Hugo Boss AG

XETRA:BOSS

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to today's HUGO BOSS Third Quarter Results 2020. [Operator Instructions] I must advise you the conference is being recorded today, and that's Tuesday, the 3rd of November 2020.I'd now like to hand the conference over to your speaker today, Christian Stoehr. Please go ahead, sir.

[Christian Stoehr, Head of Investor Relations]

Yes. Thanks very much, Leanne, and good afternoon, ladies and gentlemen. Welcome to our third quarter 2020 financial results presentation. Today's conference call will, of course, be hosted by Yves Müller, CFO of HUGO BOSS and spokesperson of the Managing Board. [Operator Instructions]So let's get started, and over to you, Yves.

[Yves Müller, CFO & Member of Managing Board]

Thank you very much, Christian, and good afternoon, ladies and gentlemen. Also from my side, a very warm welcome to all of you. I really hope that you and your families are all doing well.In today's presentation, I will mainly focus on 2 broader topics. As you would expect, I will guide you through our third quarter operational and financial performance and elaborate in detail on how we progressed with the overall recovery of our business in the context of COVID-19.Beyond Q3, I will also spend a considerable time to discuss some of our strategic initiatives and the progress we are currently making on this front in order to return to our former growth trajectory. But let's begin by taking a closer look at our Q3 performance, starting with the top line development.I am pleased to report that our business recovery, which already started at the end of Q2 post the lockdown in most markets, has clearly continued in the third quarter. Thanks to steady improvements in all regions and sales channels, we were able to limit the decline in group sales to 24% currency adjusted. In reported currency, this represents a decrease of 26%, with sales totaling EUR 533 million in the 3-month period.With an average store opening rate of around 95% in Q3, it was our own retail business in particular which recorded a considerably more robust performance as compared to the first half of 2020. This is reflected by own retail revenues being down 20% currency adjusted. While local demand in key markets picked up noticeably as compared to the previous quarter, business with tourists continued to suffer from international travel restrictions, especially in metropolitan areas.Currency-adjusted sales in our wholesale business were 30% below the prior year level. The recovery in the sales channel was less pronounced than in own retail due to our deliberate decision to allow our wholesale partners to cut their full winter orders by an average of 20% to 25% back in March and April, which led to lower deliveries in the third quarter.Despite the significantly larger store opening rate, our own online business continued its strong double-digit growth trajectory from previous quarters as reflected by revenues up 66% currency adjusted. Growth was once again broad-based, with all 3 regions recording strong double-digit improvements in Q3. Similar to the second quarter, the development in Q3 was driven by strong momentum on both hugoboss.com as well as multi-brand platforms operate in the concession model. Let remind you that both are core pillars of our strategic ambition to significantly grow our own online business in the years to come. The period from July to September, therefore, marks the 12th consecutive quarter with significant double-digit online sales growth for HUGO BOSS. This propels the share of our own online business for the 9-month period to 10% of group sales, more than twice as much as it was the case in 2019.This brings me to our regions, and first of all, to Mainland China, which clearly was a bright spot also in Q3. With currency-adjusted revenues up 27%, momentum further accelerated in the 3-month period, thus enabling Mainland China to successfully continue its recovery that already started back in March.While this development was supported by a repatriation of local demand, we also witnessed strong improvements in conversion rates in brick-and-mortar retail as well as high double-digit online sales growth. In both sales channels, off-line and online, we recorded robust growth with existing Chinese customer but also with new customers, and here, in particular, with -- among younger ones. The execution of regional events, together with the activation of local brand ambassadors, continues to lift our brand awareness and relevance vis-a-vis Chinese consumer, something I will discuss in more detail later on.The strong momentum in Mainland China positively contributed to the overall sales performance of Asia Pacific. Consequently, and with currency-adjusted sales down 14%, business recovery in Asia Pacific was more pronounced as compared to Europe and the Americas.Most of the regions, other markets, however, could not keep pace with mainland China. In particular, business in Hong Kong and Macao continued to suffer from significantly lower tourist flows, with the latter only starting to witness a more noticeable pickup towards the end of the quarter. Other markets in the region, in particular, Australia, has to cope with renewed local lockdowns and the corresponding temporary store closures in the wake of the pandemic. And last but not least, in Japan, a high comparison base linked to the VAT hike in October 2019 put further pressure on the market sales performance in the third quarter.This brings me to Europe, where currency-adjusted sales were down 21% on the prior year level as lower tourist flows continued to weigh on the region's overall business recovery. This was particularly true for Southern European countries such as Italy and Spain, 2 markets that strongly rely on international tourism, first and foremost, during the important summer months. At the same time, the region also benefited from a solid rebound in local demand, something that became visible particularly in France, Benelux and the U.K.To conclude on Europe, Germany's sales recovery was broadly in line with that of the region, with own retail slightly outperforming the wholesale channel.Let's now move over to the Americas, where currency-adjusted sales were down 41% in the third quarter. While revenues in Latin America recovered nicely, with both Mexico and Brazil only down in the low teens, sales across the U.S. and Canada were down by double -- mid-double-digit percentage rates each. This reflects ongoing traffic declines in both retail and wholesale but also local lockdowns and accompanying temporary store closures in several key areas of our business. In particular, in New York City, our important stores at Columbus Circle and the World Trade Center were close through most of the third quarter and only reopened in mid-September. In addition, several of our stores in the West Coast, be it in San Francisco or L.A., had to close their doors once again during Q3.Besides the more pronounced implications resulting from the pandemic relative to all other regions, our business in the U.S. market continues to suffer from a comparatively high formalwear share, something that is particularly true for the wholesale channel. This, in turn, did not allow us to benefit to the same extent from the overall market recovery compared to other apparel brands.Let me be very clear that we are resolutely working on changing our brand position as well as our product assortment in that important market. Our new partnership with Russell Athletic, on which I will elaborate later on, marks the first major milestone in this regard. Another exciting collaboration that will ensure we connect our brands stronger with local consumers and strengthen our positioning in casual athleisure wear will be announced shortly.Speaking about formalwear and casualwear, in concluding my comments on the top line, let's take a quick look at the sales by brand and wearing occasions. At BOSS, the brand's casualwear and athleisure wear offerings once again showed a more robust performance compared to formalwear. While casualwear and athleisure wear recorded declines in the high teens, formalwear was down in the high 20s as it continues to be particularly impacted by global social distancing measures as well as the ongoing lack of events and occasions, be it weddings, company events or business trips. Overall, currency-adjusted sales for BOSS were down 24% in Q3.Also at HUGO, our contemporary fashion brand, casualwear, proved to be more resilient than the brand's formalwear offering. Consequently, and while total sales for HUGO decreased 25% currency adjusted, the brand's casualwear sales were only down by a mid-single-digit percentage rate.This, ladies and gentlemen, closes my remarks on the top line. Let's -- so let's move over to the remaining P&L items.In the light of the overall sales decline, I am all the more encouraged that we returned to positive earnings territory in the third quarter. This development was driven, first and foremost, by tight cost control and the successful execution of various cost-saving measures in the wake of the pandemic.Let me shed some light on the different moving parts contributing to the strong rebound in our bottom line. Starting with the gross margin, which totaled 61.9% in the third quarter. The decline of 140 basis points is entirely related to the overall promotional retail environment and a later season switch to the fall/winter collection, in particular, in Europe and the U.S. caused by the pandemic. In contrast, we also recorded a slightly positive channel mix effect due to the increased share of retail sales. This, however, only partly compensated for the overall gross margin decline.Moving over to the operating expenses, which declined by a strong 15% in Q3. The significant decrease of 18% in selling and distribution expenses mainly reflects further rent and payroll savings in our retail business, with the magnitude of both effects being quite comparable in the third quarter. Besides that, we also spent less on print media advertising and physical marketing events without compromising unnecessary investments to drive brand heat for BOSS and HUGO such as the BOSS fashion event in Milan and various social media activities.Let's also take a quick look at administration expenses, which came in 4% below the prior year level. Our consistent cost management as well as positive effects from the relentless execution of our implemented cost-saving measures were also effective in the third quarter. The chief savings predominantly related to lower payroll costs as well as the elimination of nonbusiness-critical corporate expenses such as travel expenses and hiring costs. And as a result, our EBIT returned to positive territory in the third quarter, totaling EUR 15 million in the 3-month period. Finally, our group's net income amounted to EUR 3 million.With this, let's now move over to the balance sheet. Starting with inventories, which remained broadly stable in the third quarter and were up only 2% currency adjusted. This development is directly linked to the successful execution of our initiatives to reduce merchandise inflow as well as the overall gradual business recovery during the 3 months period.At the end of Q3, trade net working capital was down 7% on the prior year level, currency adjusted. Lower trade receivables resulting from fewer deliveries to wholesale partners were the main drivers here. In addition, slightly higher trade payables contributed to the decrease.Last but not least, capital expenditure declined by 65% in the third quarter as we continued to postpone several retail and IT investments to protect cash flow during the pandemic. The focal point of our investment activity was once again the renovation of retail stores as well as the further upgrade of our digital capabilities, predominantly aimed at supporting the expansion of our global online business in the years to come.Safeguarding the financial stability of our company continued to be a key priority also in the third quarter. In this context, I am particularly pleased that once more, we made great progress in successfully executing our various measures regarding cash flow protection. All 3 pillars, that includes our strict cost management, a significant reduction in inventory inflow as well as the postponement of investments, contributed positively to the strong acceleration in cash flow generation in Q3. Consequently, free cash flow totaled EUR 155 million in the 3 months period, more than twice as much as in the prior year period.Equally as important, our financial flexibility remains fundamentally sound. This is also reflected by our revolving syndicated loan totaling EUR 633 million, which was only utilized in the amount of EUR 134 million at the end of September. Also, as of September 30, we have not drawn any of the additional EUR 275 million of credit commitments that we secured in Q2.Protecting our financial strength and flexibility, which was a key priority so far this year, remains of utmost importance, even more so as the environment we are operating in continues to be fragile as we are all learning the hard way these days. In many of our core markets, in particular, in Europe and the Americas, the situation around COVID-19 has deteriorated again, and we are all witnessing a continuous and rapid surge in the number of infections. And although it is not yet fully predictable at this stage as to what sort of further countermeasure governments will implement, we are already seeing the first lockdowns in several countries in Europe. This, in turn, weighs on consumer behavior, representing a renewed risk for the upcoming holiday season.Nevertheless, and despite these uncertainties, we are absolutely determined to fully exploit our sales opportunity during the final quarter of 2020. As you all know, Q4 is of particular importance, reflecting the upcoming holiday season but also numerous sales events like Chinese Golden Week or Black Friday. Simultaneously, we will push ahead with the execution of our strategic priorities. Our strategic growth drivers, first and foremost, China, online and casualization, will therefore continue to take center stage in the short and long term.With only 7% of group sales coming from Mainland China, there is no doubt that our company remains highly underpenetrated in this strategically important market. In particular, compared to many of our competitors, there's also no doubt that the importance of Mainland China will continue to rise in the years to come, supported by structural repatriation of local demand and a growing middle class. And although we cannot be satisfied with the current size of our business in Mainland China, we have a strong position in that market, which is a great foundation for exploiting our full potential in the years to come.With 135 own retail points of sale in Mainland China, we have full control over distribution and pricing. More than 95% of our business is generating via the own retail channel. This enables us to react quickly and flexibly to any changes in customer demand as we could see in 2020 fiscal year.Our German heritage and our high expertise in tailoring resonates extremely well with the Chinese consumer. With a tailored share of more than 30% in our formalwear and casualwear offering, the product mix in Mainland China is skewed towards the higher price points in our collection. And last but not least, Mainland China is one of our most profitable markets already today based on relatively high basket sizes and a favorable cost structure as compared to other markets. Exploiting Mainland China's huge sales opportunities will, therefore, continue to be a top priority for us and support our group from a top and bottom line perspective.Based on our strong positioning in the market and our underlying momentum, we will continue to focus on executing regional events with the support of local brand ambassadors. This type of combination has proven to be a great formula for success as it enables us to accelerate our engagement with the local consumer, while at the same time also driving traffic and conversion off-line and online.The prime example in this context is Qixi, or Chinese Valentine's Day, which took place on August 25. Following strong social media activation and a big event with Li Yifeng who hosted our BOSS store in the Kerry Center in Shanghai. Different mix-and-match looks were showcased by local influencer, and Li Yifeng introduced our first China exclusive Valentine's Day capsule. The event has been a big success, not only from a marketing perspective but also in brick-and-mortar retail, with sales up more than 30% on this day. And in online, sales even quadrupled compared to last year's event.Besides Qixi, we were also very satisfied with our performance during Chinese Golden Week, where sales have seen a further strong acceleration compared to our overall Q3 performance.In addition to our initiatives to drive like-for-like growth in the market, we also see the potential for further space expansion. As we are in the process of establishing a robust retail footprint in Mainland China's best properties, we continue to seek new opportunities in order to meet the increasing repatriated local demand. And with some stores operating on net selling space below 100 square meters, there is also an opportunity to upsize existing stores, in particular, when it comes to metropolis cities like Shanghai. Altogether, this should enable us to increase space in Mainland China by at least 10% per annum.With regards to online in Mainland China, we have often highlighted the tremendous potential in the market. At this stage, growth is mainly coming from Tmall and JD, with both business operating in the concession model. Both platforms have seen high double-digit growth throughout 2019 and 2020, and we remain fully committed to continuing our growth journey here. We are also evaluating additional digital platforms for the Chinese market to ensure we are not missing even a single sales opportunity going forward.Beyond online, we are also committed to expanding our social commerce activities. In this context and in order to further exploit social commerce going forward, our stores in Mainland China have successfully implemented WeChat Work, thereby enabling our store personnel additional cross-selling opportunities by connecting more frequently with our customers. We are currently also piloting WeChat's payment function in several of our stores in order to further elevate the customer experience at the point of sale.Not only in China but also from a global perspective, our own online business is enjoying strong momentum. As you are all aware, we have set ourselves the target of growing online sales to more than EUR 400 million by 2022, and we are well on track to achieving this target. Since we announced our goal back in November 2018, our own online business has seen a CAGR of more than 40%. The next milestone will be crossing the EUR 200 million mark, which is expected very shortly and before year-end.Importantly, and as we have highlighted many times before, our own online strategy is built on 2 pillars: our digital flagship, hugoboss.com; as well as the concession business, both of which will play a crucial role in achieving our online sales target by 2022. As both should account for approximately 50% of total online sales by then, this, in turn, means that we continue to expect the concession business to outgrow hugoboss.com in absolute and relative terms. Therefore, it is all the more important that over recent years, numerous partnerships have been cemented, including Zalando, Next, Boozt and Lamoda in Europe, Macy's in the Americas or Tmall in Asia Pacific, just to name a few.As we speak, the global expansion of our website, hugoboss.com, is in full swing. At the end of 2019, our website was available in a total of 15 markets, including 13 countries in Europe as well as the U.S. and China. To accelerate the role of our digital flagship, we not only focused our internal resources on the future expansion of .com but also sealed a strategic partnership with Global-e, a leading provider of comprehensive cross-border e-commerce solutions.The 2020 fiscal year will see a total of 32 countries being added to our roster of online markets, including Australia, Japan, Canada and Mexico. This brings the total number to 47 online markets by the end of the year, and we are already working on the next rollout waves. In the first quarter of 2021 alone, we will tap at least 10 more countries, including Russia and South Korea. Further rollouts are scheduled for later this year as our ambition remains to have HUGO BOSS available in almost each and every country going to growth.From a brand perspective, one of our key objective remains to drive brand heat and elevate the desirability of BOSS and HUGO in the long run. Going forward, our marketing initiatives will, therefore, focus on 3 pillars. Firstly, highlight events. The primary goal to emotionalize our brands and have the maximum impact on our consumer. Secondly, strong partnership with influential personalities and key opinion leaders. And thirdly, exclusive collaborations with globally renowned and appealing brands and businesses.One of my personal highlights in recent weeks was our BOSS fashion event in Milan and our very successful brand reception that took place in parallel in Shanghai. At the end of September, we revealed our BOSS Spring/Summer '21 collection with a runway event at Milan Fashion Week. The event was livestreamed on Instagram and for the first time on TikTok as we continued our brand's decisive move towards casualization, revealing a sportier, younger version of BOSS than ever before.Simultaneously, and equally as important, the brand experience took place in Shanghai and was also livestreamed across digital platforms, WeChat and Tmall. The event featured a broadcast of the Milan event as well as several well-known faces such as BOSS brand ambassador, Li Yifeng. Most importantly, the Shanghai event concluded with a reveal of an exclusive collection of our upcoming holiday campaign, BOSS Meets Justin Teodoro, which were offered to Chinese customer during a see now, buy now shopping experience. The combined Milan-Shanghai event was not only a true international success story but was also proof positive of our strong capability to celebrate our brands and products digitally on a global level.I'm equally excited that we continue to make great strides when it comes to strengthening, expanding the roster of brand ambassadors for BOSS and HUGO. In September, BOSS teamed up with German fashion influencer and entrepreneur, Caro Daur, on exclusive womenswear capsule. Staying true to the elegant aesthetics of BOSS while fusing both parties' individual approaches to style, the BOSS curated by Caro Daur capsule represents a fresh and modern interpretation of BOSS that resonates greatly with our female customers.The month of September also saw the launch of the second BOSS menswear capsule co-created by British boxer and 2-time unified heavyweight champion, Anthony Joshua, bringing together Joshua's unstoppable spirit with modern BOSS style.With both collections, we saw an affirmative response with regard to sales, with many highlight pieces being sold out on hugoboss shortly after their launch.And finally, HUGO is about to launch its third casualwear capsule inspired and co-created by the brand's global ambassador, Liam Payne, thus, once again, strongly supporting HUGO's positioning in the important contemporary fashion segment.All 3 collaborations will help us in driving brand heat, in particular, among younger customer, groups on social media, and I can promise you there is more to come. So please stay tuned.Speaking about social media, I'm all the more encouraged that during 2020, we have witnessed a significant improvement in relevant social media metrics on the most important platforms, first and foremost, on Instagram. In the third quarter alone, our brands have seen a strong uplift in engagement rates, which were up by more than 60% as well as a significant increase in average like proposed, which almost quadrupled year-over-year. Without doubt, this has proved positive for the success of our evolved digital marketing approach. In particular, our strong focus on timely, relevant and user-generated content has begun to pay off and helps BOSS and HUGO to increase reach and credibility on Instagram and other relevant social media channels.To conclude on our marketing initiatives, let me spend a minute on our new partnership with iconic American sportswear pioneer, Russell Athletics. As part of the upcoming pre-fall 2021 season, a brand-new capsule collection for BOSS will come to life with a clear focus on casualwear and athleisure wear. These fresh looks will unite the best of both worlds: the export tailoring and signature style of BOSS with the instantly recognizable aesthetics of the American sportswear brand. Launching in March 2021 with a campaign produced by publisher and creative agency, Highsnobiety, this collaboration is one of the strongest moves towards casualwear in the history of BOSS. It represents a huge opportunity to strengthen our BOSS casualwear business on a global level but particularly in the important U.S. market.Speaking about casualization, as you are all aware already today, our brand's casualwear business accounts for more than 50% of group revenues. Over the last several years, more and more casualwear elements have found their way into formalwear and vice versa. Yet the global trend towards a more casualized style has experienced a further strong push together with the pandemic.Driving the casualization of our business model across brand, gender and wearing occasion will, therefore, remain a top priority for us in the months and years ahead as we are committed to exploiting the full potential of casualwear. We will also continue with breaking up the boundaries between casualwear and formalwear, thereby merging the various wearing occasions in bringing the gap between tailoring and sportswear seamlessly.As the leader in the upper men's premium apparel market already today, we are offering one of the widest range of modern outfits to be impeccably dressed 24/7. And it's our clear ambition to not only capture but lead the trend towards a more casual lifestyle. Based on our unique DNA and heritage, we have a strong foundation to build on, and I'm fully convinced that with our powerful creativity, our high retail expertise and our fast and flexible responsiveness, we will successfully push ahead to win over customers. Our partnership with Russell Aesthetics is a prime example in this regard, and this is only the beginning.And now ladies and gentlemen, this concludes my prepared remarks for today. Before we start with the Q&A session, let me just quickly reiterate what I have already highlighted before.Without doubt, the current environment remains uncertain as COVID-19 countries continues to dominate our everyday lives. Our financial strength, however, will ensure that we safely navigate the pandemic also in the coming months. We will resolutely exploit all sales opportunities in the upcoming fourth quarter, and we are determined to push ahead with the execution of our strategic priorities. In doing so, we are laying the foundation for ultimately returning to our former growth trajectory once the spread of COVID-19 is contained.And with this, ladies and gentlemen, I'm now happy to take your questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Edouard Aubin.

[Edouard Aubin, Head of Luxury Goods]

So just 2 questions for me. The first one is on -- just on current trading, if you could elaborate on your sales performance throughout the quarter and what you've seen so far -- or what you've seen, sorry, in October versus the minus 24% you posted in Q3.My second question is just on the lockdown impact in the fourth quarter. So I guess the U.K. will be going into lockdown, as you mentioned, by Thursday. So by the end of this week, could you please tell us approximately what percentage of your store base will be closed?And just to get a sensitivity analysis from you, in a hypothetical situation scenario where your sales would decline by the same magnitude in Q4 versus Q3, again, above 20%, would the EBIT margin decline by, again, the same kind of percentage, around 80% or no? Just hypothetical sensitivity analysis would be helpful.

[Yves Müller, CFO & Member of Managing Board]

Thank you very much, Edouard, for your questions. Usually, we only take 2 questions. Perhaps, we'll make an excuse here.So regarding current trading in October. So I think, overall, we saw a kind of gradual improvement in October, especially -- we have to walk through the different regions. First of all, perhaps let's start with Asia. We saw a very, very strong Golden Week, very successful Golden Week, especially in Mainland China. And so the whole region returned into positive territory versus prior year.Regarding America, we saw actually a gradual improvement in comparison to our performance in Q3. We see that this was a kind of positive development. And in Europe, the first 2 weeks were good, but then, of course, the search in terms of the infection rates somehow influenced the consumer behavior, and so the net sales were a little bit more muted.And I think, overall, you have to be aware that we are now entering in the beginning of November and to a kind of lockdown situation. You have all read this. And if you would include the U.K., we have a store opening rate at the end of this week at around 75 percentage points.And regarding the sensitivity, I think I really have to say everything is very, very uncertain for the time. So it's very, very difficult to predict the net sales, first of foremost, because the search in infections rate will, like I just said, influence the consumer behavior. On top of this, I think it's very hard to predict how the governments will react in terms of counter measurements. So -- and I think we have to react accordingly. And I think we have a kind of proven record now in Q2 and Q3 that we somehow not reacted as corporate but more like a kind of entrepreneur and that we make everything doable that we can control once it comes to CRM measurements in order to engage the consumer once of -- managing the right discount level, secondly. And thirdly, of course, cost control. I think we have proven this. I think, Q3, we managed to come back with a kind of profit situation in Q3, and we do everything to have the same situation in Q4 as well.

[Operator]

And your next question comes from the line of Thomas Chauvet from Citi.

[Thomas Vincent Chauvet, Managing Director]

Two questions, please. The first one, back to the lockdowns. So in the U.K. and France and Belgium, so significant markets for Europe, your DOS and wholesale, those will be closed for the month of November, possibly part of December. Have -- does it specifically impact your inventory management of the current autumn/winter collection but also the procurement of the Spring/Summer '21 that you've just presented? Could you just elaborate a little bit on how you see gross margin developing, assuming 4, 5, maybe 6 weeks of closures? We saw the impact in Q2.And secondly, a broader question on casual and athleisure. You've obviously made further push towards those segments this year. Very recently, we saw that with the show in Milan and some collaboration with Anthony Joshua and Russell Athletics. What do you think are the key drivers of success in that competitive segment of casualwear and athleisure? In what specific area do you think BOSS and HUGO still need to improve things?

[Yves Müller, CFO & Member of Managing Board]

Yes. Thank you very much. So coming back to the lockdown situation, like I said, around 75% will be somehow -- 25% will be affected. So the store opening rate will be 75%.I think we have shown as well during the summer period that we managed our inventories well. If I look at our Spring/Summer '20 sell-throughs, they were almost on last year's level because we somehow were able to manage these kind of inventories in a very nice way. So actually, we don't see tremendous impacts, and I think it's pretty early to call this out because we still have big moments on the online channel as well for the months to come. So actually, we have, I would assume, a lot of flexibility to somehow manage the inventories in Q4.Regarding casualwear, athleisure, the key drivers of success, clearly, it starts with the product. I think what we have to do is -- I think on the product side, we made very good progress in the recent collections. I think it's a big, big step forward. I think what we have to do is convey this kind of casualization message to the consumer. And therefore, we are engaging with key opinion leaders or big personalities like Anthony Joshua or working on this on Russell Athletics. Russell Athletics will not be just one push. We will have a second capsule in the second half of the year in order to underline our clear push towards casualization. And I think this is very important as well for our U.S. market. And I think there is much more to come actually on this side to further push casualization, so stay curious.

[Thomas Vincent Chauvet, Managing Director]

And Yves, on distribution, so you talked about product and communication on distribution in the past. I remember, you said it was quite different to sell formalwear, particularly suits, versus casualwear. The skills of the sales associates were very, very different. And you also alluded that perhaps online would be easier for the casualwear, athleisure channel as opposed to selling traditional formal wear. So how does that push towards those categories impact the way you distribute the products?

[Yves Müller, CFO & Member of Managing Board]

So clearly, from the online sector, what we expect is that online will help us to increase the casual and athleisure part once we increase our distribution in terms of online countries plus partnerships in terms of marketplaces. So this will help us.And on the other side, I think what I said during my short speech is in the stores and brick-and-mortar, the selling is actually not different. You have a certain shop layout, but what we will do in the shops is to make sure that we are breaking up the different wearing occasions because even today, we are wearing a suit with a T-shirt or with a pullover and together with sneakers. So we are breaking up these different wearing occasions by showing the different looks in terms of mannequins and how the shop personnel are wearing our products. You will just want to make it transparent that this will be more blurred lines in the future when it comes to different types of products.

[Operator]

And your next question comes from the line of Jurgen Kolb.

[Jurgen Kolb, Analyst]

Two questions from my side. First, on the collaborations that you mentioned, how much of your sales do you think you can develop and you can achieve with these collaborations being at Russell or any of these other ambassadors going forward? And where are we currently so in order to track for us how relevant this whole share will become? And with respect to inventories, how high is currently the share of the never out-of-stock products in your current inventory level?

[Yves Müller, CFO & Member of Managing Board]

So talking about the collaborations. For -- if you talk about collaborations like Anthony Joshua, it's around a kind of mid-single-digit million euro amount in terms of products. But of course, they give us the push on the golden capsule, which were not co-created with Anthony Joshua, so it kind of pushed in the athleisure products.Russell Athletics will be bigger because Russell Athletics will be sold globally and will be sold via wholesale, and we expect a good double-digit million euro number from Russell Athletics and a push from a marketing perspective.So what we are really working on, Jurgen, is to make these collaborations commercially successful and relevant for the consumer and create buzz so that they will not only be present in selective stores, but that they will be accessible for all the consumer online, off-line, retail and wholesale.And regarding the NOS share, it's around 25% is the NOS.And perhaps one remark that is going to Thomas Chauvet's questions regarding the lockdown and the inventory situation, I forgot, one big issue is that regarding our own retail buy, we have the flexibility of an open-to-buy budget where actually we can react, and once there is the lockdown, we can reduce this kind of number. So we have somehow limited the risk in terms of retail buy with this regard, and I just want to complete this point. Sorry to interrupt you.

[Operator]

And your next question, sir, comes from the line of Antoine Belge.

[Antoine Belge, Global of Consumer and Retail Research]

Yes. It must be me. It's Antoine at HSBC. Two questions. First of all, I think you mentioned that you wanted to expand in China by around 10% the selling surface. I'd be interested to know where you see the white space. And so how confident are you that there is the potential to be expanding the selling surface without putting too much the like-for-like at risk?And my second question relates to the strong free cash flow generation, which is good, yet at the same time, maybe you've seen CapEx down 65%. And also, again, congratulations on the cost cutting. But at the time when you're highlighting a lot of areas of growth, casualization, China and on online, what's the right balance between this very tight control and the need to reinvest?

[Yves Müller, CFO & Member of Managing Board]

Thank you very much, Antoine. So clearly, we want to expand our brick-and-mortar space in Mainland China. Like we said, we have today 135 POS. I mean it's a huge country, and we see a lot of white spots in Tier 1, Tier 2 and Tier 3 cities. And we had -- we made a kind of white spot analysis, and we are very much convinced that we will not have negative cannibalization effects on other stores. This will be, from our perspective, a clear possibility to grow our business. Plus, do not underestimate the effect of upsizing our stores as well. In some cases, our stores are -- and shop-in-shop as pretty small. So due to the current performance, we are really gaining market shares, and we are able to increase, in a lot of cases, our spaces to make them even bigger.And regarding free cash flow generation, overall, you're right. But as a kind of interim CEO, I was clearly leading this kind of discussion of strategic priorities. And because of the strategic priorities, we were clearly saying it's China, online and casualization. And I just can assure you that we won't hold back any investments because we are very much convinced that these are the right areas to invest, and we will push the pedal to the metal in these areas. So this is clear for us. And I think we have shown that we have enough resources available.

[Antoine Belge, Global of Consumer and Retail Research]

So maybe on this, the sort of most likely or best guess regarding the CapEx figure for this year.

[Yves Müller, CFO & Member of Managing Board]

The CapEx figure for this year?

[Christian Stoehr, Head of Investor Relations]

Yes, Antoine, I'll take that one. This is Christian speaking. I mean we -- last time, we sort of guided on CapEx. We had a EUR 50 million number put out to the market. We are slightly above that for the year now. So I guess it will be a touch above that, yes? So you see some additional CapEx, obviously, now in Q4, but it shouldn't be too much from where we stand today.

[Operator]

And your last question comes from the line of Kathryn Parker.

[Kathryn Parker, Equity Analyst]

So my first question is back on to the topic of casualwear. So you mentioned in your results that the HUGO brand outperformed BOSS. And I wondered what caused the divergence, whether any lessons can be learned, and also what the formal casual mixes of both brands.And then my second question is on the store network in China. And you said there are 135 points of sale. But what is the balance between Tier 1, 2 and 3 cities?

[Yves Müller, CFO & Member of Managing Board]

Actually, I didn't quite understand your first question regarding casualwear and formalwear. Can you repeat this or be more precise so that I can answer this, Kathryn?

[Kathryn Parker, Equity Analyst]

Sure. So my question was HUGO casualwear outperformed BOSS casualwear in Q3. And I was wondering what caused the divergence in performance and if you could give an update on what the formal casual mix is of both brands.

[Yves Müller, CFO & Member of Managing Board]

Yes. So overall, for the BOSS brand, overall, it's 40% formalwear, 50% casualwear and 10% shoes and accessories, right? And for the HUGO brand, it's 50% formalwear and 50% casual wear. So -- and the outperformance in HUGO were -- was related to a big -- great performance in the contemporary segment in the athleisure wear, which was growing nicely with the HUGO brand and was somehow outperforming even the BOSS brand with this regard because deliberately, we were increasing our casualwear and athleisure offering with the HUGO brand.And regarding the store network, clearly, we are present in Tier 1 and Tier 2 cities. But clearly, if you take Tier 1 cities, I would say that we are at around 75% more or less in Tier 1 cities with our store network.

[Christian Stoehr, Head of Investor Relations]

And Kathryn -- and -- sorry, this is Christian again. Just a follow-up to Antoine's question on CapEx. I would just like to make one slight correction here because we reduced the CapEx budget by EUR 50 million, so it's more EUR 100 million CapEx that we put out for the full year. We were at EUR 53 million after the first 9 months. So you can expect us to approach, obviously, the EUR 100 million by the end of the year.

[Operator]

And we do have another question from the phone line, sir, and it's from the line of Thierry Cota.

[Thierry Cota, Equity Analyst]

This is Thierry from SocGen. Two questions for me. First, on OpEx. You mentioned the 15% OpEx decline in Q3. I was wondering how much was due to sales weakness and how much was due to cost cuts. And in that context, I was wondering, what should we expect for OpEx in Q4 regardless of sales trend?And the other question I had was on promotionality. I was wondering that given your plans today, do you expect the same kind of level of promotionality impact on gross margin as you had in Q3?

[Yves Müller, CFO & Member of Managing Board]

So starting with the promotion activity. So I have to say, Thierry, I think for the time being, it's very unclear because we just have to take the decisions regarding the lockdown situations. So we are just about to take decisions once when it comes to 11/11 and especially cyber week and private sale activities. So for the time being, it's very early to call. But overall, of course, I think that the gross margin or the discounts will be elevated in comparison to prior years because of the special situation of COVID-19.And regarding OpEx, I think your question was related, how much was managed? Or was it more self-help or what was the driver of this question?

[Thierry Cota, Equity Analyst]

Yes, sure. I mean you had quite a steep OpEx decline in Q3. I was wondering if you could split that between the cost cut program and how much you had completed of the minimum EUR 150 million indicated for the year and how this was linked to the revenue decline itself.

[Yves Müller, CFO & Member of Managing Board]

So actually, Thierry, the majority of the cost savings have now been implemented and are now in the books. But clearly, like we said, I mean the cost cut measures were about EUR 150 million in OpEx, and the majority is now there. But clearly, we have shown, once the net sales are not coming, we have the ability to somehow control our costs and manage our costs well in Q4. And actually, we do everything what we can do in terms of maximizing the sustainable cost savings, especially when it comes to structural effects, and secondly, when it comes to rental cost expenses. So like you know, we touch almost 150 contracts every year. So I think we have been very active in getting down rental expenses in COVID times. And this applies actually for the next generation for next year as well so that we try to negotiate the best rental deals in order to make the cost base sustainable.

[Thierry Cota, Equity Analyst]

So on Q4, can you give us an indication of the voluntary cost cut program that you would still be able to implement in terms of scale or size? Is it EUR 20 million, EUR 30 million, EUR 35 million? Do you have any scale you can share?

[Christian Stoehr, Head of Investor Relations]

No, Thierry. I have to jump in here again. This is Christian, and I'm very sorry that we will not be able to give you any more precise outlook for the fourth quarter in terms of our cost savings. As Yves indicated, we'll continue to put a very strong focus on tightly managing our cost base. It all depends ultimately also on what business we do. There is obviously uncertainty around this, as we all see, as you can see as well, and that's why we won't put a number behind that for now, and we kindly ask for your understanding.Well, thanks, everybody. Mr. Operator, if I get it right, there's no further questions now in the queue. So with that, ladies and gentlemen, this completes our call for today. As always, if there's any further questions that we did not cover today, please let Frank or myself know. And with that, thanks very much for your participation. Stay safe, and bye-bye.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.