Hugo Boss AG

XETRA:BOSS

Earnings Call Transcript 2022-Q2

[Operator]

Dear ladies and gentlemen, welcome to the HUGO BOSS Second Quarter 2020 Results Conference Call. [Operator Instructions] May I now hand over to Christian Stohr, Vice President of Investor Relations, who will lead you through this conference. Please go ahead.

[Christian Stoehr, executive]

Yes. Thanks very much, and good morning, everyone. Welcome to our second quarter 2022 financial results presentation. Today's conference call will be hosted by Yves Muller, CFO and COO of HUGO BOSS. Before I hand over to Yves, allow me to remind you that all revenue-related growth rates will again be discussed on a currency adjusted basis, unless otherwise specified.

And I would also like to remind you that during the Q&A session, we kindly ask you to limit your questions to a maximum of 2. So without any further ado, let's get started, and over to you, Yves.

[Yves Müller, executive]

Thank you, Christian. And also from my side, a warm welcome from sunny Metzingen to all of you. As you have taken notice from our pre-release from mid-July, at HUGO BOSS, we look back on a highly successful second quarter with top and bottom line growth further accelerating.

Sales increased a strong 34% year-on-year to EUR 878 million, this means record second quarter sales for our company. Importantly, momentum was once again broad-based in nature with strong top line growth across all brands, all channels and key regions. But also from a bottom line perspective, Q2 saw significant improvements at EUR 100 million EBIT more than doubled year-over-year, thereby reaching new second quarter heights for HUGO BOSS.

Compared to 2019 levels, EBIT was up a strong 25%. This underlines the high quality of our top line growth and is even more remarkable given long-lasting store closures in Mainland China throughout much of the second quarter as well as the ongoing conflict in Ukraine. Equally, if not more importantly, compared to pre-pandemic levels, sales were up 29%, representing yet another strong acceleration of 12 percentage points as compared to Q1.

This is all the more encouraging as we now look back on our 4 consecutive quarters of sequential revenue improvements versus 2019, following the announcement of CLAIM 5 growth strategy in August last year. It impressively demonstrates the strength of our company, the desirability of our brands and the power of CLAIM 5. Thanks to the rigorous and relentless execution of our 5 strategic priorities, only 1 year after the introduction of CLAIM 5, we can clearly see that our strategy is bearing fruit.

HUGO BOSS with its two iconic brands, BOSS and HUGO, is stronger than ever before. Above all, the bold branding refresh that we successfully implemented in early 2022 has provided an incredible boost to brand perception and relevance. With our new modern brand identity, we are winning over consumers all over the globe, turning them into two friends for our brands.

This was particularly noticeable on social media, where many engaging marketing initiatives create a tremendous buzz thereby boosting our brands, especially among younger generations such as Gen Z and the millennials. The anchors were clearly our 2 star-studded global campaigns #beyourownboss and #howdoyouhugo, which have driven strong brand heat since their launch at the end of January this year.

Supported by dedicated brand events such as the 2022 Open Championship at St Andrews as well as the iconic Coachella festival at Palm Springs, both BOSS and HUGO were able to maintain their strong momentum on social media.

Throughout the first half of the year, BOSS has been the fastest-growing brand on Instagram among key premium apparel peers, while HUGO managed to outperform core competitors on TikTok accordingly. Equally important, both brands recorded a sustainable uptick in organic engagement rates. Since the launch of our star-studded campaigns and the implementation of our branding refresh, BOSS and HUGO have generated nearly 30 billion impressions and more than 1 billion interactions on social media.

All this is proof positive that we have successfully boosted our brand within a short period of time. And the next big activation is just around the corner. Building on the incredible success of our brand refresh, this morning has seen the go live of our fall/winter 2022 campaigns, both BOSS and HUGO have once again gathered a high profile, all-star cast to tell the next chapter with some familiar faces, including Kendall Jenner, Alicia Schmidt, Khaby Lame and Big Matthew as well as some new celebrities, including supermodel Naomi Campbell for BOSS womenswear or American model and singer Selah Marley for HUGO.

We have no doubt that the new campaigns will keep up the momentum of the brand refresh also over the next weeks and months and further boost brand relevance for BOSS and HUGO around the globe. Besides marketing, it is, of course, also our new product offering that keeps resonating extremely well with both our wholesale partners and the global consumer. Our brand spring, summer and pre-fall collections, with a unique look and feel and their strong focus on creating a 24/7 image, attracted new and younger customers, thereby resulting in ongoing strong sell-throughs across all wearing occasions.

Speaking about sell-through rates, I'm particularly encouraged by the surge in our full-price business, reflecting our brand's powerful momentum, something that also provided strong tailwind to our gross margin development in the second quarter, on which I will elaborate in more details in just a few minutes. Now with our fall/winter collection hitting the shelves as we speak, both BOSS and HUGO will ensure that product is and will remain king.

We continue to delight our customers with our brands and product lines and a superior price value proposition also in the second half of the year. The launch of various unique capsule collections has enabled us to create further excitement among others, BOSS Menswear has launched a dedicated capsule co-created by TikTok Superstar and global BOSS brand ambassador Khaby Lame, while BOSS womenswear is collaborating with German athlete and campaign-based Alicia Schmidt.

HUGO, on the other hand, has teamed up with Mr. Bathing Ape during the second quarter to further drive credibility in the important streetwear market, while joining forces later this year with Replay a truly unique denim collection. In the wake of these successes, momentum for BOSS and HUGO has further accelerated with revenues up 29% for BOSS menswear and up 6% for BOSS womenswear, both compared to pre-pandemic levels.

Our BOSS brand recorded strong sales improvement in the second quarter as well as significant acceleration compared to Q1. Importantly, growth was driven across all wearing occasion as not only casualwear continued to record strong double-digit growth, but also formalwear offering exceeded 2019 levels for the first time. This is proof positive that we are making a great progress in transforming BOSS into a true 24/7 lifestyle brands.

Also at HUGO, the broad robust performance during the second quarter is providing strong evidence that the brand's strategic focus on contemporary and commercial styles propelled the overall momentum, thereby leveraging HUGO's tremendous potential. Overall, sales were up 39% on 3-year stack with casualwear sales once again more than doubling.

From a regional perspective, growth in the second quarter was particularly strong in Europe and the Americas, with both regions recording a further acceleration. On a 3-year stack basis, sales in Europe increased 36%, representing a sequential improvement of 15 percentage points as compared to Q1. This development was driven by double-digit growth across key markets, including Great Britain, France and Germany, supported by robust local demand as well as the return of tourism.

In addition, we continue to enjoy strong momentum in both Eastern Europe as well as the Middle East as reflected by double-digit and triple-digit growth, respectively. Also in the Americas, momentum remained robust in the second quarter, with 3-year stack growth accelerating by 21 percentage points to 38%. And while all markets contributed to the success, I'm particularly pleased that our important U.S. business, where we continue to successfully foster our 24/7 brand image, saw a further acceleration compared to Q1, posting 3 years stack growth of 23%.

In this context, let me also emphasize that as we speak, our underlying momentum in the Americas remains intact with no tangible signs of a potential slowdown so far. This also holds true for our business in Europe. Finally, in Asia Pacific, revenues were down 4% versus pre-pandemic levels, also as double-digit growth in Southeast Asia Pacific was more than offset by a 13% decline in Mainland China versus 2019.

As you would expect, the latter was impacted by COVID-19-related lockdowns with 1/3 of the market's store network being temporarily closed in the month of April and May. This resulted in a 20% store closure rate in Mainland China for Q2 as a whole.

Importantly, we have seen the first sign of a decent steady recovery in Mainland China since reopening, with our business having reported double-digit revenue improvement versus 2019 and both June and July.

Let's conclude on the top line with a brief review of the performance by channel, where our brick-and-mortar business recorded particularly strong growth in the second quarter. In brick-and-mortar retail revenues exceeded 2019 levels by 19%. This development represents a strong quarter-on-quarter acceleration of 18 percentage points driven by robust store productivity improvements to levels above those seen pre-pandemic.

It reflects the successful execution of strategic initiatives to further optimize our global store network as well as overall higher store traffic in the second quarter. Speaking of physical retail in mid-June, we took the brand experience to the next level as the doors of our new BOSS flagship store opened on London's iconic Oxford Street. Our new retail approach provides a seamless blend of digital and in-store shopping experience, thereby setting the stage for a best-in-class omnichannel journey.

The rollout of our new store concept will continue to play an important role also in the future. Besides new store opening, it's also -- this also includes the refurbishment and upgrade of up to 100 existing points of sale in 2022 with London Regent Street and Vienna coming up in the second half of the year, just to name a few.

Moving over to physical wholesale, where revenue growth also saw a further acceleration in the second quarter. Fueled by our successful brand refresh, we have been enjoying strong demand from wholesale partners around the globe, resulting in strong 3-year stack growth of 18%. Finally, on our digital business, which continued its double-digit growth trajectory year-on-year, despite being up against a challenging comparison base and despite the strong acceleration seen in brick and mortar during the second quarter.

Compared to pre-pandemic levels, digital revenues even more than doubled, up 128%, leading to a digital sales share of 18% from the second quarter. With this, let's now move on to the main P&L items where the strong top line performance in Q2 has clearly also left its positive mark.

Starting with our gross margin with total 63.5% in the second quarter, representing a strong increase of 230 basis points year-on-year. This development is a direct consequence of a noticeably higher share of full price sales following the uptick in brand momentum in the wake of the brand refresh. In doing so, we were able to more than compensate for the persistently high level of global freight costs as well as some negative currency and regional mix effects.

Now it's important to stress that the negative implications resulting from higher transportation and energy costs will most likely continue to weigh on [ import ] cost in the foreseeable future. In addition, we also anticipate that unfavorable currency effects will remain a headwind for our gross margin development in the short term.

Moving over to operating expenses, which increased 34% in absolute terms, mainly reflecting higher rental and payroll costs as well as a step-up in marketing investments. As a percentage of sales, however, and driven by the strong top line development, total operating expenses improved by 240 basis points to a level of 52.2% well below pre-pandemic levels. In particular, selling and distribution expenses were up 35% year-on-year, driven by an increase in variable rents in the light of a strong revenue growth.

In addition, higher marketing investments up 29% in Q2 contributed to this development. At 6.6% of group sales, however, marketing investments have normalized somewhat following the peak in Q1 and are now closer to our target range of 7% to 8% as set out in CLAIM 5. Last but not least, we also recorded noncash impairment charges of EUR 15 million related to our store network in Russia as we impaired around half of our asset base over there in the second quarter.

Now in the light of the strong top line performance, the robust improvement in gross margin as well as the operating expense leverage generated in the second quarter, we were able to realize significant bottom line improvement in Q2 as reflected by a record second quarter EBIT of EUR 100 million as well as a robust improvement in the EBIT margin up 460 basis points to 11.4%. In this context, however, allow me to remind you that we will continue to invest in our business also going forward, as we remain fully committed to further fueling brand momentum for BOSS and HUGO. We will not compromise on that as we are convinced that this will ensure we successfully deliver on our CLAIM 5 targets.

Let's now turn quickly to the balance sheet, starting with trade net working capital, which, as a percentage of sales, continued to decline to a level of 13.8% only. A strong increase in trade payables year-over-year, reflecting a higher utilization of our supplier financing program more than compensated for higher trade receivables as well as a currency adjusted 17% increase in inventories. The inventory buildup is, above all, aimed at ensuring product availability for the upcoming season in the wake of persisting global supply chain bottlenecks.

And let me also be very clear that we continue to feel very comfortable with our current inventory situation as we continue to operate with a healthy and high-quality inventory mix. This brings me to free cash flow, which amounted to EUR 98 million in the second quarter, slightly below the prior year levels as improvements in EBIT were more than offset by the increase in inventories as well as our well-flagged step-up in capital expenditure. This concludes my remarks on our second quarter operational and financial performance.

Let's now move over to our expectations for the remainder of the year. As you will have noticed from our pre-announcement, we increased our outlet for the current fiscal year. In doing so, we take account of the stellar top and bottom line performance in the second quarter and the first half year, respectively, the uptick in brand momentum as well as our confidence when it comes to the second half of the year.

At the same time, our updated outlook reflects the persistently high levels of macroeconomic uncertainty as well as the comparison base that has become increasingly more difficult from here on, as we returned to pre-pandemic levels back in Q3 last year.

Consequently, regarding our top line, we now forecast group revenues in fiscal year 2022 to increase by between 20% and 25% to a new year record level of between EUR 3.3 billion and EUR 3.5 billion. Importantly, growth will be broad-based in Asia with all brands, all channels in all regions set to contribute to our growth targets. Our confidence is underpinned by the persisting strong brand momentum of BOSS and HUGO across key geographies and the fact that we have not witnessed any material change in consumer shopping behavior at this point of time.

Based on the anticipated strong top line growth and an at least stable gross margin development year-on-year, we are now forecasting EBIT to increase by between 25% and 35% to a level of between EUR 285 million and EUR 310 million in fiscal year 2022.

This holds true despite the significant step-up in product, brand and digital investments, which are a firm element of our CLAIM 5 strategy and will continue to lead the way throughout the second half of 2022.

At the same time, we have also factored in some of the ongoing macroeconomic uncertainties, in particular when it comes to elevated freight and energy cost levels as in general cost inflation. As is the nature of things, it is rather difficult to precisely predict how these uncertainties will evolve.

And while we have already implemented measures to protect our bottom line in the short term, including the already announced mid- to high single-digit price increase starting with the upcoming Fall/Winter 2022 season, at HUGO BOSS, we will continue to monitor the macroeconomic environment very closely and react quickly and effectively to any changes in marketing conditions also in the future.

Now this brings me to the end of my presentation. Before we kick off with the Q&A session, let me briefly recap on our performance during the second quarter and the first half year, respectively. Above all, the strong performance in Q2 is nothing but a direct consequence of our CLAIM 5 strategy, which has quickly proven to be a winning formula for our company. Thanks to the steady and focused execution of our strategic initiatives, we have made a kickstart to CLAIM 5.

Our two brands, BOSS and HUGO, have gained meaningful traction, leading to broad-based momentum as well as significant top and bottom line improvements in the first half of the year. However, we will, by no means, rest, but instead continue to push the pedal to the metal. Thanks to an exciting brand and product pipeline being filled for the remainder of the year. I'm very confident that both BOSS and HUGO will continue their successful journey.

With our increased top and bottom line outlook for the current year -- fiscal year, in 2022, we will reach another important milestone on the way to our 2025 targets, enabling us to, ultimately, achieve our medium-term ambition of becoming one of the top 100 global brands. And with this, I am now very happy to take your questions.

[Operator]

[Operator Instructions] And our first question is coming from Grace Molly at JPMorgan.

[Unknown Analyst]

I guess, if I could first ask, you mentioned that you have not yet seen any changes in consumer behavior, yet your guidance does embed a slowdown in revenue growth in the second half. So perhaps could you just give us some more details in terms of what you're seeing on current trading and order books as well? That would be very helpful.

And then secondly, on inventory, you mentioned there that the inventory growth has been driven by your decision to make sure that you do have product availability. So perhaps you could just elaborate on the actions you have taken there? And then also your comfort on inventory levels at your wholesale partners as well and whether you're seeing any changes in broader inventories across the market and promotional activity?

[Yves Müller, executive]

Yes. Grace, thank you very much for your questions and your interest. So regarding current trading, as I mentioned already during my presentation, first of all, I have to say we are very happy with the current development and how we started into the third quarter. We have seen, so far, no change in consumer behavior, and we have seen, so far, that no slowdown in overall consumer demand. So I can actually confirm what we -- what I said during my presentation and finally confirm that we are happy with the current developments.

Regarding product availability and this is 17% ForEx-adjusted increase, it's clearly driven by ensuring the product availability. You can see that how fast we are growing and this is really to ensure that we have the product availability in place. I'm not concerned at all. If I look at the quality of the inventories, we even decreased the aging structure of our inventory.

So I'm very happy with the inventory level. And actually, we have to ensure a very, very strong demand that we see all over the different geographies so that from a supplying perspective, we are capable to deliver this kind of demand.

And actually, regarding wholesale, you know that the wholesale, especially the fall/winter collection, has seen a 40% increase in sell-ins versus the pre-pandemic level. This has to also be reflected in our inventory levels. And so far, the sellouts are very good in our wholesale channels.

We see this -- we have seen that the pre-spring order has been up double digit as well. So this is a clear positive sign from our perspective that sell-out rates are good, and that the wholesale partners are even ordering more for the new collections.

[Operator]

The next question is coming from Thomas Chauvet at Citi.

[Thomas Chauvet, analyst]

My first question on China and your guidance for the full year. In light of what you're seeing in July in China, what is your kind of reasonable growth assumption for the second half in this market, whether for HUGO BOSS, what do you think the premium ready-to-wear category will do in China in the second half?

Secondly, you've provided some color on the growth in casualwear, could you give us the split in the first half between casualwear, formalwear and chosen accessories of the breakdown and within formalwear what is now the share of traditional business attire versus the formalwear related more to events that you've been pushing.

And just finally, on womenswear, it's underperformed menswear in the first half, is it much, much smaller base. So is that in line with your expectations? And can you remind us what you're doing differently on womenswear, this is the path to make it work? That would be useful.

[Yves Müller, executive]

Yes. Thomas, thank you very much for your questions. So regarding China. So first of all, we are very happy since the release of the lockdowns that the business has come back. Like we pointed out, we have seen double-digit growth in June and July versus 2019. I think we are very happy with the fast recovery.

On the other side, we remain somehow cautious with the development in China because we don't know what will really happen -- what will be happening. It can be very fast that there might be some further lockdowns because China has not yet changed their -- actually no COVID policy overall.

Regarding formalwear and casualwear, as you know, I mean, the overall -- if you would really divide it, I mean, I have to point out, Thomas, that we are clearly saying for BOSS, we want to be 24/7 lifestyle brand. We don't -- at our own side, we don't differentiate anything longer between formal and casual wear. On the other side, if you would do this, you clearly see we have around 25%, which is formalwear, 50%, which is rather casualwear. The other 25% is shoes accessories and party wear and lingerie.

And you could really see that casual wear and shoes and accessory, especially in the sneaker business, is growing very, very decent and higher base. And we just closed now that with the BOSS brand, we are now, for the first time, above the 2019 levels because we see that occasions are coming back. We see actually in our wholesale orders as well for the future, very good orders for smart casual and BOSS Black.

So actually, we are very happy with the current development of formalwear. And it seems like this trend will be persisting over the next quarters. Regarding womenswear, we are completely in line with our own expectations. You know that we have a new management. You know that regarding our own ambition, regarding CLAIM 5, we were -- we have -- we want to double the business. I think we are on a good path to execute this. And we have seen -- actually, the new management has worked on the new collections and the preorder status in womenswear are clearly on green light. So we are happy with the current development on womenswear as well.

[Operator]

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

[Antoine Belge, analyst]

It's Antoine Belge, BNP Paribas Exane. So three questions. First of all, regarding wholesale. So I mean, this year is a bit special maybe because you -- thanks to the fact that you relaunched Orange, et cetera, you were able to gain, I would say, more selling surface. So I know it's difficult, but, for instance, in that order book up 40%. Could you maybe isolate more what is sort of space impact and a bit more of a like-for-like. I know it's hard to make, but because I think there are question mark about next year when that sort of space effect is behind us.

The second question is about the -- specifically on the U.S. market, so no slowdown and no change in behavior. But that's, I would say, probably a general comment, but more specifically in terms of the success of the brand in the U.S. and especially the development in the first half. I mean, can you maybe highlight a few things where things have improved significantly?

And the third question is actually just a clarification. So when you said that China is up double digit in June, July, versus 2019, what will be this growth rate versus 2021, so on a year-on-year comparison?

[Yves Müller, executive]

Thank you very much. So regarding your three questions -- actually, regarding sales. So first of all, like-for-like in retail space from our perspective, for the time being because of these temporary closures, because of the optimization program that we are doing and the remodeling doesn't make big sense actually to report like-for-like numbers because it's only a small part and it's changed every quarter-over-quarter. So we look at the reported figures.

On the other side, I can assure you regarding -- and I'm talking about retail space there, especially there -- on the retail side, you have seen mid-single-digit space increase in the first half of the year. And regarding wholesale development, you can say that half of the business is actually coming from additional space that we generated with the supplies Orange and Green and Camel. So this is the kind of rule of thumb.

So your second question regarding the U.S., we are actually very happy with the current development. Our specific, I would call it, self-managed comeback of BOSS is clearly visible because we really changed the perception of BOSS. We reduced the formalwear share in our product offering. We are doing collaborations like NBA that resonates extremely well with younger consumers.

So we see that younger cohorts are coming in, so this 24/7 lifestyle brand in BOSS for the U.S. market is really fantastic, the current development. And I think it really comes from the right product offering together with the big branding refresh, I think going all in the good direction. And actually, we are growing in all channels in wholesale, retail and in digital, in the U.S. market. So it's very much broad-based related.

And the last question was referring to China. And I mean since the Q2 is already over, I can confirm that we are back to growth in July versus '21.

[Antoine Belge, analyst]

Maybe just a follow-up on China. So when store reopen, I mean are you seeing back to normal or more like sort of like catch-up effects/in pent-up demand and -- or is it just like, I would say, obviously coming back to normal trends?

[Yves Müller, executive]

Well, I would say it's getting to normal. I think we see -- actually week-over-week, we see there constant improvement, but you never know in China. Because tomorrow, there can be new lockdowns, so we have a kind of cautious view for the second half of the year. And I think this is also reflected in our guidance.

[Operator]

The next question is coming from Michael Kuhn at Deutsche Bank.

[Michael Kuhn, analyst]

Two from my side as well. Firstly, again, back to the guidance, and I know it's always nasty questions. But if I look at your guidance at the midpoint on EBIT you basically imply EUR 160 million in the second half. That would be like 13%, 14% less than you had in the second half of last year. And even at the upper end, it would be down 10%. So I see you have some buffer safety in here, but maybe some more thoughts on why you guided that way. And let's say, what key risk factors you currently see into the second half of the year?

And then secondly, on the Russian impairment, EUR 17 million. I think, entirely booked in the second quarter. Is your Russian asset base now written down to 0? And are there any remaining risks in Russia? Or are you entirely out here?

[Yves Müller, executive]

Michael, thank you very much for your questions. So I'll start first with the second question. So all in all in the first half of the year, we booked EUR 17 million impairment, so EUR 2 million in the first Q1 and EUR 15 million in Q2, just to get the numbers right, how we come up to the EUR 17 million. it heavily depends actually on the fluctuation of the Russian ruble.

So it's a little bit difficult to say how much is the asset base for the -- so there is a remaining asset base, but we already in terms of right-of-use assets and fixed assets. This is what we are alluding to, and we have already depreciated more than half of it, but it all depends on the ruble, right?

So this gives you a kind of uncertainty if this is really half -- for the time being, it's more than half that we already impaired for the Russian business. Regarding the guidance, I think you have to -- first of all, I think -- and I clearly want to mention this. So with Q2, I think we have shown that the top line growth, which is broad-based, which even accelerated, which is high quality, which is visible in the gross margin.

And together with the operating leverage that we can achieve that we can really get very fast, close to our 12% EBIT that we want to achieve in 2025. So I think it's visible what is doable in our business model. I think we have to be very aware of this. And actually, we are very happy with the second quarter results. And it shows you what the business model can show.

With regarding the guidance, you clearly can see -- you clearly has to take into consideration that we, as HUGO BOSS, clearly want to invest further. So the brand momentum that we enjoy, all the investments that we're doing into the products, the investments that we are doing in to the digital investments.

So -- although there are a lot of macroeconomic uncertainties, I just want to give you the clear message that we want to -- that we will continue to execute on our CLAIM 5 strategy. And this means that we are still clearly in the investment mode, say, in terms of products, in terms of quality investments into the product, in terms of marketing investments, in terms of digital investments, in terms of investments into the store portfolio, and we will do this, and this is clearly reflected in our guidance.

And on the other side, what you can see is clearly regarding freight costs, cost inflation, this remains high and remains an issue, and this is also reflected somewhat in our guidance for the second half of the year.

So clearly, all these uncertainties that we see, I think, we are maneuvering in very difficult times. I think this has been somehow reflected in our guidance as well. And actually, by the way, if you take H2 in comparison to H1, we want to increase our EBIT margin. So still, if you look at this, there will be a slight improvement that is inherently in there.

[Michael Kuhn, analyst]

Okay. And that implies -- so you could see, let's say, like a little more momentum in OpEx in the second half as you referred to marketing and other investments planned?

[Yves Müller, executive]

Yes, I mean we will invest, and there is cost inflation, which we see this, and this is reflected in our guidance.

[Operator]

The next question is coming from Manjari Dhar at RBC.

[Manjari Dhar, analyst]

I just have two, if I may. Firstly, given the supply chain disruption you've been seeing, has this changed how you're thinking about your geographic sourcing profile longer term? And then secondly, just sort of building on the earlier question on casualwear versus formalwear split versus HUGO accessories. Is the current split a level that you're happy with? Or do you see there's potential for that to change further?

[Yves Müller, executive]

Yes. Manjari, thank you very much for your questions. So the second question, I think, is pretty easy. I think we are very happy with the current split. We want to be a 24/7 lifestyle brand. I just can repeat this. I think there are a lot of initiatives coming up with all different product groups. So overall, we see actually growth coming from all different product areas. And I think the split will be rather similar in the near future.

And regarding supply chain for the future, I think we have to be aware that for everybody listening, I think we have a very -- in comparison to our competitors, a very big footprint actually in the European market, including Turkey. So 50% of the supplier are based in Europe, including Turkey. So this is another starting point in comparison to other competitors. And going forward, and I think it was -- you have made a kind of strategic question. I think in the future, what we intend to do to more near-shore even further.

So if you have your market set up being 20% of your net sales will be done in Americas, 15% in Asia and 60% in Europe, I think we go more into this direction overall in terms of supplier setup. So this means that we are about to find new suppliers on the American continent as well to supply the American market with ease. So this will be a strategic exchange. This is point one.

And secondly, we perceive actually Izmir as our own factory, our own production site, a big asset in these times of supply chain disruptions. So we're going to increase actually our factory there. There was one unused hall that we are, just in these days, about to fill so we are hiring more than 1,000 people in Izmir to produce more casualwear items because we have seen that the own production which makes around like 17%, 18% of the full sourcing volume is actually a good percentage, and this can be increased by another 2 to 3 percentage points.

And this ensures a big flexibility actually for our supply chain. And I think these are the two directions that we are strategically taking. So near-shoring, being more proportionate to the net sales from a sourcing perspective and investing into the owned facility, especially in Izmir, to ensure the high flexibility.

[Operator]

The next question is coming from Philipp Frey at Warburg Research.

[Joerg Frey, analyst]

Yes. Hello, gentlemen. I also want to understand a little bit more your guidance. If you look historically, basically your H2 margins are usually around 200, 300 basis points higher your H2 EBIT margins than H1. And looking what was basically changing now relative to the first half, well you've higher prices, increased prices in the second half, if the strong order book, the momentum should not be detrimental. You see even some freight rates at a margin coming down, at least in terms of spot market.

While marketing has been high, do you plan higher marketing than in the first half, so significantly higher than 8 percentage points? Or is it basically just the risk of -- well, to full price sell-through if the market is really deteriorating what you are factoring here in the guidance? So said otherwise, other than risks to full price sell-through, are you -- have you any visibility on anything deteriorating substantially relative to the first half in your margin structure?

[Yves Müller, executive]

Philipp, so thank you very much for your questions. So I mean, I answered, I think, the question from my perspective already. So first of all, regarding top line, we have seen no change in consumer demand. So starting into the second half of the year, we are very happy with the current start.

However, the macroeconomic uncertainties are very high, we see that freight costs are high and will remain high. We see cost inflation coming from energy costs there might be some risk coming from the demand side as well, but we don't know it yet. We haven't seen it so far, but there might be a risk. So having said this, and knowing that we continue to invest from a strategic point of view in CLAIM 5, we feel very comfortable with our guidance, and that's it.

[Joerg Frey, analyst]

So I understand, well, that's a substantial risk buffer. And probably adding on that one, you -- can you quantify your current sell -- full price sell-through? And well, -- and if you judge a bit the sustainability in a normal economic environment, are we currently at a level where you would say, hey, we've increased our price value relationship so this should be kind of new normal in an average economy where we are in full price phase? Or do you think that you are basically punching above your weight in terms of full price sell-through rate right now?

[Yves Müller, executive]

I think we enjoy for the time being, very good brand momentum. Full price sales in comparison to the last period is clearly going up. We needed less discounts, which I think -- which is a very, very good sign. And from my perspective, as CFO and COO, I think still, of course, you can improve year-over-year all the time. So I don't think that this is from this perspective over and we continue very good momentum and I think this will prevail in the second half of the year as well.

[Operator]

The next questions come from Kathryn Parker at Jefferies.

[Kathryn Parker, analyst]

So my first question is a follow-up to the last one. So touching back on the gross margin. I wondered if you could share the exact impact of the higher full price sell-through on the gross margin. I mean, looking at your helpful chart, it looks like it was around 500 basis points, but I wondered if you could confirm that. And then part two of my question also on the gross margin.

So when you gave the 60% to 62% range back at the Capital Markets Day, I wanted to check whether this included any impact from higher full price sell-through or if we want to take a view on the share of the full price business, if we should add on a certain percentage to account for the higher share of full price sales.

[Yves Müller, executive]

Yes. Thank you very much, Kathryn. Regarding the gross margin. I mean we have indicated you 1 chart. And I think the net-net effect was in comparison to prior quarter, was 230 basis points. And all the other effects actually freight costs, regional mix and currency have been on the negative side.

So clearly, the full price sell-through was a big win of around-ish, I would say, 400 basis points. I mean, as a rule of thumb, perhaps this could be right -- the right indication.

And actually, regarding the gross margin, I mean, you know that the big driver was, especially, the quality investment investments that we did. And yes, we included already a kind of increase. We have some assumptions regarding full price increase in our long-term guidance regarding our gross margin.

Hello, Kathryn?

[Kathryn Parker, analyst]

Yes. So just one follow-up. I mean what are your expectations for the second half in terms of the impact of the full price business growth? Like we still see an elevated gross margin in H2?

[Yves Müller, executive]

Well, we have changed now our assumption. We are saying it will be at least the prior year one. So this is what we announced today. I think we see that freight costs will remain pretty high. We have now, in the first half of the year, I think, we have 170 basis points better than last year. So I think we have a good tailwind. We have a strong start into the first half of the year. And let's then -- let's take it from there, right?

[Operator]

Next question is coming from Andreas Riemann at ODDO BHF.

[Andreas Riemann, analyst]

Yes. Two questions from my side. The first topic would be the strong wholesale performance. You mentioned better sell-through, but can you also help us and maybe explain, do you gain more shelf space with existing partners? Or do you actually find new retail partners. This would be question number one.

And then China, last year, there was the forced labor debate in the consumer boycott, Today, you did not really mention that anymore. So is demand for your product still suffering to a certain extent from that? And how about marketing? Can you work with local influencers' testimonials again? Or most of them still shy away from working with you or maybe from working with Western brands in general?

[Yves Müller, executive]

First, I start with the China question because it's an easy one. We are not suffering from boycotts or anything. We are able to get local influencer. I think this is good news from the China side. So actually, our business in China is back to normal. There are other issues like there's no COVID policy. This is a different thing, but regarding this kind of other issues that come from Xiangyang issues is over, and we are back to normal.

And regarding the wholesale business, like I said, I mean, we are clearly -- we are always saying we want to grow more with less. So we are really focusing on the big accounts. We can really see that every account on our top 20 is growing their business. So it's actually, from this point of view, it's a very broad-based growth that we can see. And as I said already, during the Q&A, I would say that now half of the growth that we have been seeing is coming from additional space.

[Andreas Riemann, analyst]

And maybe as a follow-up to the wholesale question. Are any partners left in this world that you would like to work with and you're not working with them yet or...

[Yves Müller, executive]

Well, you always find new wholesale partners, but we are saying we have a clear segmentation on the wholesale side in terms of good, better, best. Like I said, I think the growth potential with the existing ones is even higher to find new accounts.

[Christian Stoehr, executive]

Great. Thanks very much. So I do not see anyone else queuing up for questions. So let me take over from here and conclude today's conference call. So thanks everybody for dialing in. As always, if there's any follow-up questions, please feel free to contact the Investor Relations team any time. And thanks very much for your participation. Have a great summer, great holidays and speak to you then in a few weeks' time. Thanks very much, and bye-bye.

[Yves Müller, executive]

Bye-bye.

[Operator]

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