining in net sales in womenswear because we've reduced the distribution surface. And that was deliberately done. And overall, it makes the whole BOSS group more profitable at the end because we drive sales productivity.

[Operator]

Our next question -- you can proceed, sir.

[Yves Müller, CFO & Member of Managing Board]

Okay. Thank you. In addition to this, if I'm talking about Milan, you will see both the combined men’s and womenswear fashion show. So this is a clear statement of BOSS as well that women play an integral part of the BOSS strategy.

[Operator]

Our next question comes from the line of Piral Dadhania from RPS (sic) [ RBC ].

[Piral Dadhania, Director of Premium Brands]

It's RBC. So 2 questions from me, please. The first one is on range rationalization. My understanding was after the unification of BOSS Black and BOSS Green, et cetera. So all the BOSS lines into a single line that there were excess SKUs and option counts, which would start to be reduced come Spring/Summer 2019. Could you perhaps provide an update as to what the -- what progress you've made on that front? And how much more there is to go? And what type of gross margin benefit we can expect from range rationalization going forward? And then the second point is just coming back to your guidance once again. It feels like the cut was relatively minor. And to that point, consensus expectations are already looking for 7% EBIT growth for the full year, I think, on Bloomberg, you have mentioned saying that EBIT could rise between 7% and 8%. So my question really is, why did you not cut the guidance more in the first place? And secondly, do you believe that sell-side consensus estimates are too conservative to come out and say that EBIT will rise in that sort of range?

[Yves Müller, CFO & Member of Managing Board]

So coming to your first question, what we always said, and which was an integral part of the Capital Markets Day back in November 2018, we said that we want to reduce our SKU range and the big effects that will start will be actually spring/summer 2020 versus 2018, where we want to reduce, in this period, the SKUs 2020 over '18 by 30%. This is what we always say. And if I now because we are now selling -- we have start selling the Spring/Summer collection, I can confirm that we achieved the reduction of this range by close to 30%. So we achieved this kind of range reduction, but this will be effective in 2020, starting in 2020. And then we will see from there, how far we can go. But the first step is a 30% reduction in sportswear. So this comprised casualwear and athleisurewear, this is what we always said and this is what we executed, and that was done. And this gave you -- this was one of the major driver of the gross margin improvement. As you know, we were always pointing out we want to improve our EBIT margin from 12 percentage points to 15 percentage points in 2022. We said half is coming from gross margin, half is coming from cost or operating leverage, and this was 1/3 of the gross margin improvement. So this is, in our calculation, a good up to 50 basis points. So to be very precise regarding your question. And regarding the guidance, we are clearly saying that we reconfirm our guidance, first of all, and at the same time, we are saying to be more precise, and that we expect a lower range of the guidance. This is what we did. Because we are convinced that we want to treat this in a very honest and transparent way. Because we see that in the U.S., we had to adjust our expectations and now we expect for the U.S. market a slight decline. And that was the reason why we were more precise regarding our guidance.

[Operator]

Our next question comes from the line of Philipp Frey from Warburg Research.

[Jörg Philipp Frey, Senior Analyst]

I want to come back a bit on the non like-for-like part of your current performance contribution. Can you update us a bit how the non like-for-like sales uplift of renovated stores and the increased [Audio Gap] particularly now with more data? And secondly, what percentage of your overall or the overall business of Zalando, which we expect is now already converted into a concession model.

[Yves Müller, CFO & Member of Managing Board]

Philipp, thank you very much. So regarding non like-for-like. So overall, what we disclosed today is that out of 390 BOSS stores, we have already now 52 stores in the new store concept. Some of them are brand new, some of them are more remodeled. And we still see, and this is clear, we still see positive development once we change into the new store concept, and we see double-digit improvements regarding sales productivity and net sales. But as a matter of fact, as you know, because the like-for-like base means it's very slow at our because we have space on the calendar years. So we have only 3 stores that are now on the like-for-like base out of those 52. So this is very limited, and that's why we are pointing out that non like-for-like, it's more and more relevant. And so the positive news is, once we've remodel the store, we see positive effects. And that's actually the reason why we are continuously investing into the store concept. And you could see that, in our investments, we increased our investments by almost 50% in comparison to last year. So we are really in a rollout mode now, like we communicated to the capital markets. And regarding Zalando, if you take the figures for Zalando, for the Q2 figures, it's just the additional business that we did was possible, starting in the German and Austrian market. So in July now, we will start to add new country. And most importantly, and this effect is much stronger is that we completely convert the business casualwear and athleisurewear in Q3. So this is what we're about to do with the Zalando. So in the current numbers and the online concession, you only see a very small part, which is actually a new business for Zalando that we started back in November '18.

[Jörg Philipp Frey, Senior Analyst]

Would it be fair to say that probably more than 80% of the business potential of Zalando is not yet converted?

[Yves Müller, CFO & Member of Managing Board]

This is fair to say.

[Operator]

Our next question comes from the line of Thomas Chauvet from Citi.

[Thomas Vincent Chauvet]

Yves and Christian, firstly, your FY '19 guidance implies an acceleration in like-for-like to -- around 5% in the second half. I understand some of the drivers will be a stronger product pipeline, step-up in marketing campaign. Can you perhaps indicate whether July accelerated towards this level of 5%, especially given the easier comp? Secondly, on the admin cost, I think it's the first time ever, they're coming down in absolute value. What time of -- what type of costs have you taken out? And is this trend of a decline in absolute terms sustainable in H2 and perhaps next year? And just a follow up, Yves, on your comment of the LFL in physical stores holding up. How did full-price stores compared with outlet in Q2? And are you generally satisfy in full-price stores about the level of markdown, you're saying it didn't have a major impact on gross margin?

[Yves Müller, CFO & Member of Managing Board]

So thank you very much. So your first question was related to like-for-like. Yes, you're right. We are -- we are indicating that we expect a like-for-like development in the second half of the year of mid-single-digit improvement. And like I said, to Antoine, and we are actually not commenting on the July performance. This is our general rule and that applies for every quarterly result. And regarding the administration costs. So the improvements are coming from both personnel cost, one, because of the reorganizations that we did, that we did in Q1. You remember, we had some one-off costs there. So we see the benefits now in Q2, which is in the run rate and lower depreciations as well. And regarding the performance. Overall, we had a kind of -- in Q2, we had a kind of outperformance of the outlet business versus the full-price business that has had one major reasons because we renovated a lot of our outlets, the big outlets. And they had, really, a tremendous performance, especially when it comes to Bicester in U.K., we'd very good comments in New York, we had some 2 Germans, they are now in the base as well. So those renovations are running very clearly outperformance. But despite this kind of outperformance in the outlet, overall markdowns remained stable in comparison to prior year. So this -- they can see that in the full-price business. Actually, we really kept the markdowns under control.

[Thomas Vincent Chauvet]

Yves. And just on the admin coming down. So you're -- if it's personnel cost and DNA, that should continue in the next 2, 3 quarters, I would guess, so a decline in admin costs until maybe Q1 next year?

[Yves Müller, CFO & Member of Managing Board]

Yes. This is the -- because of the efficiency program that we initiated back in November, this is our clear intention.

[Operator]

Our next question comes from the line of Volker Bosse from Baader Bank.

[Volker Bosse, Co]

Volker Bosse, Baader Bank. I would like to start with the question on your online business, I mean, thanks for all the details, what is to come in the second half? I missed the Asian names. So perhaps you give us an update where we stand with Tmall? For example, I mean, you mentioned that in earlier calls and what is here to come? And how is the underlying momentum progressing here? And the second question would be related to the gross margin. You're 100 basis points down in the first half. To be honest, I'm still struggling with the bridge. So you spoke about inventory valuation. So how much of the 100 basis points comes from which component perhaps, it would be helpful? And also for the second half, I mean, you expect a huge increase, gave some components, but we also see cost inflation, freight costs, personnel costs, all over the place, at least listening to competitors. So how does that play into your projections?

[Yves Müller, CFO & Member of Managing Board]

The last question was related to OpEx, right? Or I didn't get that.

[Volker Bosse, Co]

Yes, I mean -- no, it was of OpEx, you're right. I mean it was -- we started with gross margin, but then we came into OpEx, of course, sure.

[Yves Müller, CFO & Member of Managing Board]

Okay, okay, okay. So starting with the first business. So the Asian digital business is mainly, like we always said, Tmall and JD. And as we said in May, we changed our partner to now a new marketing agency running the website on Tmall and JD. And since then, we are very satisfied. So we could double the net sales on these platforms. So we are very satisfied this, and we will continue this. But on the other side, I mean, we are like a small start-up in Asia, don't overestimate this doubling. But it's going from our perspective, it's going into the right direction, and we are developing this business nicely. And this is clearly what we have expected, and we are doing the business on plan. And in addition to this, I mean, with the fashion show in Shanghai, of course, we want to exploit our better position, our higher customer base on these existing platforms to showcase this in the digital world. And regarding gross margin, it's clearly -- it's an effect coming out of 2018, not 2019 because it was a kind of positive effect in Q2 2018. That was then timely reversed in Q3 2018. So overall, it was a neutral effect. Overall, we are today confirming our gross margin being up 50 basis points. I know that in the first half of the year, we are now down 60 basis points, but we are very much convinced that we can achieve this, especially, when it comes to Q3 to improve this. But your question was related to the drivers. So the majority, if you talk about 80-20 rule, so the majority was related to this inventory valuation regarding gross margin.

[Volker Bosse, Co]

Majority out of the 100 basis points, which we saw in Q2 down?

[Yves Müller, CFO & Member of Managing Board]

Exactly. And regarding cost inflations, and you sometimes have this on the other side, I see tremendous potential in utilizing the purchasing department to get this down. If you see the raw material prices of wool and cotton, you see some deflation tendencies as well. So overall, for the time being, it's not an issue for us.

[Operator]

Our next question comes from the line of John Guy from MainFirst.

[John William George Guy, Managing Director]

Yves and Christian, 2 questions, please. My first one is with regards to the EBIT guidance of up to 7 to 8x IFRS compared to EBIT down from a low single-digit on a reported basis, that implied basically, you're looking for an IFRS 16 impact of around EUR 25 million to EUR 30 million? And is that for the full year? But looking at 1H '19, the IFRS impact at the EBIT level is basically flat? And if I go into your interim report, which, I think on Page 31 mentions the EUR 66 million IFRS impact related to the straight-lining. Can you talk a little bit more about that straight-lining impact? And what's going on there? Is it just a simple case that you basically, I guess, didn't book enough rental expenses? Or were there some deferred tax charges that you're now having to roll through? I'm just trying to understand what this actually means? And what kind of basis that will have rolling forward? Because I don't think it's particularly clear. So it'd be great if you could comment on that. And my second question is around inventory. Yes, from a headline perspective, clearly, we've seen nearly a 4% in reported growth, but as a percentage of sales, it's still notched up around 20 basis points, it's still ticking up? And within the context of the confidence that you just flagged around gross margin increasing by 50 basis points for the year, how much of that is already factored in, based on the weaker performance that you're seeing in the North American market, which doesn't look like it's going to change?

[Yves Müller, CFO & Member of Managing Board]

Thank you very much, John. Coming to your first question regarding IFRS 16. Overall, I would say, clearly, we make the decisions that we have based our guidance of -- excluding IFRS 16. I think this is very crucial because it's a big project that is now running in all the big retailers. We talk in our case, about more than 1,000 retail contracts that has to be analyzed and has to be reported. It's a very complicated topic when it comes to rents, minimum rents, we talk about stores, shop and shop. We talk about variable rents? We talk about rent-free periods, we talk about indexations and all these things. I don't want to make it too complicated. But I just wanted to give you the indication. It's a big topic for all the retailers. And we are in current discussions with our auditors. And at this stage, this is the best to our knowledge, how IFRS 16 would change our view from a repurchase perspective. On the other side, I cannot exclude today that there might be some changes going further, and we will clearly make a note to you once it comes more transparent. But clearly, our full guidance, our guidance and the whole numbers are based on excluding factors of IFRS 16. And regarding the inventories, yes, we've reduced our inventories now another 6 percentage points now to 3% ForEx adjusted. And you were talking about -- you did some ratios with net sales. If I look at my conversion cycle, so for the first time since 4 quarters, I'm now back into better conversion cycles, actually, than one year ago. So it's the first time because they are based on the expectations for the months to come. And regarding, I think, your question was related, the weaker U.S. market and all these things, they are all accounted in our numbers and our guidance. And we clearly stick and reconfirm our guidance regarding gross margin to improve it to up to 50 basis points.

[John William George Guy, Managing Director]

Okay, great. Thanks, Yves. Maybe just one clarification. Then so for point one, I should deduce that possibly it looks like you didn't maybe account for high enough rental expenses in the past? And that within the transition of IFRS 16, there could be some massaging here in terms of basically raising some of those rental costs? That's the way that I see it because it's not DNA, and I don't know if it's deferred tax assets. I appreciate it's a complex issue, but the base effect looks like you could argue if you're being skeptical that you maybe haven't been as conservative or too conservative on rental costs in the past. And now you're having to adjust for that.

[Yves Müller, CFO & Member of Managing Board]

No. I cannot confirm this. Actually, to precise, it's the opposite. It refers to straight-line method. And I think we have been conservative in the past. And we are still in discussion with our auditors to solve these issues. I think it's nothing to worry about. We have been always conservative. And this was actually confirmed by the auditors as well.

[Operator]

Our next question comes from the line of Elena Mariani from Morgan Stanley.

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

A couple of questions from me as well. The first one is on your medium-term targets. You've provided, a few months ago -- us with the guidance for fiscal year '22, and an outlook of 5% to 7% organic growth and a 15% EBIT margin. Can I just confirm whether, as of today, you're still comfortable with these guidance? And if so, what do you think could close this reacceleration in the coming years towards like the middle point of the range and towards the 15% EBIT margin? That's question number one. And then a couple of clarifications on the gross margin. You're talking about an unchanged guidance of plus 50 -- up to plus 50 basis points for the full year. Is this more like close to 50 basis points? Or could this be also 10 basis points? Given you've tweaked the guidance slightly towards the lower end. Can you be a little bit more precise on the gross margin as well? And also perhaps, how should we think about phasing in Q3, Q4, given that the big chunk of conversions is going to come in the third quarter? And also, one final clarifications on the e-concession business. Last time, you told us that this was representing approximately 10% of online sales in 2018, and it should be around 20% of online sales in full year '19. So is it correct to assume that you're going to have around EUR 35 million of sales related to e-concessions by the end of 2019?

[Yves Müller, CFO & Member of Managing Board]

Okay. Thank you very much, Elena, for your questions regarding the medium-term guidance, I can clearly reconfirm today that we stick to our midterm guidance, which is like a CAGR of 5% to 7% regarding top line and 15% of EBIT margin. And clearly, we see in the months and the quarters to come, acceleration, especially coming from the online concession part. This is a big part. And the second big part is actually coming from all the measurements that we are taking. I was just saying that we were heavily investing into our store network. And you will see positive effects coming from the modernization of the store network and the rightsizing and making the whole system more efficient. And we are clearly on our expectations, and we will meet this midterm guidance. Secondly, your question was related to the gross margin. I mean we are guiding the gross margin as a specific and up to 50 basis points means up to 50 basis points. Your further question was related regarding the phasing. Yes, I think the phasing refers more to the Q3. So we should see positive effects coming in Q3. So this is not end loaded more in Q4, so that should be coming in Q3, the improvements. Especially because we said this inventory valuation effect will have a very positive effect in Q3. And your third question was related to online concession. Yes, clearly, the online concession, and we are in good track. And even today, the online concession part makes more than 20% of our online business. And we are well on track, and we are performing better than actually expected.

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

Okay. And one small follow up. And all the benefits we're going to see from the third quarter from the conversions. Is it correct to assume that they will then annualize in the third quarter of next year, so you're going to have a tailwind also in the first half of 2020?

[Yves Müller, CFO & Member of Managing Board]

Yes, that's true.

[Operator]

Okay. And that will be our last question. I would like to hand the call back over to Mr. Christian Stoehr. Thank you. Please go ahead, sir.

[Christian Stoehr, Head of Investor Relations]

Thank you, and thanks, ladies and gentlemen, this completes our call for today. And unfortunately, we are running out of time. I know that there were a few more people who wanted to ask questions. I promised that the IR team will get back to each and everybody right after this call. So thanks very much for your understanding. And I wish you a very good day. Thank you very much, and goodbye.

[Yves Müller, CFO & Member of Managing Board]

Goodbye.

[Operator]

Thank you. That concludes our conference for today. Thank you all for participating. You may all disconnect.