Hugo Boss AG

XETRA:BOSS

Earnings Call Transcript 2023-Q2

[Christian Stohr, Vice President-Investor Relations]

Good morning, everyone. Welcome to our Second Quarter 2023 Financial Results Presentation. Today's conference call will be hosted by Yves Muller, CFO and COO of Hugo Boss.

Before we get started, allow me to remind you that all revenue-related growth rates will be discussed on a currency adjusted basis, unless otherwise specified. And I would also like to remind you that just like in the past, we kindly ask you to limit your questions during the Q&A session to a maximum of two.

So with this, let's kick it off and over to you, Yves.

[Yves Muller]

Thank you, Christian, and also from my side a warm welcome to all of you. Thanks for joining our conference call today, and thank you for your interest. From our press release earlier this morning, you will have notice that at Hugo Boss, we look back at an excellent second quarter and first half year performance, respectively. I'm therefore very pleased to elaborate in detail in the next 30 minutes on the operational and financial progress achieved in Q2, as well as our increased outlook for the remainder of the year and all of this less than two months after we all met at our beautiful campus here in Metzingen.

Back in June, we hosted our 2023 Capital Markets Day, providing you with a comprehensive update on our CLAIM 5 growth strategy and as part of that, raising our 2025 financial ambition. So just to get everybody on the same page, let's start with a very brief summary of our raised mid-term targets, which we reaffirm today with even stronger confidence following our stellar performance in the second quarter of fiscal year 2023.

As laid out in detail during our CMD, at Hugo Boss, we are fully committed to growing our top line to EUR 5 billion by 2025, representing a strong reported CAGR of 11% as compared to fiscal year 2022 and thus, well above the anticipated industry growth. An ambitious yet very realistic target, particularly when looking at our ongoing strong brand momentum and the many business opportunities that lie ahead, no matter whether from a brand, channel or regional perspective.

Our superior top line ambition is coupled with significant improvements in EBIT, which we forecast to grow to a level of at least EUR 600 million by 2025, representing a strong CAGR of more than 20% compared to 2022. With our bottom line growing almost twice as fast as our top line, we are targeting an EBIT margin of at least 12% by 2025. The main reason for raising our mid-term guidance only two years after its official introduction was the relentless, consistent and very successful execution of our various strategic initiatives. At the same time of our most recent CMD, we were looking back on seven outstanding quarters for our company with a steady sequential acceleration of brand momentum and broad-based growth across both brands, all regions and all consumer touch points. On that, I'm all the more excited to confirm today that our growth trajectory has continued seamlessly also in the second quarter of 2023.

Following our strong start into the year, we maintained our stellar momentum in Q2, recording further significant top and bottom line improvements and adding our eighth excellent quarter to a successful track record of CLAIM 5 Strategy execution. Overall, currency adjusted revenues increased a strong 20% year-over-year or 17% in reported terms, mounting up to more than EUR 1 billion and making the three months period a second – a record second quarter for Hugo Boss.

Importantly, no different to previous quarter, growth was once more broad based in nature and as reflected by double-digit sales improvement across all brands, regions and consumer touch points. Fueled by the very robust top line momentum, EBIT increased 21% to EUR 121 million in the second quarter, with added margins up 40 basis points to 11.8%. On the back of these successes and based on our continued confidence when it comes to the remainder of the year, we are once again raising our top and bottom line outlook for fiscal year 2023, following our former guidance increase back in May.

I will get into all the details of our increased outlook later in my presentation. But first and as usual, let's take a closer look at Q2, starting with our top line performance. Without doubt, the second quarter of 2023 fits seamlessly into our CLAIM 5 success story as we impressively continued our double-digit growth journey. Building on the latest trends and no different to previous quarter, it was once again the relentless execution of our numerous brand, product and omnichannel initiatives that provided substantial tailwinds for both of our brands and resulted in the further acceleration and top line momentum.

When compared to pre-pandemic levels, growth accelerated by eight percentage points to a strong 52%, another clear testament to the strengths and resilience of our brands and the power of our winning formula CLAIM 5. Speaking about our brands, fueled by the bold spring/summer 2023 campaigns, both BOSS and HUGO successfully continued their journey of market share gains driven by the superior sales trajectory, which continued seamlessly also in the second quarter.

Above all, this reflects the ongoing success of our latest collections fully living up to our 24/7 lifestyle ambition, which ones more led to strong sell-through rates across the globe. Consequently and supported by robust double-digit increases across all varying occasions, second quarter revenues were up 18% for both menswear, up 32% for both womenswear and up 21% for HUGO, each representing a quarter-on-quarter acceleration compared to 2019 levels.

Let's now move over to our channels where growth was equally broad based in nature as reflected by double-digit sales improvements across all consumer touch points. Starting with our digital business, which recorded a meaningful acceleration quarter-over-quarter, posting revenue growth of 30%. This development reflects double-digit growth across all our digital touch points, including noticeable revenue improvements of our online flagship hugoboss.com, up 27% versus last year. Overall, the revenue share of our global digital business increased to a level of 19% in the second quarter.

Switching gears to our brick-and-mortar business, which also looks back at an excellent second quarter. This is reflected by very robust year-on-year growth of 17% in both physical retail and physical wholesale, each representing a further acceleration on a four-year stack basis. In physical wholesale, we continue to enjoy strong demand from partners around the globe, leading to broad-based growth across all regions.

Importantly, the buying patterns by our key wholesale partners remain very much intact and we are about to serve robust order books also during the second half of the year. Consequently and in contrast to some recent emerging industry trends, we remain optimistic when it comes to our ability to maintain our strong momentum in this channel and thus, continuing our market share winning trajectory also going forward.

This brings me to brick-and-mortar retail, where the vast majority of our strong performance was once again related to double-digit store productivity improvements, where space expansion only had a minor impact. Year-on-year store productivity increased strong 13% to a level of EUR 12,500 per square meter, thus well above pre-pandemic levels. This development reflects ongoing robust traffic trends across geographies, as well as the continuous optimization and modernization of our global store network, including the rollout of our new store concept.

Speaking of our store universe and as laid out during our CMD in June, we are making considerable progress and turning our points-of-sale into true points of experience. In this context, the rollout of our brands engaging next-level store concepts plays a decisive role with our omnichannel strategy with our Halo store on London’s Regent Street, meanwhile shining a new splendor following its grand reopening earlier this year. Overall, we aim to modernize at least 100 own retail points-of-sale in 2023, turning them into the place to be for our global customers. But that is far from all in order to excite and surprise BOSS and HUGO fans all around the globe, we will also keep pushing ahead with engaging pop-up concepts and the seamless integration of inviting hospitality concepts, be it our newly opened BOSS Café on Regent Street, our most recent BOSS pop-up store at Printemps’ flagship store in Paris, or BOSS taking over the Dubai AURA Skypool Lounge later this year.

This brings me to our regions, all of which contributed with double-digit growth to our remarkable Q2 performance. And while other business in the Americas and EMEA continue to benefit from both robust local demand and a further pick up in tourist activity, Asia-Pacific recorded superior growth in Q2. Starting with the Americas, where we successfully continued our double-digit growth trajectory with revenues up 20%. We recorded double-digit improvements across all of the region's markets. When compared to 2019 level, this translates into a strong growth of 64%, representing a further acceleration of four percentage points quarter-over-quarter.

In this context, I'm particularly pleased that we managed to also drive robust growth of 16% year-over-year in the important U.S. market with all consumer touch points contributing. And while our business in Canada performed broadly in line with that in the U.S., we also continued our outstanding momentum in Latin America as reflected by significant double-digit revenues improvement.

Moving over to EMEA, where sales increased 15% year-over-year driven by robust demand across all touch points. Here, four-year stack growth accelerated by nine percentage points quarter-over-quarter to 53% and thus, even stronger than in the Americas. Momentum remained very robust in key markets such as Germany and France, recording revenue growth of 19 and 15%, respectively. At the same time, sales in the UK came in slightly below the prior year level, being up against a particularly strong comparison base. When compared to pre-pandemic levels, however, revenues in the UK were up 32% and thus, broadly in line with the performance of other key markets. And to finish on EMEA, also in the Middle East, we continued to enjoy strong momentum throughout Q2 as reflected by robust double-digit growth year-over-year.

To conclude on our regions, let's take a look at Asia Pacific, where momentum sharply accelerated in the second quarter, up 41% versus the prior year level. This development was driven by robust growth of 28% in Southeast Asia and Pacific, including yet another outstanding performance in Japan, as well as a further recovering of our business in China following the markets reopening in late 2022. The latter saw revenues up 56% year-over-year with strong support also coming from both Hong Kong and Macau.

With this, let's now move on to the remaining P&L items. Starting with our gross margin, which totaled 62.3% in Q2. While this represents a decline of 120 basis points year-on-year, allow me to recall that our gross margin in Q2 was up against a particularly demanding comparison base from the prior year period. As a reminder, last year's gross margin was up by 230 basis points to a strong level of 63.5%, following the successful branding refresh and overall supply chain constraints, which drove our full price business to new heights.

Against this backdrop, the gross margin decline in Q2 is mainly due to some unfavorable currency effects and negative impact from the channel mix as well as higher product cost levels. The latter reflects both quality investments as part of CLAIM 5 and general cost inflation, which were only partly offset by our latest round of mid-single-digit price increases successfully implemented for our fall 2023 collections.

Speaking about our gross margin, let me also reiterate once again that for the full-year 2023, we continue to expect gross margins to remain at least stable year-over-year. This implies an anticipated gross margin expansion in the second half of this year and particularly in the final quarter of 2023 as we anticipate benefits from additional freight cost relief, product cost lapping, an easier comparison base and the more pronounced impact from our latest price initiatives.

Moving over to operating expenses, which as a percentage of sales decreased 160 basis points to a level of 50.5%, thus well below pre-pandemic levels. Our strong operating leverage in the second quarter reflects, first and foremost, further efficiency gains in our brick-and-mortar retail business. Selling expenses in this important channel improved by a total of 270 basis points to a level of 20.8% of group sales, supported by our initiatives to continuously optimize and modernize our global store network.

In doing so, we were able to more than offset some further investments into our business as part of CLAIM 5, as well as higher fulfillment, variable rental and payroll expenses in light of our strong top line performance. And while marketing investments also increased in Q2, up 16% year-over-year, at 6.6% of group sales, they came in somewhat below our run rate for the full year, which we continue to anticipate at around last year's level of just under 8%. Altogether and spurred by the strong top line performance, we recorded a robust increase in EBIT in the second quarter, up 21% to a level of EUR 121 million, translating into an EBIT margin expansion of 40 basis points to a level of 11.8%. To conclude on the P&L, net income attributable to shareholders also increased noticeably, up 31% to EUR 75 million, with additional support coming from lower financial expenses compared to the prior year period.

Let's now turn to the balance sheet. Starting with inventories, which increased 53% currency adjusted. And while we have already discussed the rationale behind our deliberate decision to increase our inventory decision in detail on several occasions, let me once again emphasize that we continue to feel comfortable with our inventory position, including its overall composition, quality and aging structure. This being said, we have successfully implemented a number of measures to bring down inventory levels, which are starting to take effect.

Inventory growth has begun to decline in Q2, down 30 percentage points quarter-on-quarter and is set to continue decreasing meaningfully also going forward. We thus anticipate a gradual normalization of inventories starting on the second half of the year and remain confident of bringing inventories down in absolute terms closer to last year's level by the end of fiscal year 2023. In doing so, we will make clear visible progress towards our mid-term ambition of bringing inventories down to a level of below 20% of group sales by 2025 as laid out at our CMD in June.

This brings me to trade net working capital, with the moving average of the last four quarters increasing to 17.9% of group sales. In this context, the higher inventory position and increase in trade receivables, in light of our strong momentum in wholesale, we're only partly offset by higher trade payables, reflecting the ongoing strong reception of our supplier financing program. Also for the full year, we continue to expect our trade net working capital ratio to be somewhat up year-over-year, now anticipating a level of between 18% and 19%, thus, at the upper end of our mid-term target corridor.

Moving on to capital expenditure, which was up 56% on the prior year level, totaling EUR 66 million in Q2. This development reflects the strong uptick in investment activity aimed at supporting the successful execution of CLAIM 5 also going forward. While focus areas continue to be our global store network and our digital capabilities, we also began ramping up our investments in logistics. Overall, and based on our latest estimate, we now forecast capital expenditure in fiscal year 2023 to come in at a level of between EUR 250 million and EUR 300 million, translating into around 6% to 7% of group sales. Last, but certainly not least, free cash flow amounted to EUR 60 million in the second quarter as our strong bottom line improvements were partly offset by the delivered build-up in inventories and higher CapEx.

This, ladies and gentlemen, concludes my remarks on our second quarter operational and financial performance. Before opening the floor to your questions, let's take a closer look at our raised top and bottom line outlook for the current fiscal year. Building on our strong growth trajectory during the first six months of the year and sustained brand momentum, at HUGO BOSS, we are very confident when it comes to the second half of 2023. Importantly, our product and brand pipeline is well filled to continue inspiring and exciting customers all over the world. This includes the launch of another two star-studded brand campaigns for fall/winter and the coming weeks, once again geared to maximizing buzz for BOSS and HUGO around the globe. On top of that, BOSS will be back in Milan for a spectacular fashion show in September, but at the same time, continuing to drive brand relevance by collaborating with strong partners, including the latest product brought together with Porsche.

At the same time, let me be clear in saying that we remain vigilant due to the persistently high levels of macroeconomic and geopolitical uncertainties facing our industry. And not to forget, the comparison base during the second half of the year is also becoming somewhat more challenging, as I'm sure you're all aware of. Taking all of this into consideration, we now forecast group revenues in 2023 to increase by between 12% and 15% in reported terms, modestly ahead of our target CAGR of 11% by 2025. This means that we are anticipating revenues of EUR 4.1 billion to EUR 4.2 billion in fiscal year 2023, making it another record-breaking year for HUGO BOSS.

Importantly, and fully in line with CLAIM 5, growth will once again be broad-based in nature, with all parts of our business set to contribute strongly. Based on our higher top line expectations, we are now forecasting EBIT to increase within a range of 20% to 25% to a level of between EUR 400 million and EUR 420 million in 2023. In this context, we remain fully confident of being able to offset ongoing investments in our products, brands and digital expertise by an at least stable gross margin development as well as further efficiency gains, in particular, when it comes to our brick-and-mortar retail store network. Our EBIT margin will thus improve to a level approaching 10% by the end of 2023.

Ladies and gentlemen, fiscal year 2023 will inevitably mark another important milestone for our company towards achieving our increased 2025 financial ambitions, both in terms of top and bottom line. In this context, it goes without saying that we will not rest, but instead, keep pushing the pedal to the metal when it comes to further executing our CLAIM 5 strategy.

In doing so, we will ensure the seamless continuation of our successful growth journey in the second half of 2023 and beyond. Because one thing is certain, with CLAIM 5, we have introduced the right strategy at the right time. As laid out in all detail at our CMD in June, sticking to our game plan of rigorous strategic execution enables our company and our two brands to unleash their full potential in the quarters and years to come, making HUGO BOSS stronger, more profitable and more sustainable. This, in turn, will enable us to not only achieve our ambition of becoming one of the top 100 global brands, but also ensure sustainable shareholder value creation by 2025 and beyond.

This, ladies and gentlemen, concludes my remarks for today. We are now happy to take your questions.

[Operator]

[Operator Instructions] First question is from the line of Grace Smalley with Morgan Stanley. Please go ahead.

[Grace Smalley, Morgan Stanley]

Hi, good morning. Thank you. I have two questions, please, and apologies if they are both related to gross margin. So firstly, on the Q2 gross margin bridge that you provided, please, could you comment on what you saw in terms of promotional activity during the quarter and where that fits in the gross margin build that you've given in the slides? Should we think about the pricing outlined in the build as being net of list pricing, net of promotions? And then could you also explain what is driving the negative channel mix impact on gross margin in Q2 and also whether there was any impact from regional mix?

And then my second question. Looking ahead, you've reiterated your guidance for the at least stable gross margin for the full year despite the decline you saw in the first half. Could you break down the drivers of the positive inflection you expect in gross margin in a bit more detail? And in particular, I think you called out in your prepared remarks that you expect that inflection to come through, particularly in Q4. So could you comment if you also already expect to see gross margin expansion year-over-year in Q3 as well, please? Thank you very much.

[Yves Muller]

Thank you very much, Grace, for your questions. So first of all, regarding this negative channel mix effect, it's more related to the fact that digital wholesale was growing faster than digital retail, whereas brick-and-mortar was more or less at the same growth. So this is more or less related to this kind of negative channel mix effect. Then regarding promotional activities, the promotional activities only had a minor effect on the gross margin. So overall, you can somehow neglect this. So, this is the reason why it was not put into our bridge that we provided to you.

And finally, in terms of the at least gross margin development. So now we are standing in the first half year. We are like 70 basis points below last year's gross margins, but we are very much convinced and very confident that we will achieve at least the same gross margin level in comparison to last year. This will come in the second half of the year because a lot of effects, say, if it comes from product costs, if it comes from freight costs, if it comes from raw material, if it comes from a dollar development versus the euro, if it comes from price increases. So, these are all actually tailwinds that will help us, and they will go, especially through in Q4, like we laid out during the presentation.

[Grace Smalley, Morgan Stanley]

Okay. Thank you. And sorry, just to follow-up on that, they will come through, especially in Q4, but you would still expect gross margin expansion in Q3 as well, but more significantly in Q4. Is that the right way to understand that?

[Yves Muller]

We're not commenting this.

[Grace Smalley, Morgan Stanley]

Okay. Understood. Thank you very much.

[Operator]

Next question is from the line of Susy Tibaldi with UBS. Please go ahead.

[Susy Tibaldi, UBS]

Good morning. Thanks for taking my questions. My first one is on your updated sales outlook. If I calculate what it implies for H2, it's a high single-digit growth, which [Audio Dip] to H1. Of course, you [Audio Dip] tougher comps, but I was wondering [Audio Dip] in the trend already in the month of July that is giving you a reason to be more cautious for H2 or different reasons. And if you can give some observations by region would be very helpful.

And secondly, on your OpEx, you saw really good leverage on your brick-and-mortar costs in Q2. Do you think this is sustainable going forward? Or should we expect some normalization in H2? Thank you.

[Yves Muller]

Thank you very much, Susy. So the line was a little bit distorted during your first question regarding the sales outlook. So clearly – so I think worth first mentioning – worth mentioning is that our guidance implies the reported, and you have seen big versus ForEx and reported that there is a deviation between three percentage points to four percentage points as we have seen actually in Q2. So, you have to keep this in mind. So overall, you are right that it's a high single-digit, low double-digit number that we expect for the remainder of the year.

Actually, we are very happy with the performance ended July. In July, we have seen no somehow a change in consumer demand for our both brands or for channels or geographies. So everything is we are operating on all, firing on all cylinders. So, we are very happy with this kind of performance. So overall, you can say, well, yes, there is some – of course, the comparison base is increasing in the second half of the year. Secondly, we factor in some macroeconomic uncertainties like always, and we take it from there.

And OpEx, yes, we are very happy with the current performance regarding our operating leverage that we have achieved so far. And let's work very closely on optimizing continuously, especially our brick-and-mortar retail costs. We said that strategically, we want to get it down to 20% by the year end 2025. So, we are already standing at 20.8% now in Q2. So, we're really making big progress by optimizing, but a big driver of the OpEx is clearly the improvements that we made in store productivity. So, we increased the store productivity by 13%. I think this is overall a very strong number in brick-and-mortar retail, and this is clearly driving the operating leverage.

[Susy Tibaldi, UBS]

Thank you.

[Operator]

[Operator Instructions] Next question is from the line of Thomas Chauvet with Citi. Please go ahead.

[Thomas Chauvet, Citi]

Good morning, Yves and Christian and congrats for these good Q2 numbers. My first question on the channels. If we look at the first half, the wholesale growth is almost 10 percentage points above the retail growth. And, obviously, that's probably a bit counterintuitive given what's going on in the U.S. European department store channel. I understand your comment is that you're gaining market share. Could you provide us more color on the shape of the order book in wholesale and also tell us within that 22% wholesale growth, what was roughly due to new space with existing or new partners?

And secondly, on the CapEx budget for 2023, increased by EUR 50 million versus the May update. I mean, is that mainly due to phasing of store and digital project between H2 and next year? Or is it a deliberate decision to spend more? And if so, where are those incremental investments located?

And just coming back to your July comments, Yves. Actually, if I take the top end of your revenue guidance, given the effect that implies more like 12%, 13% constant FX growth in H2. You said no change in trends in July. Can you be more specific and indicate maybe whether July is above or below that kind of 12%, 13% constant FX and comment on the key geographies and channel? Thank you.

[Yves Muller]

Yes. Thank you very much, Thomas, for your questions. So regarding the July performance, I think I don't want to make a kind of – I don't want to be more specific with this. But I can assure you that we're really happy with the first 32 days of trading in our third quarter. So regarding the first half year results, so if you compare actually currency-neutral, our brick-and-mortar wholesale numbers, they were increasing by 22% brick-and-mortar wholesale and 21% retail. So, I don't notice actually any difference there.

It's more on the digital sales side, where we were increasing a little bit more in terms of wholesale partners versus our concession business, but this is not actually moving big the needle. Overall, we are very happy with the order intake that we have in wholesale partners. So, we are growing constantly. We are gaining market share and we are actually growing in both aspects, getting more doors, getting more visibility, more penetration, plus on a product-by-product basis, we have a kind of improved like-for-like performance. I mean this is logic, if you just compare the store productivity gains that you have seen actually in retail. And this is also actually reflected in wholesale. But still in wholesale, we are able to grow additional spaces and doors.

And regarding the investments, so we see actually tremendous success with our new store concept. We want to have at the end of this year, 40% of our universe being remodeled and being in the new store concept. So, we are pushing the pedal to the metal in terms of making it really – changing a lot of and investing into the store network by remodeling, by relocating in order to somehow feel this branding refresh that we did, that this is also visible at the POS and turn them actually into points of experience.

So, we are pushing the pedal to the metal with this. And like I said during my presentation, we are also – we said in order to – we said this during the CMD, we are beginning our investments into logistics in order to drive and to support the growth that we are having and we are starting to invest into logistics as well. And this is actually both retail and logistics investments are driving the increase in CapEx.

[Thomas Chauvet, Citi]

Okay. But that's mainly phasing rather than – if I understand correctly, rather than more costly projects?

[Yves Muller]

Exactly. It's more phasing related.

[Thomas Chauvet, Citi]

Okay. Thank you. Thanks Yves.

[Operator]

Next question is from the line of Anthony Charchafji with BNP Paribas Exane. Please go ahead.

[Anthony Charchafji, BNP Paribas Exane]

Yes. Good morning. It's Anthony Charchafji from BNP Paribas Exane. So just two questions. So the first one on the margin. So, I see that EBIT margin up 40 bps, but at the EBITDA level, it's down 280 bps with G&A down 18% in Q2. So could you give some color on the component in between? So that's the first question.

And the second one would be on pricing. So could you remind us what price increase you did this year and also for 2024 and 2025? I recall that in your guidance, you are not including any price increases, but you have – you have a peer, Ralph Lauren CEO that stated two weeks ago that he is willing to keep on increasing prices and knowing that half of your sales at BOSS with the BOSS Black line is priced similarly to Ralph Lauren and your willingness to put it slightly a bit above. I mean, can we expect some price increases in 2024 and 2025 and yes. Thank you.

[Yves Muller]

Bonjour, Anthony. Thank you very much for your questions. I start with the pricing one. So first of all, we have – to put everybody on the same page, we have included or we have decided two price increases. One was in August 2022 fall/winter. And the other one was now in autumn 2023, which was hitting the sales floor in May 2023. So these two price increases were around mid-single digit. And they have been decided. And they have been so far, of course, considered. And furthermore, in terms of 2024 and 2025, we have not decided any price increases yet because we are very much focused on a very good price value proposition overall. We know that we are gaining market share, and we take the decision collection by collection. But for the time being, no price increases have been communicated or decided.

And then related to the EBIT performance or EBITDA, first of all, I'd like to point out that for us, it's very important that – to the capital markets that we improve our EBIT margin overall. So, you can see here with our revised margin that we are about to improve our operating margin again now to this 10 percentage points. So, I think this is very important for us to be very reliable in terms of growing above industry growth and still improve our operating margin. So last year, we made 100 basis points. And this year, we are about to reach the 10 percentage points in EBIT margin. So, this is very crucial for us on our way to our at least 12% in 2025.

And regarding this EBITDA, of course, we do a lot of investments, the investments they turn into depreciation, once you know the investments have been done. So there's – it always comes with a kind of time delay. So the investments that we are doing are hitting our P&L always a little bit later. The same is true for the digital investments that we are taking. And for example, if you take the logistics investment that we're about to start, the construction time is almost 1.5 years. So it takes time until the CapEx turns into a depreciation that this is the main driver for this.

[Anthony Charchafji, BNP Paribas Exane]

Thank you.

[Operator]

Next question is from the line of Manjari Dhar with RBC. Please go ahead.

[Manjari Dhar, RBC]

Good morning, Yves, Christian. Thanks for taking my question. My first question was just on womenswear. I wondered if you could give some color on what's driven the outperformance there and any learnings you've made in womenswear over the last couple of quarters? And then secondly, on the financial interest line, I just wondered if you could give some color on sort of how your planning assumptions for the lease interest versus the FX impact for H2?

[Yves Muller]

So regarding womenswear, if this was the right question because the line wasn't so good. So yes, it's another quarter of outperformance of BOSS Womenswear. We always said that we start with the product. You have all seen at CMD that we have really worked very closely on the collection for BOSS Womenswear and that we're going to expand this collection to a more 24/7 lifetime presentation for spring/summer as well. So, we are overall very happy currently with the performance that we see in BOSS Womenswear. The order books for BOSS Womenswear look good as well.

And I think we are on a very, very good track. And you see that actually that we are taking bold moves because with the reopening of our BOSS store at Regent Street, we offer – the full ground floors is now offered to BOSS Womenswear. So, we are making constant steps there to improve our BOSS Womenswear offering and to give actually more space to BOSS Womenswear in order to outgrow the market. So, we are overall happy with the current performance of BOSS Womenswear, and we hopefully continue to do so.

And regarding the financial expenses, we have had some positive effects actually from the ForEx side in the second half of the year. But as you all know, Manjari, it's very volatile. So, I think it's very difficult to anticipate this for the second half of the year. But overall, of course, we focus as well on earnings per share, and we are happy that our net income was increasing over proportionally.

[Manjari Dhar, RBC]

Thanks for the color, Yves.

[Operator]

Next question is from the line of Rogerio Fujimori with Stifel. Please go ahead.

[Rogerio Fujimori, Stifel]

Good morning, Yves and Christian. I have two questions. The first one is on China. I think in Q2, you were up 56%, lapping a 34% decline in Q2 2022, so up 3% on a two-year basis. Is this a good proxy for H2? And any color on exit rates in China?

And my second question is a follow-up to Susy's question on the guidance, focusing on Americas. I think sales were up 27% in H1, and you are guiding 10% to 15% in the full year. So the midpoint implies a small sales decline in H2. So could you help us understand the key headwinds you see for H2 beyond the tough comparative and the buffer for macro uncertainty? Thank you.

[Yves Muller]

Thank you very much, Rogerio. Thank you very much for your questions. So perhaps regarding U.S., the remaining piece is perhaps a sense of conservatism that is built into the numbers. Just take it from there. Overall, we are very happy. And now I repeat myself with the performance that we have seen starting into Q3. And regarding China, I think, first of all, I think it's worth mentioning that we were growing against 2021 as well. That was the all-time high year of China. So, we are happy with this kind of performance that we have seen in Q2.

And I think this will continue also in the second half of the year. Be aware of the fact, of course, that at the end of Q4 2022, there was a COVID breakout in China. So the comparison base is getting a little bit easier in Q4, as you might recall. But overall, in terms of our own performance, China, we are happy with the performance in China.

[Rogerio Fujimori, Stifel]

Thank you.

[Operator]

Next question is from the line of Jurgen Kolb with Kepler Cheuvreux. Please go ahead.

[Jurgen Kolb, Kepler Cheuvreux]

Yes. Good morning, guys. Two questions. First one, I was wondering if you could give us an update on your production facility that you're planning to increase in Latin America. What's the status here? Have you made any progress in finding the right destinations or the right factories?

And secondly, on your productivity gains that you mentioned with 13% in own retail, could you break that down into conversion, into pricing, into average ticket and traffic? That would be helpful. Fantastic. Thank you.

[Yves Muller]

Thank you very much, Jurgen. Thank you very much for your two questions. So first of all, regarding production facilities, I think there is regarding the sourcing a lot going on. So first of all, I'd like to mention that we are de-risking China a lot in the Asian market. So, I think this is happening a lot. So, we are moving from China to Vietnam, Pakistan, Sri Lanka to Turkey to another regions to de-risk China. I think this is worth mentioning, like we laid out during our CMD. And regarding our Latin American engagement, of course, we want nearshore. We want to increase Latin America, and we have now found a new supplier in Mexico where we want to produce. So, we will starting producing in Q3 now with this kind of partner. It always takes some time. A lot of checks that has to be done regarding sustainability and all these issues, but we are ramping it up for the second half of the year and start producing in Mexico.

And regarding productivity, it's – there are – if I would lay it down into these four drivers, if you have footfall conversion, ASP and net sales and units, I would clearly highlight that footfall and the higher prices are driving the productivity gains. So, conversion and units being sold being more or less stable. The prices, the price increases and, of course, the product mix and the footfall because of the branding refresh are driving the productivity gains.

You can imagine, if you remodel or reopen new stores, this is helping you as well in terms of generating curiosity. We have now in some of those points of sale, the BOSS Cafe. So if you turn this into your point of experience, you generate additional footfall and this is really driving the productivity gain as well.

[Jurgen Kolb, Kepler Cheuvreux]

Understood. Very good. Super. Thank you very much. Best of luck for H2.

[Operator]

The next question is from the line of Andreas Riemann with ODDO BHF. Please go ahead. Mr. Riemann, your line is open. Please go ahead.

[Yves Muller]

In that case, Emma, maybe we move on to the next.

[Operator]

Next question is from the line of Michael Kuhn with Deutsche Bank. Please go ahead.

[Michael Kuhn, Deutsche Bank]

Good morning. I hope you can hear me.

[Yves Muller]

Can hear you. Good morning.

[Michael Kuhn, Deutsche Bank]

Just one question from my side on trade net working capital that you increased the guidance to 18% to 19% from 17%. And simultaneously, you also increased the sales guidance. So looks like a disproportionate increase of the absolute trade net working capital. Just maybe some color on that. What is driving that? Is it inventories predominantly or other items as well? And what has changed in your view on trade net working capital over the last couple of weeks that made you move up the guidance here? Thank you.

[Yves Muller]

Yes. So the major driver is actually coming from the supplier financing program because we are changing here the platform. So today, we have a collaboration with the bank and we are changing our supplier financing program to an independent platform. And currently, the ramp-up in terms of technically and to put those to convert the existing suppliers from the bank to the new independent platform takes some time, takes some more time than we originally expected. And this is somehow driving the payables or somehow affecting the payables at the end. So this is the major driver. A little bit technical question, but there's a, like I said, this change in how we use the platform. We are just using today one bank. And tomorrow, we are using an independent platform, and these changes take longer than they originally anticipated.

[Michael Kuhn, Deutsche Bank]

So, that means H2 is basically the transition period, and we could maybe expect a relief from that position going into next year?

[Yves Muller]

No, we are ramping it up, but the ramp-up takes longer and this somehow affects the trade payables and the trade payables are expected actually to go up in 2024, more pronounced than in 2023.

[Michael Kuhn, Deutsche Bank]

All right, thank you.

[Operator]

Next question is from the line of Jorg Philipp Frey with Warburg Research. Please go ahead.

[Jorg Philipp Frey, Warburg Research]

Hello, guys. Actually, I would like to touch first a bit on the license business and applaud you on this strong figure of 33% growth. But can you shed some light? Is there anything aperiodic in this number? How much of this growth is driven by the fragrances business? Is this really close to this 33%? Any particular launches you are going to conduct in the second half that you want to mention?

And then the second question, touching a bit on 2024 already. Well, you had now such a long period of really stellar growth. And obviously, apart from brick-and-mortar, when you have high comp sales growth, if you look at the other areas, to what extent are you currently experiencing diseconomies of scale, if you stretched your organization too far already? And can you – is this a driving factor for probably even higher margin growth than one would expect in the face of probably slower growth in 2024?

[Yves Muller]

Good morning, Philipp, first of all, touching – talking about the license business, yes, it was growing 32%. I think overall, we are happy how the license business is evolving. We have a very, very close relationship with Coty, Safilo, and Movado, as you all know. And overall, the underlying trend is more or less that you see the growth, that you see in the current apparel business. So the growth rate in Q2 is a little bit overstated because of the prolongation with the contract with Coty. There is a low single-digit million euro amount in terms of the prolongation is included there. So, this is the reason why this number is a little bit overstated as a kind of well, let's call it, extraordinary item, but nothing that I would have called out during my presentation. But the underlying more or less like growing plus 20%, and this another 10% is more like related to Coty with this prolongation of the contract.

And regarding economies of scale, if I get this right, of course, I mean, we are on a very good track to achieve our operating leverage. This is what you have seen already in Q2 in those numbers. And we feel very much committed to have at least 12% operating margin. I think we are firing out of all cylinders in our company. We are really very concentrated and very much focused on executing CLAIM 5. And I think we are on a very good track of achieving our mid-term goals.

[Jorg Philipp Frey, Warburg Research]

Thanks a lot and keep up the good progress.

[Yves Muller]

Thank you.

[Operator]

Last question is from the line of Chiara Battistini of J.P. Morgan. Please go ahead.

[Chiara Battistini, J.P. Morgan]

Hello. Hi, thank you very much for taking my questions. I just have one on wholesale. And I was wondering whether you could give us some more color on how to think about space growth being either like more shelf space in department stores where you're already present and new doors versus rather replenishment and sort of like-for-like organic growth within wholesale?

And then a question on ASP. Just to come back, I got the comment on pricing. I was just wondering also whether you could comment on how much mix has actually been contributing to growth in the quarter and what you expect for the year from that point of view, please? Thank you.

[Yves Muller]

Okay. Thank you very much, Chiara, for your questions. So regarding pricing or the mix, so the mix is overall more or less neglectable. I mean there is – in the second half of the year, of course, we are selling more outerwear than in the first half of the year. So, this will drive a little bit more of the ASP higher at the end. But overall, if you take formal wear, casual wear, shoes and accessories, they are all more or less growing at the same pace. So nothing that I would really kind of call out in terms of mix and the comments I made regarding the store productivity increases in retail. So it's more or less stable.

And then regarding wholesale, I think as a rule of sum, you could say, because we are still gaining more doors, we are gaining more penetration. We have here some pop-ups in wholesale as well. So as a rule of sum, I would say half of the growth is coming like-for-like on a product basis and the other half is coming from space, more doors and more customers joining.

[Chiara Battistini, J.P. Morgan]

Thank you very much.

[Yves Muller]

Thank you, Chiara.

[Christian Stohr, Vice President-Investor Relations]

Well, thank you, Chiara, and thank you, everyone, for dialing in today. Since there's no more questions, this completes today's conference call. If you have any further questions, please feel free to contact the Investor Relations team, as you always do. Thank you very much for your participation, enjoy your summer holidays, and we look forward to reconnecting soon again. Bye-bye.