TOM TAILOR Holding SE

XHAM:TTI

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the First Quarter Results 2018 of Tom Tailor Holding SE. On our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Viona Brandt, who will lead you through this conference. Please go ahead, madam.

[Viona Brandt, executive]

Thank you, and welcome also from my side. As usual, Heiko Schäfer will start with a business update, then Liam Devoy will talk about our development in the eCom business; and Thomas Dressendörfer after that will talk about the financials figures. And finally, Heiko will also give business outlook. After the presentation, we will do a Q&A. And yes, Heiko, please?

[Heiko Schäfer, executive]

Thanks a lot, Viona. Ladies and gentlemen, thanks for your attention. We have a lot to talk about when we think about the first quarter. Here, before we get into that, so let me start off by mentioning a few things that we should all keep in mind as we go through the details in a second. The first thing is, we are essentially in year 1 after RESET, which means that you will obviously see a lot of the full year effects kicking in from the various initiatives that we've launched in 2016 and '17, and Thomas will lead you through the details of that later on. So we need to keep that in mind.

Secondly, our business transformation, which means the professionalization of the company, the infrastructure build of the company is changing and operating of teams will continue. With that, obviously hiccups will happen, we will see them along the way, but we react fast, and we will have a few example to showcase that.

Thirdly, we are coming off pretty weak quarter for the overall market, and we're going to walk you through a few details. And unfortunately, of course, we cannot completely insulate ourselves from that. So we will see some of the year market effects on our side, too, but however, we are seeing essentially 2 different, very different developments in our group, which means we're going to look -- give a little bit more detail around BONITA, specifically where the trend is likely different from what we are observing on the Tom Tailor side.

So if we think about the first quarter, and we exclude the effects of the RESET program, then our TOM TAILOR brands grew sales on a normalized basis. And as I said again, we're going to walk you through some of the details of what that normalization means. If you look at TOM TAILOR brands, only on a normalized basis, we grew about 3%. BONITA Q1 sales performance was absolutely not satisfactory. We're going to go into the details there. On a normalized basis, sales have been declining by 14%, not normalizing for RESET effects, the losses are higher. If we talk about Tom Tailor firstly, as I said, brand sales grew by about 3%, mainly driven by strongly growing wholesale business. And we're going to look at the countries and where that comes from, retail for Tom Tailor on a normalized basis like-for-like was essentially flat. So about minus 0.4% in the first quarter.

With that performance, we feel pretty confident that we've outpaced the market again. If you think about the market statistics and mainly look at Germany here, which is our core market. The German market was actually down about 4% in the first quarter versus prior year's quarter. So in a declining market minus 4%, we managed to grow, especially on the wholesale side, almost 6% overall, which is a pretty positive result.

Nevertheless, there have been a few negative effects, which we are seeing in the numbers overall apart from the RESET effects, we have some severe issues in the first 2 months relating to our eShop, to some extent also on the SAP side. On the eShop side, our e-commerce side, specifically our sales were in the full quarter down minus 20% versus prior year caused, to a large extent, by technical problems and teething issues after the go-live of the new shop. The good news is in April and May, we're actually back on track. We see growth again, and we've managed in very short time to fix most of the problems that we have seen. Liam is going to walk you through some details there later on.

Overall, sales for TOM TAILOR brands grew in most markets outside Germany. But as I said, overall, if you take everything together, including the RESET effects, sales dipped slightly. On the BONITA side, as I was mentioning, sales were absolutely not satisfactory. And frankly speaking, most of that was internal operational mistakes. So of course, the market weakness has an effect and the climate has an effect, but the major part really is -- are things that we had in our own hands, relating predominantly to the mix of product that was flown into the stores that were for that quarter way to spring oriented, not wintery enough. And we, for sure, didn't have enough freshness for too much emphasis on basics like "never out of stock" product in the first quarter. I'm going to walk you through more details later on. We've taken countermeasures, and the good news here, again, is April and May both look very strong. April trading was actually up like-for-like 11% on the sales side and more than 20%, actually 25% on the gross profit side. So we're pretty happy with how April went for BONITA, and the May right now month to date displays a continuation of that positive trend.

We think about the financial performance overall of the group, again Thomas is going to walk you through the detail, but of course, we have seen impact on the group level mainly relating to the weak performance of BONITA. So group EBITDA is below the first quarter of '17, but still positive with about EUR 4 million. Given the relatively little weight that the first quarter has on overall annual results, though, we stick to our guidance that remains unchanged.

Talking about some business highlights now in the first quarter, and specifically starting with TOM TAILOR brand, and we'll illustrate briefly the normalization effect and, as I said, Thomas will walk you through the details later on for TTI and BONITA.

So if you look at the left-hand side of Page 4, you see the actual reported first quarter 2017 numbers of sales we have here. So EUR 152 million net sales in the first quarter of '17. If you account for RESET effects, you can look at a normalized first quarter 2017, that was about EUR 133.8 million. Now what are these normalization? They obviously relates to closures among retail stores of 55 stores have been closed. We licensed our kids business out alone, that was about 8 -- I think EUR 8.2 million sales that we have licensed out. We have closed the content division that still was generating sales in the first quarter of '17, but does not exist anymore in 2018. And similarly, we exited countries like our [indiscernible] from the Asian region or our exit in France. These regions do not generate sales anymore really in the first quarter of this year. And you see that, that overall accumulates to a normalization effect of minus EUR 18.5 million for TOM TAILOR brand only.

So if you look at the new baseline then, basically that we start from to do a growth comparison, EUR 133.8 million, you see that we've been able to grow by about 3% here for the TOM TAILOR brand, and that is mainly driven by our wholesale business. You see on the right-hand side, where it comes from. Russia, one of our key growth markets, have been growing by about 17% on the wholesale side. Actually retail growth was similar, but mainly through expansion. Netherlands have been up 14% versus prior year. Our classical export business mainly flowing into product flowing into the Baltics, the Nordics, Greece, India, and so on was up by about 10%. And even in Germany on the wholesale side, we've been growing, if you account for RESET effects.

Retail was essentially flat, I mentioned it earlier minus 0.4%. So overall, we're pretty happy with how we've been performing. If you account for RESET effect, given the market environment and that's on the next page. Because as I was mentioning earlier, the market has been pretty difficult. Here's the example of Germany, where you see the monthly market sales trends figures plus 3% in January, but then minus 4% in February, minus 6% in March, so overall minus 4% for the first quarter in the Germany market. The drivers of that are well-known, traffic decline in bricks-and-mortar retail, you see some examples that we've got from key accounts or shopping center and managers. We had a record-high influenza wave in Germany and an unusually cold weather, and some of that has actually have been [indiscernible] for other markets outside Germany. Two, if you take Russia for example, average temperature is way, way below the prior year. Now again in such a difficult market in the first quarter, we've actually been performing relatively well, if we look at sort of the normalized basis here.

Now if we look at where that comes from, that's Page 6, we wanted to give you a little bit of a flavor for where we see growth occurring. And so yes, there have been 2 core markets overall shrinking. Germany, especially on the retail side, driven by the market trend, of course. And then Switzerland, I think you all know the story of the Swiss retail market and specifically the apparel market that is under severe stress. So that has been down double digit for us. It's a continuation of a trend that we've seen last year already. Apart from that in most of other markets that we're acting in, we've recorded a solid growth. So if you look at the dark blue area here, these are countries where we operate with our own sales subsidiaries, so where we have Tom Tailor team managing, as I was mentioning earlier, we've recorded a healthy growth. Russia, I was mentioning the 17% growth in the first quarter on the wholesale side. Similar figure on the retail side, through store expansion, Benelux, I was mentioning, Netherlands alone up 14%; Southeast Europe, which is a retail-dominated market, we have more than 100 stores down there, has been slightly positive like-for-like and strongly positive on the profit side; and Austria is another big retail market for us has recorded about 7% positive like-for-like sales.

The green areas are the areas that we serve or countries that we serve more through an export business and there the trend has been especially positive. As I was mentioning earlier, on the Nordic side, the Baltics side, South Europe like Greece, for example, also positive sales development in our operation or licensing business in India. Canada, which is another region here has been down. So that has actually not been positive, but overall let's say, outside market has been seeing a positive trend.

Now that's the classical -- one of the classical channels here, as we talk a little bit more about our e-commerce business, which was actually a weakness in the first quarter. Liam will walk you through that in a second before he hands it back over.

[Liam Devoy, executive]

Thanks, Heiko, and greetings from my side as well everyone. Thank you for joining the call. As Heiko already noted, we brought live our eCom in-sourcing activities, and brought live our shops in Q4 2017, definitely the right thing to do, but we did experience teething issues. During our phased upgrade, both our user experience, content, speed, our mobile platform and personalization activity. So post go live, again, we did experience issues. The key call out is that we were affected in January and February. You can see the recovery in March. Also, April is not officially closed yet, but clearly you can see, and we will show that later as we close the month that we are plus 10%. And as Heiko has noted on the other channels, we're already over the first few days of May beginning to see good and positive activity on eCom as well. I would call out as well that the strong recovery efforts, we have a new Head of Digital, that gentleman, Stefan Wenzel, has begun to add a significant quick impact. So we look forward to now focusing on features and functionality improvement as we move forward.

I'll turn it back over to Heiko.

[Heiko Schäfer, executive]

Thanks a lot, Liam. So as I said, I think we deliberately chose to pursue a pretty aggressive time line here with the e-commerce products for various reasons. Hiccups were expected. We didn't expect the hiccups to be that significant, to be honest with you. But in the end, as I was mentioning earlier, we react fast, and we are very happy to see that new colleagues definitely show a very quick and very healthy impact. So we're happy about that. Not happy about the numbers, but happy about the change, trajectory that we're on.

One thing that we always want to mention is the continued investment into the equity of our brands. If we talk TOM TAILOR brands specifically, the activities continue. We have a relatively strong campaign out in the first quarter, which we call happy moments. Some of you may have seen the TV spot, which almost brought us a formal warning from the Deutsche Velonot, which we're pretty happy about, but that campaign has actually delivered pretty positive results. It was a bit controversial because we showed some naked flesh. But in the end, it generated a high reach in social media, more than 3.9 million views, the traffic in our own channels rose after the campaign. And the main focus product that we displayed here, [ mainly 10 ], sales were actually up 40 percentage points in eCom and 25 percentage points in retail. So very strong result of the campaign. We continue our collaboration with outside partners in the first quarter, we launched our collaboration with the German band called Revolverheld, and we're planning to do at a minimum 2 capsules for them this year. The first capsule has been sold into our wholesale already, with pretty strong result actually outperforming the Naomi capsule. We had a big event in Berlin when we launched the collaboration, very strong and positive feedback, and we're happy to continue selling our pipeline of external partners. We're going to talk about that later on in more detail.

One aspect -- one segment of our business that we are, as I was mentioning earlier, absolutely not happy about is the performance of our BONITA business, for sure the least satisfactory segment, and this is to be very honest not only driven by a weak market and RESET effects, but really mainly due to own homemade operational mistakes we've made, and I will walk you through that a little bit more.

So Q1 sales normalized were down 14% overall, minus 20% if you do not normalized for RESET effect. You see those on the right-hand side, but for sure we have closed stores through RESET, 60 BONITA Men stores and 80 BONITA Women store closures that contribute the sales loss of about EUR 6.3 million, as shown on the right-hand side. So moving from the actual quarter 1 '17 down to the adjusted basis, a drop from EUR 66.6 million to EUR 60.3 million. However, we definitely boosted the downtrend here or the impact by own internal mistake, and they relate to 3 main reasons. The first one was, we went through pretty strong clearance again in the first quarter clearing Q4 '17 leftover, but also to some extent 2016 goods. Those went out with, obviously, reduced prices impacting top and bottom line here strongly. The major impact, though, was coming from the mistakes that we made in the collection balance. So to give you a few examples on the first hand, we have way too much "never out of stock" NOS basic products in the stores. We increased the NOS share to about 40% coming from traditionally 25%, and that is something that we, as a board, frankly, have overlooked that was driven locally by our BONITA team.

Additionally, we didn't have the right winterized product in the stores. To give you another example, if you show up in February, it was about 35% T-shirts in the store. We definitely not matching what we call ready-to-wear needs of our consumers. Again, we've missed that. And I think we took consequences here and the new leadership team that you see in place today has taken immediate counteractions here.

So clearance and "never out of stock" sales has been reduced very quickly, which increased the share of fresh product in the stores starting, to some extent, in March, but then really showing effect in April and May. And in addition to that, the team around Norbert Steinke, who's our Chief Sales Officer out there, has focused on operational sales performance in the stores, an area that also we have not properly attack in the past, with an initiative that looks at boosting our conversion rates here. So you see on the right-hand side, as I was mentioning earlier, the effect of internal mistakes dropping the total sales to about EUR 51.8 million, again mainly driven by internal mistakes.

Now the good thing is that actually we're seeing rebound of sales in April and May, to some extent, due to the countermeasures that we've seen obviously, the market overall and the weather helps. But just to give you an indication, April sales like-for-like has been up 11%, gross profit more than 25% up and May shows a similar picture, actually on the top line, even better than April.

Now that's obviously leads us to the conclusion that our overall strategic plan and priorities remain unchanged. So we stick to the plan and the priorities. We continue to modernize the product and for us the perfect test case for modernization are the capsules that we have with Franziska Knuppe, usually a bit more modern in their esthetic appeal. We see that, that product is turning faster, weekly rate of sales of about 2 to 4 percentage points higher than the main collections. We continue our refurbishment of the stores, which we have done in the first quarter, about 25 stores in the first quarter and another at a minimum 50 stores to come. We started that now.

These refurbished stores typically show a, let's say, 4.5% to 5% at this point higher sales development than the nonrefurbished stores. We expect that performance to actually improve throughout the year. From a sales channels expansion perspective, we always talk about the potential that we see in concession spaces in wholesale and e-commerce. E-commerce, given the weak quarter, we had overall still a large untapped opportunity, but on the concession side, the expansion continues both with existing accounts and new accounts. And on the consumer reactivation side, we continue our mailings, for example, to activate consumer and bring them back. CRM mailings. We have print activities relating to the Franzi capsules also in the first quarter, and we will continue along that route.

Operational excellence here mainly focuses on the sales performance in the stores. This is mainly about coaching and training our more than 800 store managers and their colleagues better than we've done in the past. And again, the stores that are part of this current program typically outperform the rest of the stores, the peer group significantly. But overall, positive trend in April and May for BONITA. But make no mistake, we're absolutely not happy with the results that we had in the first quarter. So more work to be done here.

I will hand over to Thomas Dressendörfer, our CFO, to walk you through some of the financial details for the first quarter.

[Thomas Dressendörfer, executive]

Thank you, Heiko, and welcome also from my side. We're on Page 12, key financials. I just want to emphasize once more that the, let's say, TOM TAILOR brand have been growing on a like-for-like basis, so demonstrating that this brand is very capable and very strong. And the total group has been impacted by BONITA, I just described, where we do not see a brand problem, but [ the activity handicraft problems relating ] to our homework properly, and we'll improve on that.

So this is, for us, let's say, Q1 impact, not a general impact. So overall, we have a very strong performance on BONITA. If you have a look at the numbers as well, the gross margin for the total company had again increased to 57.3%, due to, let's say, sourcing project and due to large work on pricing. But due to the, let's say, volume shortfall on the BONITA sales, the absolute gross profit is not sufficient to compensate for -- to compensate -- to be better than last year. We have further full year OpEx savings coming in from the RESET program. So part of the gross profit shortfall has been compensated, but it will not sufficient to be in the same level of last year. So we are slightly below last year, but we still have a very strong positive EBITDA. Keep in mind that in the textile business, especially in the retail business, Q1 is never -- is very, very weak profit-wise because -- let's say, you have the sales months and you have the low-priced product like T-shirts coming in, but we have a positive EBITDA, which is very important.

I would also like to stress that the guidance is confirmed, but we are pretty sure that we can compensate for the shortfall going forward, and that will be in line with the EBITDA guidance of approximately 10%.

What we've added now to the reporting is like-for-like reporting, like-for-like, and that's on the -- that's focusing on normalized sales for 2017, which is described in detail on Page 13. So what we have done is we're just taking the 2017 sales reported, and we have adjusted them for all the divestitures. I'll take an example, TOM TAILOR KIDS, we have outsourced the license business. So the sales will not be visible anymore in 2018. So we've taken the 2017 numbers and have normalized that in the numbers. So part of the KIDS divestitures, you would see on the brands Q1, the EUR 10.8 million, which probably have reduced 2017 sales.

Brands include Tom Tailor Polo, Contemporary Women, Contemporary Men. Countries, Heiko said it before, Asia, France, couple of other things happen there with the stores, now we're closing heavily stores. That's another EUR 5.9 million. So on the Tom Tailor side, you've got just 2017 base on Q1, you have to deduct EUR 18.5 million from the base to make a true comparison to the Q1 2018. The same applies for BONITA. There we have, let's say, divestitures of EUR 6.3 million split into brands, which is BONITA Men and the store closures EUR 3.9 million. So in total to make a true like-for-like comparison, we actually take 2017 reported numbers and correct them downwards by EUR 24.9 million. Then you have, let's say, profit comparison and you're able to, let's say, do a proper like-for-like comparison. And that is another column, which is the full year impact, and I'll just focus on the total number, which is EUR 69 million. So if you take 2017 base, EUR 923 million of sales. You need to correct the base by EUR 69 million, this will be the starting base for -- this would be the corrected base for 2017 and versus that base we're going to show growth continuously in the next quarters.

I'll just move on to Page 14, where as I said, we're showing you detail, the TOM TAILOR brands sales normalized and the BONITA normalized sales. And if I take the adjustments, which I just described before, I need to correct the reported sales 2017, EUR 152.3 million, down to EUR 133.8 billion (sic) [ EUR 133.8 million ]. We have reported sales 2018 of EUR 137.9 million, which is a 3.1% growth versus that base. And if we split that up into wholesale and retail, wholesale has been up by 5.8%, a great number and retail in this very, very tricky environment, we've managed plus/minus 0, which minus 0.4. You see on the right side BONITA, we have a big impact coming out of divestitures from last year. But nevertheless, our performance also on the normalized base have not been good, and Heiko has described the issues and how we've been addressing them to compensate for these shortfalls.

Let's have a look at the total group. And the takeaway is Tom Tailor is the functioning brand. It's a growing brand. It's very profitable brand. And in Q1, we've actually suffered from BONITA, which we've been addressing. So if you look at the total numbers, we have, let's say, a decrease of 5.3% on a like-for-like basis. You will see on the reported gross profit also the decline because we could not offset fully the shortfall, but if you look at the margins, we're at 57.3% versus 53.1%, again, let's say, a great job getting gross margins up. The [ vested ] base for further profitability, the moment we're back on gross margin also with BONITA. And then, let's say, impact for BONITA falls through to the EBITDA and the EBIT margins. It's at the forefront of the impact of EUR 8 million, approximately half of that could offset with OpEx savings coming out of all the RESET programs we initiated last year and resulting into a plus EUR 4.1 million.

I'll just go into details. Wholesale, I'll just read you through that. That's Page #16. And I said before, that's the wholesale brand, Tom Tailor wholesale is growing very good 5.8%. Please keep in mind, that [ we're not obviously prices on the badge ]. Quarter 1 performance is competitive in all these things. We can say, for us, let's say, our business TOM TAILOR brands, actually wholesale is a very strong growing business. We see enough potential going forward, and let's say very big potential source to continue, there's growth part. And I think it's 5.8% on that period. We're really proud on that. And really, we're more proud, if you look at the margins, the reported gross profit went up by 6.4%. And we have looked at the margins, last year it was 46%, we went up to 53%. So we're doing a lot on the gross margin side to optimize and to improve the by sourcing project by discounting -- discount projects and so on. And then of course working on the actual gross profit and/or the margins, you will have the respective EBITDA, in fact, which was growing by 16%. And our TT wholesale business is at 19.9%, 20% EBITDA margin, which is pretty high in that industry.

Let's have a look at TOM TAILOR Retail, which is at Page 17. As I said before in a very, very difficult market, especially with the retailers, we have more or less managed to stay flat versus prior year with just minus 0.4%. That's a mix of, let's say, Germany is slightly down, other countries really growing up, strongly growing, especially in our Russian market where we're expanding every year 15 to 20 stores. If you have a look again on the gross margin, yes, there is a small gross profit, there's a small decline, but just a very small decline. But again, the same story on the margin from 52.3% up to 57%. Again, confirming very strong, let's say, profit focus of the company, improving all levers to manage the EBITDA and the bottom line. And on the sales, not again, we have very big -- we have countries with very positive growth in retail which confirm that we can still continue to grow in the retail business, if we do it properly.

Moving on to BONITA. We talked a lot, and I just want to add another perspective. We have already scheduled our one to one with the investors. BONITA is a game of try. There's a lot of trial and error. We try a lot of things. Sometimes, the majority of the cases, things worked right, sometimes things don't work right. And we had the quarter now where it did work properly. The important thing is that we acted very quickly. We analyzed, we take conclusions, and then we take decision very, very quickly, and that's what we've done in BONITA. And Heiko already mentioned, we have a very strong April already, approximately 11% growth and more importantly, the gross profit is 25% above last year. So you see the speeds of this company, reacting on the mistakes. Yes, we do mistakes. I think that's actually normal. If you don't try out, and you will never improve things. Sometimes you have a mistake, the important thing is that you realize and you take corrective measures to get back on the growth path again.

Last but not -- so that's BONITA, we've talked a lot of details. We went to operating cash flow. And as you know, we're not only doing research, changing the company completely, and turning around completely. We're -- in our spare time, we have been introducing SAP in the system. For those who do not know the history, we have 72 systems in the company, and we've decided to move to SAP to have one system. We do that -- we've done that in basically 7 months, 8 months of introduction, so very, very quickly.

Other companies were 2 years on such project. We do not have the time because, let's say, we actually have to bring the company back on track. So things happen, some mistakes happen, like this route before. And we have an SAP -- and in the setup, we had very simple issue, let's say, create invoice but we could not print it. And it took some time to find out of the mistakes, where that was, but the effect was that invoices have not reached the customer and the customer has postponed the payment into April. So this is, let's say, just a phasing impact. We have similar issues on the payables. We have to be involved with the suppliers in Asia. We have to generate the custom document, the shipping documents, all these things. And as we have some printing problems, we decided to not have any kind of risk, we paid earlier, and we have enough time to get out the papers out of the system. That led to a double whammy. We didn't get the receivables from the customers because they didn't have the invoices and based on a conscious decision towards delivery problems we paid supplies in advance, let's say, advance by 1 week. So this is wash if you take quarter 1, quarter 2, all the problems have been fixed. So you will not see this negative impact as one-time negative impact coming out of that.

The next column interest paid. You see it would be the first impact of our, let's say, renegotiation with the banks. We are in a very good grid. We have, let's say, optimize the interest cost, and we significantly cut it down from EUR 2.9 million last year to $0.7 million this year. On the CapEx, this is exactly what we said. We said [indiscernible] approximately EUR 35 million this year into the business, be it store refurbishment, new stores, be it SAP, be it additional software for pricing for other sophisticated tools, all this is on track and is fully in line with plan.

Then moving on to the guidance. I just want to confirm the guidance. We have margin improvement plans, gross margin improvement plans, April looks very good, May looks good as well. So we believe that we can confirm the guidance and the key targets number for us is to have reported EBITDA margin of 10% at the end of the year. And I'm very confident that we'll be able to do that.

Having said all of this, I would like to pass back to Heiko to sum up what has happened and what's going to come, and then we'll open for questions.

[Heiko Schäfer, executive]

All right. Thanks a lot, Thomas. Yes, talking about the outlook, what does it mean for us, again, before we get into details, obviously, not a great start into the year. But in the end, if you look at the weight of the quarter in our overall annual results, we're not worried, as Thomas was saying, that we can hit the guidance and thus, the priorities for us do not change. We stick to our plan. We think we have a good plan in place and our priorities remain the one that you've seen before. Talking about BONITA, this is about the modernization of range and stores and what our key call out from the new team, especially when it comes to a product range, modernization looks pretty promising to me and the results of Franzi capsules confirm that we're moving in the right direction. Operational excellence and sales channel expansion, obviously additional things that we need to emphasize and don't forget, we still have a few stores on the BONITA side to close. So that process and the cleanup process will on a smaller scale than in the past still continue.

TT product push, we're putting a bit more emphasis on, let's say, the sharpening of our growth potential for the TOM TAILOR Brand from the product side, as I was mentioning earlier, specifically, on the women side, we've launched test capsules to test new wearing occasions. We've actually ventured into what we call big and tall area where we tend to see that we can generate additional sales here, providing consumers that has a slightly not ideal body shape, let's say. So all of that is working fairly well for us at the moment. On the TT Retail side, Q1 was really and especially Germany was really about cost optimization, I would say. So not unless every store closes but managing our staff in a better way and Q2 was focused more on, let's say, sales performance optimization, having product ready to wear in the stores, when you need it, driving up our replenishment share to be able to replenish best sellers where we need them and do not create leftover risks in the stores. So there is a lot of work in conjunction with the supply chain team to make us really retail ready and performing and then obviously, CRM activities, customer loyalty management and omnichannel continues to be a big theme for our retail team specifically in Germany. Growth hubs, I think, we've talked about them in prior calls, the priorities here remain Russia, our e-commerce business and then, let's say, specific export countries where we do see a lot of potential, to give you one example, we've been entering discussions with a partner in Spain, [ now talking ] less about the potential entry there. It looks pretty positive. So there is demand for our brand also in countries that we have not had a strong presence in and whatever we see a risk free way to enter, then we don't do it and so far signal looks very positive. The strengthening of our brand equity will continue. We are working on our collaboration partner pipeline for 2019, stay tuned for more news and then obviously, our fall, winter campaign is being finalized, as we speak. And then the simple number that for us an internal phrase to say, we're still coming out of the SAP projects and work to do with regard to business intelligence and reporting what we're simplifying processes internally. So priorities remain. Also our market yield outlook in regards to priorities remain -- I think 2017 was clear. 2018 is about building a healthy and balanced portfolio. I'm not going to go through all the details because you have actually seen that already in prior calls. Just to reemphasize, in this year, we'll shrink to grow sustainably. I think Thomas explained in detail what that entails, and how we can basically explain the RESET effects here, but in parallel putting the right things in motion for healthy growth afterwards.

And the target for us remains we think, we can achieve an EBITDA margin in 2020 that is larger than 12% close to EUR 1 billion sales that doesn't change. We feel very confident that we can move in that direction, and we're sure that you will accompany us at that time.

Having said that, key takeaways, what were the main messages from the first quarter, I think, Thomas has largely summarized it already, so I'm not going to go through every point here. We continue to perform well with the TOM TAILOR brand. We're gaining market share, you can look at the statistics yourselves, [ Haf Maisa & Partner, our contact reports ], they will show you that relatives to competition, for example, in Germany, we're gaining market share, we're continuing to do that. On the e-commerce side, after the teething problems, and new eShop start to deliver against plan, April up by about 10%, May continues in that direction. We've addressed the operational mistake that we had on the BONITA side and again, April and May show very positive trend at the moment. We are confident that we can continue our gross margin trends here with the project that Thomas was mentioning earlier. We see the benefits of the RESET program kicking in full year about EUR 30 million of savings that we're seeing and the investment priorities, for us, also remain unchanged both on the brand equity side, but we're also investing heavily into our talent bench. I think you've seen a few good examples in the first quarter with Stefan Wenzel joining with Norbert Steinke, Karsten Oberheide and Raphael Heinold joining on the BONITA side. So our professionalization continues but we're also upgrading the store look and feel on the BONITA side especially. So our guidance remains confirmed, and with what we've put in place for the years beyond 2018, we're pretty confident that we can achieve the growth targets and the profitability targets we've given ourselves.

Having said that, I stop here and would like to open it up for questions from your side.

[Operator]

The first question is from Sabrina Taneja, Commerzbank.

[Sabrina Taneja, analyst]

I have 3. So first of all, on a top line decline, there were 3 reasons. One was that the weaker market due to colder weather, second were RESET effects and then the third you also mentioned were technical issues. You have kindly shown us how much of this effect is attributable to RESET, but maybe you can also give us some kind of color on how much was related to the technical issues, and correct me if I'm wrong, but it should be just a minor impact when considering your online sales share. And maybe you can also give some examples what the teething problems were here. Second question is you confirmed your guidance expecting a slight decrease in sales versus prior year, so is it still fair to assume the EUR 900 million sales target you mentioned in the past, given the weaker top line in Q1. Third question is on gross margin, gross margin benefited from us discounting and improved product cost. Will we be seeing a similar impact in the coming quarters or what's the highest impact in Q1?

[Heiko Schäfer, executive]

Okay. Good. Thanks, Sabrina. Good questions, overall. Let me start with the first one, the sales that's due to the technical issues. Actually, the dip that you see here was not as small as you were mentioning. I mean, it's big enough for us at least to worry about it. If you look at the effect that the eShop issues had on the own eShop and then also on our marketplace business because that is driven through the same systems landscape was almost, let's say, EUR 1.5 million at the minimum top line, but a pretty negative also effect on the bottom line because what you need to take into consideration is that if you lose, let's say, paying customer and you lose traffic, you need to invest afterwards again when your infrastructure is fixed to bring this customers back. So we have seen an over proportion of, not only top line loss, but more importantly bottom line loss due to the inefficiency that we have. We have to invest over-proportionally in online marketing to regain and reactivate customers and consumers to get them on to our eShop platform. So both top line dip and bottom line dip. Liam, you want to add?

[Liam Devoy, executive]

Yes. And Sabrina to answer your questions, as a couple of examples on the technical side and to emphasize Heiko's point, is that the primary issues that we saw that affected us commercially where, one, the movement from [ cut to checkouts ]. Obviously, that's a critical measure, customer satisfaction. And then secondly, we had issues with payment processing as well. So both of those have been corrected as we noted, but we can't escape the fact that they had an impact on us in the first 2 months of the quarter. So back to you, Heiko.

[Heiko Schäfer, executive]

I think Thomas wanted to take the second one.

[Liam Devoy, executive]

Apologies. Go ahead, Thomas.

[Thomas Dressendörfer, executive]

Okay. On the EUR 900 million, yes, that's the number what we envision, what we're planning. But please keep in mind that we have a Tom Tailor. We have couple of stores which make losses, where we are negotiating with the landlords on an exit. So this can be -- maybe we are lucky and then I think, 2, 3, 4 stop -- stores will go out, it will be more. This is very opportunistic approach, depending on the possibilities of what we have. So I would say the sales target would be around EUR 900-plus million minus EUR 10 million in that range. So we do some corrections, and we'll also see some other opportunities to bring it up. And then on gross margin...

[Heiko Schäfer, executive]

Just one sentence to add to what you're saying. But keep in mind, obviously, our main focus for optimization is still the bottom line, right. So we're not going to buy sales necessarily if we have to.

[Thomas Dressendörfer, executive]

Okay. On the gross margin, you'll see a constant increase coming from, let's say, sourcing and from pricing that they've been varying from quarter-to-quarter because each of the quarter, you have, let's say, different product mix and you have a different, let's say, sales pattern, you have some months -- some quarters you have more sales month or less sales month. So this number may change slightly, but the messages, given, let's say, on a full year basis will continue to increase, gross margin steadily by approximately 1% every year, due to sorting, due to better pricing.

[Operator]

The next question is from Philipp Frey, Warburg Research.

[Joerg Frey, analyst]

Just 2 quick questions. Could you please help us a bit also with the phasing of your adjustment for the remainder of the year, remember for example, Kids were also, if I'm not mistaken, discontinued as of mid last year. So just a bit of flavor, probably you couldn't also send it around after the call. Add then a bit more relevant economically, can you help us a bit with your approach in managing the counter risks there in Russia, particularly after the end of the quarter, they obviously had the larger adverse movement for you, well, that's impressive 13% growth in Q1 is. I guess the risks increasing. Just some flavor on that one, please.

[Heiko Schäfer, executive]

Okay. I'll give you the -- on the first one, you're going to have in Tom Tailor, it will be EUR 12 million in quarter 2, it's going to be EUR 18 million in quarter 3, and in quarter 4, it will be approximately EUR 7 million. What we'll do is we will take this chart -- what we've shown you is we're going to have the numbers every quarter plus half year, and we'll also have, let's say, similar effects on the BONITA side. There I can also give you number, quarter 2 is going to be EUR 4.4 million, then EUR 1.3 million and then it just going to be EUR 500,000 in quarter 4 on BONITA. So a declining, of course, some of the stores were out, and we're not really impacting. So you see the bigger impacts usually in the first 3 quarters and last quarter not very big. On Russia, you have, let's say, you have 2 impacts, obviously, the impact from the sales side, which you can influence by changing the shelf prices. This is what we're doing, we're adjusting, and that's common in that industry with many of the retailers, many of fashion company that depending on the, let's say, on the change on the FX rate, the change on shelf price. On the gross margin, obviously, you have an impact, but it's still manageable because we have, let's say, and -- we're not secured in these things and because, let's say, securing this [indiscernible] is very, very expensive and doesn't lead to the desired results. So at the moment, let's say, very cleverly managing that on a quarter-to-quarter basis whilst shelf pricing, via let's say better purchasing, via direct shipments to manage that. Suppose we have further problems in Russia. And this is what we're always looking for is, we are, let's say, very strict, we're not sending any money. We're not taking too big risks on these stores. All of them have to be canceled with a maximum 12 months. So we do not have any kind of long-term contract in that business, usually it needs to have 3 to 6 months. So if suppose something happens, you can close the stores rather quickly. The second thing what we're doing is that we're not all, let's say, all the growth what we're having 15 to 20 stores going forward all of these are financed out of their, let's say, own operating cash flow, which means they're putting a lot of pressure on the organization to be very soon very profitable in that business, which is helping us. So we're not taking any kind of risk in sending money. And with this flexibility with this pressure on the organization, we're actually pretty good managing profitability, and Russia is a profitable business, very profitable business for us.

[Joerg Frey, analyst]

Yes. Well, definitely. I didn't want to appear to suggest otherwise. It's -- obviously, it's 17% growth [ interest rate ]. And if I may ask, have you at all any store rental contracts, which are denominated in half currency?

[Heiko Schäfer, executive]

No, everything [indiscernible].

[Operator]

The next question is from [ Guansa Nomur, Basket Advisor ].

[Unknown Analyst]

Just one question about the OpEx because effectively we saw that the difference in OpEx from the first quarter of last year and the quarter of this year is only EUR 3 million. So can you coincide the savings from the RESET plan in Q1 this year and maybe give us some more color on the savings you expect for the full year, because, of course, I think, as you said, the improvements in the gross margin is now largely achieved, I think. So to see some operating leverage, we need to see some decline in the OpEx?

[Thomas Dressendörfer, executive]

Okay. On the OpEx is very simple, what we've said last year, we've been consistent on that messaging, we have saved due to RESETs approximately EUR 30 million to EUR 40 million on an EBIT level. You will see the full year impact this year. However, we did 2 things. We have increased our marketing spending with last year by EUR 15 million. So part of the savings will be offset by increased marketing expenses. So it's not -- at the OpEx savings, they are not there because they are there. But if you consider based on very conscious decision, we're increasing marketing spend significantly to further strengthen the brand equity for Tom Tailor and for BONITA. That's what we're doing is on the e-commerce that we would like to have our current share of 9%, and we would like to have the share of 25% of our total sales. To manage that you have to enforce -- we had to hire pretty good people on the e-commerce platform. And these people are not cheap, they are specialized on e-commerce, not many around, and so we've added approximately 10 people on these e-commerce side, again, slightly after seeing the savings from that. On the full year numbers, we do not disclose that at this stage.

[Heiko Schäfer, executive]

Maybe just one thing to add what you also need to take into account in addition to the classical marketing advertising spending I've mentioned earlier as an answer to Sabrina's question that we have to beef up our online marketing traffic generating expenditures quite significantly to give you a figure. Traditionally, we have spent about 10% of online sales on online marketing. We've rent that up last year already to about 12%. I think we boosted that and in the plan to about 18%, and we have gone way beyond that in the first quarter in the last 2 months in order to bring back customers that we have lost due to the traffic problems. So -- just to reemphasize what Thomas was saying, you do not see obviously the full effect of RESET because we deliberately invest some of that back into the business.

[Operator]

At the moment, there are no further questions. [Operator Instructions]

[Heiko Schäfer, executive]

We got about 3 minutes left, but we would take 3 questions if there are. That doesn't seem to be the case. Then I would say, yes. Thanks a lot for your attention, for your continued interest, on your interest hopefully. We are coming back to you next quarter very likely with better numbers than this time. And we're sure we're going to meet some of you on our roadshows over the next -- next week. Happy to continue the conversation and look forward to meet you in person. Thanks a lot. Bye-bye.

[Operator]

Ladies and gentleman, thank you for your attendance. This conference has been concluded. You may disconnect.