TOM TAILOR Holding SE

XHAM:TTI

Earnings Call Transcript 2018-Q3

[Operator]

Dear ladies and gentlemen, welcome to the TOM TAILOR Holding Investor and Analyst Call on the announcement of the company's Q3 year results 2018. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Mr. Heiko Schäfer, who will lead you through this conference. Please go ahead, sir.

[Heiko Schäfer, executive]

Thanks a lot, operator. Thank you, ladies and gentlemen, for your interest in joining us today, although we certainly have, already, better results to present and communicate.

I would like to welcome also my fellow board members. Our CFO, Thomas Dressendörfer on the call; our COO, Liam Devoy; and today also with us in Hamburg is our Chairman of the Supervisory Board, Dr. Thomas Tochtermann. So let's dive right into it. I mean, it's needless to say before we go into details that we are disappointed with the Q3 results overall on group level. Specifically as they relate to BONITA, we've certainly overestimated the speed with which BONITA could be transformed or stabilized. We're going to dive a little bit more deeply into what that means, but just to say that upfront.

Let's look at the summary. Q3 at a glance, we really need to look at this in a differentiated manner. Yes, I think, you're all aware if you look at the sector news, that it was a special quarter with pretty unusual climate conditions, but on the TOM TAILOR brand side, we coped with it, and that is especially due to the relatively strong development of our wholesale business, whereas on the BONITA side, the results were, and there is no doubt about it, extremely disappointing. There were 3 main drivers for that. Weather is not always a good excuse, but in this context here it is one. However, there was also a resulting pressure to clear leftover stock at lower prices and margins resulting from Q1 and Q2. That was a second driver for BONITA's performance. And then thirdly, some of the transformation projects that we've started didn't deliver the planned impact, for example, the store refurbishment. And these 3 things together were some of the drivers that contributed to the situation. But overall, I think, on the TOM TAILOR side, specifically on the wholesale side, a relatively strong development. We'll go through the details in a second.

TOM TAILOR Retail, of course, we saw the development here, but again that needs to be differentiated by regional market. BONITA was the main driver for the results that we're seeing here. Two more sentences. The first one is that, obviously, all channels, also including BONITA, saw increasing inventories given the weak selloff that we had. That's something that we're going to get to later on. And then a last comment before we get into the details, and I think we've also stated that in our press release, that given the situation that we're seeing at BONITA at the moment, we are and have the duty as board members here to assess and reassess all options to create shareholder value. We can't go into details, but all options really means all options, and that's what we're doing now.

So let's dive into some of the business highlights. If you look at Page 4 in the presentation. The third quarter, the entire year, but also specifically the third quarter, was no doubt a special one for the textile market. You see sort of a string of profit warnings here from various players in the industry. Some of them in Germany, the German market was specifically affected, but also outside of Germany, a lot of our competitors, or sometimes even customers, had their own issues coping with the situation. And you saw, as I was saying earlier, a string of profit warnings. We also had to go out, and if we go to the next page, Page 5, in mid-September with updating our guidance, and we would like to take 2 minutes just to explain to you why it came at that particular point in time. The first one was that the -- our most critical market, or region, let's say, the Germanics, so the region of Germany, Austria, Switzerland, had a very weak development here. We saw, according to publicly available information, that the market in Q3 alone shrank between 5% to 6%. And as a result of that, the entire market was a bit in a discount mode. You saw pretty aggressive promotional activity in the third quarter, basically since mid-August, sometimes up to 70% reductions. Now, if that market or that region is suffering, it hits us over-proportionally because, especially this year, it is a very important region for us. We're still generating about 3/4 of our profits in this year in that region. So weak core region hitting us over-proportionally.

The second reason was that Q3 and Q4 have a very particular heavy weight on of our profits this year. The last 4 months really contribute to around 65% of our profits this year. And specifically, the months of September and October are crucial here because we consider them full-price months where you typically generate a lot of profit in that second half of the year.

Now, if those months then are affected by specific circumstances relating to weather, for example, it has, again, an over-proportional impact on our expectations for the remainder of the year and whether we can catch up with the developments that we've seen. Now, the middle of September, we got to the point that we saw a combination of events coming together here. The first one was a weak August and September trend, specifically for BONITA. BONITA's negative trend actually accelerated in September versus prior months, and I'm going to show you that in a few moments. And also, when we looked at the updates that were coming in middle of September from our sales subsidiaries, there was no indication anymore that we would have an opportunity to compensate for that weakness, which we've seen October through December. And all of that coming together basically led us, then, in the middle of September to the conclusion that we will have to go out and update our guidance.

So if we then look at the markets and how we've been faring, starting off with TOM TAILOR in Q3. On the left-hand side of Page 6, you see market figures, in this case from Textilwirtschaft, and you see very clearly how the third quarter worked out, plus 3%. July still relatively a good month, then negative in August and extremely bad in September, minus 13% the entire quarter, as I said earlier, between minus 5% to minus 6%. In that environment, we managed to grow our TOM TAILOR brand on a normalized basis. Thomas will walk you again through the details of that later on. Normalized meaning we excluded the effects from the RESET program, specifically here in the third quarter, the effect from licensing out our Kids business. So if you then go basically and look at the normalized basis for Q3 '17, which is the EUR 160.5 million net sales, we managed to grow relative to that baseline by about 2%. And you also see where it's coming from. Our wholesale business in the third quarter for TOM TAILOR grew more than 17%, whereas the retail shrank by minus 5.2%.

Let's look into the drivers of that positive development on the wholesale side, Page 7.

The strong trend that we are seeing for TOM TAILOR Wholesale here was mainly driven by some of our international markets. You see sort of a red thread here because we've been talking about some of these markets for a longer time now. Really, internationalization continues to be one of the drivers of our TOM TAILOR brands growth. Russia, for example, was up more than 29% year-on-year. We had positive developments on the online wholesale partners side, franchise store expansion and also strong sales in department stores in Russia. Some of our international growth markets grew by more than 25%, for example, in the Nordics, the Baltics area, Greece, but also Spain. Very positive development, and even some of the more mature markets, like the Benelux region, managed to grow, obviously, in size, not that significant.

In our core markets, wholesale in the Germanics, the development was essentially flat. But that, again, keep in mind, in an environment that's shrinking 5% to 6%. Additionally, to the good top line development for TOM TAILOR Wholesale, we saw an increase in expansion in gross margin, Thomas will walk you through the details for that later on.

Retail, TOM TAILOR Retail, a slightly differentiated picture here, Page 8. If you look at the upper part, we look at our international retail full-price business, which is about 2/3 of our global retail sales. And you see that, actually, we started off relatively well internationally into the third quarter. So July up by about 5% like-for-like. This is like for -- the true like-for-like figure, so excluding any normalizations for RESET effects. So July up about 5%, August then flat, September hit us badly internationally. If you look at the German situation here, it's of course, a bit weaker August and September, both very weak months. We had a traffic decline, sometimes double digit lower than the prior year, and a lot of that was driven by the climate conditions and the weak consumer sentiment that we saw in the third quarter. But again, differentiated picture, international retail for TOM TAILOR 2/3 of the business, relatively solid development in some of our younger markets like Romania, Bulgaria even in September, positive like-for-likes. So overall, pretty solid, I would say, for that quarter. Germany, a different situation.

A lot of you are interested in the development of our e-commerce business, so let's spend a few sentences on that. When we saw how the markets developed in the third quarter, generally, but also then on the e-commerce side, we decided to shift gears a little bit. We actually focused our e-commerce efforts more on building tech features and being a bit more diligent in terms of online marketing investment because we saw that the market wasn't developing as we had planned. I mean, you're aware, sort of, of the Zalando profit warning. Obviously, we've seen some of that in our figures with Zalando beforehand. We said at that point that we would focus more on efficiency on the performance marketing side. We reduced the spend, for example, by about 10 percentage points versus Q2, and focused the teams really more on enhancing the shop. You see some of the examples of that here on the right-hand side, visual merchandising, imagery user flows were optimized. We made progress on the personalization side. So for example, also personalized listings that are now being shown based on your past behavior on our shop, and so on and so forth instead of driving the top line at all costs. A result of that was that, actually, from a top line perspective, e-commerce declined versus prior year, but versus the prior quarter, we saw an improvement of the profitability here. So EBITDA was up versus Q2, but overall, top line still down versus prior year.

I think the main point for the discussion, though, also for those who have been going through the press releases, of course, the development at BONITA. So let's talk about that briefly. BONITA, and there's no beating around the bush here, BONITA's development in Q3 was more than disappointing in various ways. If you look at the left-hand side of the page, you see the like-for-like sales development in our brick-and-mortar stores. So again, July minus 9%. August, then, already minus 14% roughly, and September sales minus more than 30%. A severe impact. And, again, coming back to what I said earlier, when we saw the first sort of half of September passing, it was very clear to us that, that gap would be so big that on a group level, we can't keep our guidance. Also keeping in mind that in addition to the top line development for BONITA, we saw a contraction of gross margins. You see the figures below, so the gross margin reduced by about 2.4 percentage points in July and then a stronger decline in August and September. What was the driver of that, you may ask now. There were 2 different sets of reasons. July, August was really driven by the necessity to reduce our Q1 and Q2 leftover stock. Remember, we had a weak quarter for first quarter for BONITA, and then, let's say, a solid quarter in Q2. But the first quarter still led to carrying some leftover goods with us. It was up by about 6% versus prior year then, and we decided that we need to clear out these goods, which happened in Q3. So the sold units in July and August grew by about 3%, but the average sales price declined, and of course, that has an impact on the bottom line. September then, which is usually the heavy month where you start selling knitwear, and jackets, and more expensive and higher-margin autumn products, was affected by the unusually warm weather. So the temperatures that we've seen in September did absolutely not help to sell those higher-value items, the twisted seasonality, which again, on a prior year's comparison, led to a decline in top line, but also gross margin. Additionally, we had the first month in September of a new look for BONITA, a much more modern collection look coming from the current CPO, the Chief Product Officer. And that collection in September also had a lower gross margin because we had consciously decided to invest in the new collection's quality and hand feel. All of that coming together, not positive at all. Also, what we didn't do then in the third quarter quickly was to adjust the cost base, especially fixed costs that can't be adjusted, but given the weak development that we've seen on the top line and gross margin side, we couldn't adjust the cost base quickly enough to cope with some of the trends here.

It didn't help that the only growing channel here was our e-commerce. With BONITA, you see the numbers on the left-hand side, it's double-digit positive, but it doesn't help in the grand scheme of things because the sale is small. Now the takeaway here is now, what does that mean for BONITA, and if we go to the next page, I think what we're seeing now is that for the last 24 months, we've tested a lot of corrective measures. You see some of them displayed here on the left-hand side. I'm not going to go through everything from a reduction of the range, breadth, modernization of the designs now. We have heavy marketing support, collaboration with celebrities; we closed a lot of unprofitable stores; we modernized some of the strong performing stores. So a lot of activity, but frankly speaking, for sure we've overestimated the opportunity here for a quick recovery. It will take longer, there is no doubt about it. There are tough segment headwinds here for BONITA. The Classic Mainstream segment, which BONITA is in, and, like, competitors, like Oliveira are in, has been contracting about 7% every year for the last 4 years. You've seen that competitors are either insolvent or really struggling. The store closures, the cost adjustments that we've executed to date have not been sufficient to restore profitability for the group. And some of the corrective measures that are shown here on the left-hand side didn't yield the desired or planned effect for sustainable like-for-like stabilization.

So yes, we've tried a lot of things, we overestimated the potential impact they would have, and now we're at the point, and we're stated that very clearly in the press release, where we're reassessing all options for BONITA to create shareholder value.

Having said that, I would hand over to Thomas Dressendörfer, our CFO, to walk you through the financial details.

[Thomas Dressendörfer, executive]

Thank you, Heiko, and welcome from my side as well. Needless to say is that we're all are very, very disappointed about our performance in Q3, especially after an excellent fiscal year 2017 where we demonstrated that we could turn around the company, make it profitable, have positive free cash flows, all these things.

Firstly, I am also very, very, let's say, disappointed about the performance. And for the first time in my life, I -- for those who know me my approach is make impossible things happen. There is no hurdle that can stop you; let's go for it. This is the first time in my life that I have had to accept that extreme weather conditions can have an impact on the business. So a new learning, and it has been my first profit warning I have made in my life. So firstly, you can please accept that I'm also very disappointed about the performance. But all this motivates us much more to be even better in the quarters going forward and manage -- let's say, manage the expectations of the shareholders.

Coming to our key financials, I've, let's see, our preface used only words, and less numbers, we'll come back to in a minute. If you, let's say, lay back and look at the situation, I think it's important to differentiate between the performance of the TOM TAILOR brand and the BONITA brand. And BONITA, we'll come to that in a minute once more. And I'm sure you're going to have a lot of questions around these things. But just have a look at TOM TAILOR brand. Despite the terrible weather situation that we have, you go out, we still have warm weather. In September, we had 30 degrees and plus, where you sit in the cafe and you don't buy a winter jacket or knitwear, we still managed to grow slightly the business versus prior year. We were below our internal expectations, obviously, but we managed to grow the business, which I think is a huge achievement. And if you take into account where the company was 2 years ago, we've really managed to turn around on TOM TAILOR, and we have a good and solid and profitable foundation going forward.

Overall, BONITA negative sales, and you've seen that the majority of the sales decline in BONITA happened in September. So we were very quick on the profit warning and to address these things, but the BONITA sales shortfall impacted the whole company.

EBITDA, you'll see later on, TOM TAILOR we've managed to keep on the same level as prior year. All of the, let's say, profit shortfalls, EBITDA shortfalls are mainly coming from BONITA. Overall, that's also an important message. Compared to all other competitors, the company is profitable. We have a positive EBITDA. We're not like many of the other companies, in a squeeze or something. We are making profit, which is a very positive sign.

Coming to the brands. So we've managed, what Heiko said before, to manage an average by 1.9%. That is adjusted for the RESET closure we had last year. Again, we've demonstrated on the gross margin that we are very good on sourcing, optimizing the pricing, plus we have an excellent rebate discount management increasing the gross margin. This is good. And the EBITDA, I said before, is on the same level as last year although we have higher marketing, sales and income spendings. BONITA, you see in the numbers, we'd only have to say sales, gross margin, EBITDA are not in line with our expectations, and we have to work on these things.

Logically, we have, let's say, on the free cash flow, we have some impacts. There's no need to, let's say, talk. Good things about that. We had expected higher sales. They did not turn up, the way it came. So we have -- we're sitting on inventories which we're going to sell off over the next couple of months and get them down again. I'm very confident that we have that. But it's a logical consequence of having extreme weather conditions, very hot weather, and now having all the expensive jackets and knitwear sitting in the warehouse.

On the cash flow, it is negative. Obviously, again, we have CapEx, we always said from the beginning that we want to reinvest it in the business. So all this CapEx is planned. It's on purpose, it is really getting this business up and forward for the next year. So that money has been spent, approximately $30 million for this year. We have higher net working capital, I just iterated that, mainly inventories, and we have lower EBITDA, mainly BONITA, so that all leads to a negative cash flow.

Let me quickly come to the -- explain the normalized sales, which is Page 14. So what we do for the last quarter is we adjust the prior year numbers, so 2017 numbers, for all the RESET closures what we had. So elimination of brands, TOM TAILOR Polo, Contemporary Woman, Contemporary Men, BONITA Men. In the case of BONITA, we are adjusting for the stores which are closing, and we're adjusting for the countries which we've closed. So take France, China, South Africa, Ireland, North Ireland and Canada and all the other things. If I adjust for these things and I compare this number to the reported sales for 2018, you see the 1.9%, which we've mentioned before, and the same applies for BONITA, you'll see a minus 16.7% normalized sales 2017 versus Q3 2018.

TOM TAILOR brand, what we've tried to do here, we've put in Retail and Wholesale together, because at the end, Retail, Wholesale, e-commerce, these are different channels to address the needs of the consumers. So it is important to see the overall picture of the TOM TAILOR brand. And what you see on the sales side, 1.9% increase, see the page before, on a reported basis, it is minus 8%.

On the gross margin, gross profit, you see a slight decline. Obviously, we are missing some of the, let's say, overall sales, which leads to a small reduction of the gross profit. But you can look at the margins. They went up from 52.5% to 55.1%. Reasons as explained before, good sourcing and excellent discount rebate management in a very difficult environment where basically all the competitors were on discount as of end of August.

On the margins, absolute-wise, we're more or less slightly below last year, so a marginal change. But you see the increase of the EBITDA margin to from 11.1% to 11.8%, again confirming that TOM TAILOR is a brand where we can achieve margins between 11% and 13% going forward because this is a very strong brand, scalable, international, all the potential to be one of the bigger players in this business.

On the next page, we have BONITA, and basically, all the key KPIs, sales, gross profit, EBITDA are not in line with what we had expected. And if you make the math, it's less -- it's not an expense or OpEx issue. Yes, we've got to downsize and adjust to the new sales base. But we had no OpEx increase. Unexpectedly, everything is fine. It really reduces to sales and gross profit and gross margin. And you see the terrible Q3 where we are just underperforming on the sales levels, on the gross profit level and on gross margin level.

We have -- we'll continue working on this brand to really bring it up, we believe it is in the right market. Just to, let's say, confirm once more, we are in a segment with the elderly woman, growing demographics, excellent wealth situation, all these things, so the market is there. Currently some of the players are under distress, and we'll continue the way on this, and as Heiko said before, continue means we're, let's say, evaluating all options going forward.

We will then sum up TOM TAILOR and the BONITA brand on Page 17, just very quickly. So on the like-for-like, on a normalized basis, we have decline due to BONITA of minus 3.2%. The margins, the gross margins, are more or less flat. We've lost all the gross profit from -- in the case of BONITA and slightly also from TOM TAILOR brand. Margins, EBITDA margins are down from 9.2% to 4.7%, mainly due to BONITA. And the EBIT is also down, but it does show a positive. So it's not a situation where -- other companies are showing different results.

Cash flow, I said before, we're starting with a negative operating cash flow mainly due to the net working capital. And there, basically exclusively, on the majority of the cases, building up inventories, as we had different plans, much higher plans for our TOM TAILOR. And BONITA units, we expected much more sales, which due to the extreme weather, did not materialize. So we're sitting on some inventory. We already have initiated plans to sell it off. We do have some experience. We have enough sales channels outside of the Germanic countries so the cannibalization should be controlled or should be marginal. You know these stories, we can lots of these goods into the Russian market, into Poland, where we have a lot of outlets. And there are other channels, which are outside of German-speaking countries, thus reducing the cannibalization effects on that. You see the interest paid significantly has gone down versus prior year. The reasons are clear. We renegotiated a new syndicated loan and all the lines on top, where we have very favorable interest rates. You see a huge savings coming out of that. You see the CapEx increased. Again this was planned. We have always said 2018 would be the year of investing into the company. So these investments have been done, and they will help the business going forward. Unfortunately, this has been spent and is resulting into a negative free cash flow. Again, we are addressing all these things, and I think going forward, for the next quarters, we will see we will come back to similar levels as in 2017.

The last 2 pages -- last 3 pages is just a summary of the total company year-to-date September, so a 9 months' perspective. TOM TAILOR has been growing by 1.5% on a normalized basis. BONITA has been declining on a normalized basis by minus 9.3%. If you then have a look at Page 20, you see the combined picture of both companies. And the key message is there that we were very, let's say, confident in the first half year conference call that we should be able to manage our original guidance. Unfortunately, the Q3 weather conditions really stopped the group development. So it's not -- and this is an important message -- this is not an underlying problem which we have since month 1. It is really an unrelated Q3 impact where we had extreme weather conditions impacting TOM TAILOR and BONITA, stopping the development.

This leads me to the last slide, which is the guidance, the adjusted guidance after the profit warning. We still believe that we should be in the range of EUR 840 million to EUR 860 million. We expect EBITDA margins in the range of 7.5% to 8.5%. I have to -- having learned something new, I have to say if we're going to have 20 degrees until December 24th or something, this is -- you can't sell jackets in that, with these outside temperatures. So this underassumes certain normal weather conditions, obviously. But from all that we know, from all the measures we have been putting into place on the sales side, on the inventory reduction, all these things, we -- this gives us confidence that we should be able to manage this guidance, except for these extreme situations. This finishes the financial part, and I would like to hand back to Heiko on the outlook.

[Heiko Schäfer, executive]

Yes. Thanks a lot, Thomas. Let's talk a little bit about what's coming. I'm sure you're all wondering so what does that mean for the next years to come.

If we go to Page 23 in the document, we would like to differentiate our outlook '19 through '21 by brand a little bit more than we've done in the past. And if we talk about the TOM TAILOR brand, I mean, we've talked about the strategic priorities for TOM TAILOR already in the last calls. We follow basically 3 main directions here, growing our existing healthy core; professionalizing it for more profit through systems, through state-of-the-art processes; but also expand into adjacencies that are next to the core, for example, growing adjacent segments on the women's side; growing more online; growing through internationalization, we've coined the phrase Go East for that; and growing our younger line, TT Denim. These priorities we've talked about already in the last calls, they do not change for TOM TAILOR. And that will result, and we're pretty confident in that, in the fact that we will outpace and continue to outpace the market growth from a top line perspective, and then our bottom line should grow faster than the top line. With that, we still expect that we'll have a sales growth, let's say, low to mid-single digit and an EBITDA margin 13 -- sorry, 11% to 13% for the TOM TAILOR brand. For BONITA, we recognize that there is a longer transformation with some heavy lifting to do. The priorities will largely remain the same. We need to compensate let's say, for the development in the bricks and mortar stores on the e-commerce side. On the concessions side, probably also looking more at a healthy outlet business that we can develop here for BONITA. The continued modernization of products, to some extent stores and the CI, a reactivation of our loyal consumer base. So these things don't change. We need to put much more emphasis, though, on operational excellence and efficiency here, and that's something that will come. What that means for us is, essentially, in the next 3 years a relatively flat top line development. We will restore profitability, but for sure, it will remain below the profitability of our TOM TAILOR brand. So sales flat, and EBITDA, let's say, maybe around up to 6%, that's what we're looking at right now.

Specifically for the TOM TAILOR brand, we would -- and that's the next page, look to have a Capital Markets Day in May next year where we provide you with a deep dive into the strategic priorities. Again, fundamentally, the priorities will not change. We will complement them probably, we'll talk about the ambition level that we can potentially increase for TOM TAILOR, but the main avenues here for growth will not change for TOM TAILOR. And in May next year, obviously, we'll provide happily a little bit more detail around TOM TAILOR.

Coming to the summary and to wrap it up.

If you look at Page 26, here. So what are the main takeaways? Again, as Thomas was saying, as I was saying in the introduction, the TOM TAILOR brand is healthy, remains healthy. We're continuing to grow against a very weak market trend also in Q3, driven specifically through our efforts on the internalization side, and that especially in Wholesale. E-Com will remain one of the growth drivers moving forward, but in Q3, we adjusted to the market environment and prioritized tech build and profitability. But overall, we expect our e-commerce and digital business still to grow solidly double digit through the next coming years. I think we were very clear that BONITA continues -- or has continued to be a drag on the group's performance in Q3, and there's no quick turnaround. We're continuing the transformation with a moderate sales expectation, but at the same point in time, we will revisit all options to create shareholder value for the group, looking specifically at BONITA. And again, for the TT brand, strategic growth plans and the priorities are unchanged. We will outgrow the market, profits will outgrow sales and we're pretty confident we can keep pushing the TOM TAILOR brand forward here. I would conclude with that and hand over to the operator because I'm sure you have a few questions that you would discuss with us.

[Operator]

[Operator Instructions] The first question is from Volker Bosse of Baader Bank.

[Volker Bosse, analyst]

Volker Bosse, Baader Bank. Three questions from my side. First of all, I would like to look into the fourth quarter's gross margin. I mean, we can do the math what you need for Q4 in sales and EBITDA. But what kind of gross margin level did you include in your model for the fourth quarter? Is it fair to assume also a gross margin for fourth quarter on previous years' level as you achieved in the third quarter? The second question is regarding your guidance. Perhaps you can give a little bit more granularity which trend convinces you that you will be able to make it to the revised guidance and top line as well as EBITDA? Perhaps you can give a trading update on October or on e-commerce or -- to have a bit of better feeling that you will be able to make it. And finally, and it is a key question for me is, of course, about BONITA. I mean, you're stating you're looking at all options, whatever that means, perhaps a sale, a divestment, downsizing. But at the end, I think that what we see the current share price is dragged down by the goodwill of EUR 850 million you have on BONITA. And given your equity, well, you -- perhaps you can give a little bit more detail how you think you get rid of the goodwill and how you will handle the challenges, whatever comes up, in regards to goodwill.

[Thomas Dressendörfer, executive]

Okay. Thank you, Mr. Bosse. I'll start with the first question, and I'll partly answer question two. And Heiko will take over on BONITA and can also add some further perspective. Q4, I mentioned 2 things. TOM TAILOR is on a strong path of growth. We have a lot of plans in place in each of the channels and each of the countries to really continue to grow and to grow strongly. So from all that we know, and current trading is in line with our expectations, current trading meaning the October numbers are in line with our, let's say, interim forecast for TOM TAILOR. So we are, at the moment -- again, I have to say that I have never used that before in my call -- to actually say under normal weather conditions. If this extreme situation continues, I can't guarantee for that. But under normal conditions, I really expect that we should be in line with our internal forecast, which means a strong growth in the quarter 4. One the gross margin, we will be slightly below, because we, for obvious reasons, have to sell off our inventory, which is a must in the current situation. This is going to drag the gross margin slightly, maybe by 1% or 2%. So that -- with that, we should not have a big impact on the EBITDA. So from all that we see, and let's say, BONITA in trading, it seems that October was stabilized, the sales trend is not more erratic. It's rather flat. It's still below last year. But that, we have taken into account in the forecast. So from all that we know today, I do expect to be within the guidance.

[Heiko Schäfer, executive]

Maybe just to add to what Thomas was saying, Herr Bosse, we -- when we came out of the first quarter and we saw sort of the situation, we decided a couple of measures, and some of them are bearing fruit only in the fourth quarter in terms of special packages, for example, in wholesale, that we would promote and sell to our accounts. So we've really loaded the -- or backloaded the year a little bit, specifically on the wholesale side through sales and products programs, and some of them will have an impact now. Thomas was saying how we started off into October. October overall was relatively solid. You asked about some trading indicators also maybe on the e-commerce side. We're seeing order values in Q4 so far up by about 25% in our own e-shop for TOM TAILOR. BONITA in a similar range. So some channels are performing relatively well, and at the moment, we have no indication, let's say, that this should turn for the TOM TAILOR brand, yes? So that's why we are, at the moment, feel pretty confident. I mean, I look outside right now. It's still way too warm, but nevertheless, we hope if this doesn't continue, that -- and we get back into a regular rhythm, that also jacket sales will pick up again as we normally expect them. I think you asked specifically also about all options for BONITA, and before we go into details, all options basically means all options, and we can't really go into a lot of detail at this point. It means all options, yes? I think you can easily think about what that means. Thomas, do you want to comment briefly on the topic of the goodwill?

[Thomas Dressendörfer, executive]

Yes, I think it's very important that we shared the numbers, that the -- and I fully agree, the BONITA impairment -- the BONITA intangible asset is a huge stone hanging on the share price of TOM TAILOR, and when there's a resolution on that, all the investors will be much more comfortable. Just to give you the key numbers once more and the possible impact, we have an intangible assets for BONITA of EUR 184.6 million. That's the number. And we have -- at the same time, we have a deferred tax liability against this of approximately EUR 60 million. So it's not EUR 184 million. It's the net of these 2 things, so it's EUR 125 million, which is the impact in the worst case. If you would say BONITA is worth nothing, this would be the impairment amount, so big, big numbers. But keep in mind that this is a brand in a market which exists. You have the demographics working for this market. You have the wealth working for this market. You have a brand which is well distributed in over 700 stores and approximately 70 wholesale places. It is a company which has an excellent warehouse where it can distribute, overnight, things into each of the stores and back. It's a company which has an SAP working excellently, and you have a company which has a headquarters which is also working effectively. So what I'm trying to say with that, the worth of this company is not 0. It can't be, because there are assets which are running again, and there's markets and all these things. The second thing that you need to know, it is a noncash wind. If you write off the revenue impairment, there's no impact on the EBITDA. It's a big impact on the net income, and this goes into the equity. So we're talking about impact on the equity side and not on EBITDA, not on the form, because it's a noncash item. All the cash flow calculations do not need to be adjusted. All the DCF models to valuate the company do not need to be adjusted. Yes, there's an impact on the equity ratio, I would say that's clear. And you can assume -- you've known us now for quite some time that we are proactively sorting out and analyzing all the options that we have, and it is also understandable that we can't disclose the options that we have at this date. But please assume that we are, let's say, very active, together with all the key stakeholders are working on options to address this issue because our mutual objective is to get the share price back where it has been. And I fully understand that BONITA is a drag on our share price, a significant drag. But just give us a couple of weeks more, and we can, let's say, come up with an option which is hopefully suitable for all the investors. Does that answer your questions, Volker?

[Volker Bosse, analyst]

Yes.

[Operator]

The next question is from Philipp Frey, Warburg Research.

[Joerg Frey, analyst]

Well, I have to touch the nasty BONITA issue as well. Just regarding, well, all options here, can we at least say that you are not prepared to invest more than your depreciations in CapEx in the future in BONITA? Or should --

[Thomas Dressendörfer, executive]

Yes.

[Joerg Frey, analyst]

Yes, I just wanted to rule that out that you want to pour massive amounts of fresh cash on that.

[Thomas Dressendörfer, executive]

Yes, we have a balanced approach on this. Don't worry.

[Joerg Frey, analyst]

Okay. That's at least...

[Thomas Dressendörfer, executive]

These shares are all value driven. Don't...

[Joerg Frey, analyst]

Yes. But just wanted to make that clear for everybody that we don't talk about, well, fresh cash for BONITA to drive massive store refurbishment programs or whatsoever. And then a bit regarding the just normal business. Regarding the amount of inventory write-downs that you expect in Q4. Or should -- or are you more or less targeting to, well, to draw this -- to do -- well, to generate offer over a longer period of time rather than writing it down aggressively? That's probably the second one.

[Heiko Schäfer, executive]

Yes. I mean, maybe just briefly, you need to differentiate the situation. Thomas can talk about the write-downs. If we talk about TOM TAILOR, the larger part of the buildup is coming from product from our "never out of stock" program that hasn't been sold off. The beauty of the "never out of stock" program is that it typically runs longer. So the life cycle of the product is not just a month, but it has a longer life cycle. And you can basically melt it off or continue to sell it over the next couple of months. So that's one. And anything that is more seasonal driven is something that we're selling off through the channels that Thomas was mentioned, clearance partners, our own outlets largely, to bring that down again.

[Thomas Dressendörfer, executive]

I think as a reference, sorry, Heiko, 2 years ago, the inventory for TOM TAILOR was much higher. And we've managed without write-downs. So this is not -- what I'm trying to say is we have experience on how to handle these things. You need time. That's the only thing. This is not something -- you can't -- I'll bring an extreme example, we have a couple of winter jackets at the moment in our inventory. We'll not be able to sell them off in May, but we may be able to sell them off in August in Russia again. So we need some time to manage the sell-off. But these things have been done by TOM TAILOR, and we can do it again. I'm not worried about that one.

[Joerg Frey, analyst]

Okay, that's helpful. And then just mathematically, if I'm corrected -- calculated correctly, your new EBITDA ambition more or less comes down to around 10% on group level in the current structure. Can you confirm that?

[Thomas Dressendörfer, executive]

Depends how the sale -- it's a mix that depends on the sales and BONITA turnaround. If you say TOM TAILOR -- BONITA's going to be flat at EUR 230 million, EUR 240 million going forward, and TOM TAILOR is going to grow faster, then you may see a small -- a higher one. It's a mixture.

[Joerg Frey, analyst]

And lastly, did I miss the e-comm figure for Q3? Or didn't you mentioned it in terms of...

[Heiko Schäfer, executive]

The -- you're referring to top line for e-commerce?

[Joerg Frey, analyst]

Top line for e-commerce, yes.

[Heiko Schäfer, executive]

Yes, it was actually negative overall from a top line perspective, so our e-commerce business did not grow in the third quarter versus prior year.

[Operator]

The next question is from Lena Gerdes, Commerzbank.

[Lena-Katharina Gerdes, analyst]

So I just have one quick question, or 2 actually, regarding the CapEx and depreciation and amortization. How -- can you give further indication on how you split it in between the intangible assets and your PPE values, for now and also what you expect towards the end of the year. And what the main drivers behind the D&A are.

[Thomas Dressendörfer, executive]

Can you repeat the question once more, because I'm not sure if we got it.

[Heiko Schäfer, executive]

Yes, come a bit closer to the phone maybe.

[Lena-Katharina Gerdes, analyst]

Sorry, can you hear me now better?

[Thomas Dressendörfer, executive]

Yes, yes.

[Lena-Katharina Gerdes, analyst]

Okay, great. So the question is regarding the depreciation and CapEx distribution. So currently, you have quite a lot of amortization as well as CapEx distributed towards the intangible assets, and I was just wondering whether that will remain the same and also how the distribution has been for the 9 months now for both intangible assets and the property, plant and equipment on both the CapEx and the depreciation and amortization side.

[Thomas Dressendörfer, executive]

The depreciation is going to continue where this -- all the CapEx that we have is depreciation. The amortization is going to run out in 2020. So we're not going to put anything further into the amortization, if that is your question.

[Lena-Katharina Gerdes, analyst]

From 2020.

[Thomas Dressendörfer, executive]

Yes, exactly. It's all the stuff from our predecessors which we don't want to continue, it's all going to be depreciation. And to give you the CapEx numbers going forward, as a group, we expect to have in the range of EUR 20 million to EUR 25 million CapEx going forward, the majority obviously on the TOM TAILOR side to continue growing the business.

[Lena-Katharina Gerdes, analyst]

That makes sense, but I was just wondering, in regards to the CapEx, right now, you still have the majority -- also in the previous year, you had the majority listed for the intangible assets and whether that will remain the same, or whether that -- in terms of brand, where is it going? And on...

[Thomas Dressendörfer, executive]

It's the software. Yes, it's the software, where it's going to be most probably on the same level.

[Lena-Katharina Gerdes, analyst]

It's going to be on the same level as in the prior years, so at 47?

[Thomas Dressendörfer, executive]

Yes, the software is something we're -- that's always got to work. We need additional software.

[Lena-Katharina Gerdes, analyst]

Okay. But that is a quite high amount. So you're planning on keeping it at...

[Thomas Dressendörfer, executive]

That's very different. Technically not a -- sorry for that. Don't get me wrong. We're still in the budget process, so I can't give you the final on this. But for your calculation, you can go into a, let's say, into a model, take the number that we have and minus 20%, you should be fine.

[Lena-Katharina Gerdes, analyst]

Sorry, I didn't hear that.

[Thomas Dressendörfer, executive]

You would take the number that we have currently and deduct 20%. That should be a fair number going forward.

[Lena-Katharina Gerdes, analyst]

Okay. For the intangible assets side.

[Thomas Dressendörfer, executive]

Yes, exactly.

[Lena-Katharina Gerdes, analyst]

Okay. And then depreciation for amortization will run out in 2020. And for the depreciation, that will remain relatively...

[Thomas Dressendörfer, executive]

Yes.

[Operator]

The next question is from Alexander O'Donoghue of Berenberg.

[Alexander O'Donoghue, analyst]

Just a couple of questions. I know that you talked about the sort of longer-term guidance figures. But could you give a bit more concrete on maybe just what you expect for next year? Maybe not giving specific numbers, but just some sort of guidance on what you expect for the profitability, specifically next year. And then secondly, just specifically how that will translate into the free cash flow for next year as well.

[Thomas Dressendörfer, executive]

I would love to do that, but please accept, next to me, I have my -- the Chairman of the Supervisory Board, who has not seen the budget and has not approved the budget. So I may get in a very difficult situation if I now disclose a number he has not seen before. So I would rather give you the chance to ask a further question which I may be able to answer.

[Alexander O'Donoghue, analyst]

I mean, are you able to say...

[Thomas Dressendörfer, executive]

Alexander, give me a call later on. Then I can tell you.

[Alexander O'Donoghue, analyst]

But I mean, do you think we -- I mean, is it possible to say if it can be -- I mean, do you think it will be at least at the same sort of EBITDA margin next year as this -- as the new revised guidance for this year? Is that fair? Because, I mean, you're growing the margin, right?

[Thomas Dressendörfer, executive]

Yes. I wouldn't put it that way. Wouldn't -- we want to, but this, what happened this year, is, for us personally is a personal disappointment. We'll try to beat everything next year. That's our ambition. So if that helps, if this gives you an indirect answer to your question. I...

[Alexander O'Donoghue, analyst]

Yes -- no, no, understood. And then just the other thing I would like to ask then is just sort of about the net debt. Just what's your current view on the level? Are you comfortable still with the leverage that you have? And how will you manage that going forward?

[Thomas Dressendörfer, executive]

No, definitely not. We had -- last year, we had a net debt-to-EBITDA ratio of 1.3, and now it went up to, I don't know, 2.4. This is completely unacceptable, but it is driven by the high CapEx. It's driven by the high -- and the CapEx was planned. Don't forget, we wanted to invest it into the business. It was driven by the high inventories, lower than internal sales, what we planned. Yes, we're better than last year, but we're lower than our internal expectations, resulting in huge inventories. And you have the profit situation with BONITA, and that's another EUR 20 million. We have EUR 30 million CapEx, EUR 30 million inventory overall increase versus our internal targets. So it's -- you can argue, is it good or bad or something, but all this results into a net debt-to-EBITDA which is, for me personally, unacceptable. This is by far too high, and this has to go down.

[Operator]

The next question is from Jurgen Kolb, Kepler Cheuvreux.

[Jurgen Kolb, analyst]

On BONITA, if I may come back on that one, the -- can we assume that there are no kind of relationships or synergies between BONITA and TOM TAILOR that, say, in the case of a disposal, would harm your underlying business, first of all?

[Thomas Dressendörfer, executive]

You're right. There are no synergies.

[Heiko Schäfer, executive]

Correct, no synergies. Essentially, it's a separate -- it's basically an independent company. We've got a separate headquarter location. Most of the IT systems are separate, separate institutions. You can argue whether our combined telephone contracts provide a big synergy, but they're probably not. So it's an independent company.

[Jurgen Kolb, analyst]

Okay. Some of the assets of BONITA, are they pledged to the banks? So in the case of...

[Thomas Dressendörfer, executive]

No, no, nothing.

[Jurgen Kolb, analyst]

Nothing pledged, okay.

[Thomas Dressendörfer, executive]

We have huge flexibility to -- if this answers your question.

[Jurgen Kolb, analyst]

Okay. Of the around EUR 30 million inventory increase, can you break it down how much came from BONITA and what was from TOM TAILOR?

[Heiko Schäfer, executive]

It's about half, half.

[Thomas Dressendörfer, executive]

Half, half.

[Heiko Schäfer, executive]

It's about half, half. And again, for TOM TAILOR, as I was mentioning earlier, most of it comes from "never out of stock" program, which has a longer life cycle. And just to be very clear, I think Thomas mentioned it earlier. We are coming from a level for BONITA in 2016 from about EUR 70 million inventory value, yes? We're now at about -- I don't know what the most recent figure is, let's say, EUR 48 million to EUR 50 million. So it's still a significant improvement. We're not meeting our own expectations, and that's something that we will work through.

[Jurgen Kolb, analyst]

Okay. And just to make clear also on the TOM TAILOR inventory levels, you're planning to really sell off all the merchandise and not keep it for, I don't know, next season or something like that? This is just so that you want to go clear into the new year.

[Heiko Schäfer, executive]

Yes. That's not exactly what I said. The "never out of stock" program has the beauty that it has an extended life cycle, and if you don't sell it today, you're going to sell it tomorrow. You can sell it in January. You can sell it in February. So most of these articles have a life cycle of, let's say, 3 to 6 months. And if you're sitting on it today, you will just order less or reorder less of the same article then for the next quarter, which means that, that is a process that we can organically melt down. The seasonal product that is winter and autumn specific, that's the point that Thomas was referring to, that is something that we will work through in order not to sit on too much of it, but we're not going to burn an endless amount of money here, rest assured.

[Jurgen Kolb, analyst]

No, that's clear. I should have been more precise. I was referring to the seasonal -- more seasonal product. Obviously, the other plan stands. Yes, okay. And lastly, maybe any additional comment you may have with respect to IFRS changes, IFRS 16, 17, how that's going to affect your P&L or balance sheets, if you have?

[Thomas Dressendörfer, executive]

The P&L, you will see -- I'll make it very simple. Obviously, the big projects for this company, we have 1,400 stores. So we're really talking about huge, huge, huge impacts. Just for those who do not know the background, where you take out the rental contract out of the P&L, which is -- which will increase your EBITDA. So you'll most probably see a doubling of the EBITDA going forward, but you'll see the corresponding effect below EBITDA, before EBIT. And the most important thing is you will increase your balance sheet by EUR 450 million to EUR 500 million, basically impacting all the ratios you can think about. Just take our equity ratio, which is now above 30%. If you increase the balance sheet sum by EUR 450 million to EUR 500 million, and we have not finalized the numbers yet, you'll see, let's say, declining ratios on that. But this is -- this will be an adjustment overall in the whole inventory, and that's something we just have to take into account. The current plan is that for the first Q1 reporting in May, you will see the first, let's say, results. I'll also give further indication here that we'll also slightly adjust our reporting to, let's say, show off e-commerce as a separate channel, being a very important channel going forward, that you have more transparency about the profitability and the growth of this channel.

[Operator]

There is a follow-up question of Volker Bosse of Baader Bank.

[Volker Bosse, analyst]

Perhaps you can share your view on the impairment? I have to come back to that. And perhaps you can stimulate our fantasy. So if you take the EUR 120 million depreciation to the balance sheet, your equity value would half or fall below EUR 100 million. So how would you deal with that effect? And how would the banks look at these potential impairments in regards to any equity ratios you have agreed on with the banks? And can you rule out a capital increase given the lowered equity situation after potential impairments? I know it makes not too much sense at this level, but perhaps you can share your view with us on this topic.

[Thomas Dressendörfer, executive]

Yes. Obviously, this is premature, the question, because we've not done all the options and we've not gone through all the detail. The process is very simple. You have, let's say you have -- you're planning a budget, 2019, '20, '21, going forward. It's a classical DCF model where you get approval of these budgets by the Supervisory Board somewhere the middle of December, and then you start discussing this with the auditors in detail. And then we will know the numbers, what they're going for. And I said before, it is not the case that the company is worth 0. There's the market outside there which is big. There are millions of people -- women in the age of 55 years and plus. They have -- they are wealthy. They like buying things. They go into the stores. So it's not that we're talking about a market which has disappeared overnight, and then we have to close down the thing. Plus, you're talking about a company which has 700 stores, which is a unique asset in that region. You are talking about a company which has, most probably, still a state-of-the-art warehouse with overnight deliveries, very, very efficient, all these things. You're talking about a company who has a very efficient SAP system, working, functioning. You get twice a day your numbers per store. You can do everything with that, everything's good. You have a functioning headquarters, so there's a value behind that. It's not going to, let's say, disappear into 0. So we need to be -- the second point is that, it's noncash. I just have to repeat that. Please assume that we are -- let's say, we're trying to -- let's say, we are -- we usually try to think ahead, so this is not taking us by surprise. Let's say this BONITA change and this rejuvenating is something, it's a journey we're doing now since 1.5, 2 years trying to manage that. We have a very open discussion with the banks a lot. They know exactly what this is, and as this is noncash, this is a different topic to be addressed. And I would not like to say more at this stage because it's not the right environment. Please accept that, Volker.

[Operator]

As there are no further questions, I would like to hand back to you, gentlemen.

[Heiko Schäfer, executive]

Yes. I think we've said basically, we've gone through the closing. Thanks a lot for your interest. We've got some pretty intensive weeks ahead. Believe us, we've got a quarter to secure, and that's what we put the full focus on. You've asked a lot of good questions. Some of them, we cannot always answer, but rest assured, the important issues are being dealt with. We look forward to touching base with you during one of the upcoming roadshows, and then, obviously, later during our next official call. Thanks a lot, and have a good weekend. Please go out and buy some TOM TAILOR and BONITA products, ideally some jackets. Thanks a lot.

[Viona Brandt, executive]

Thank you. Bye-bye.

[Operator]

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