Earnings Transcript for BRBY.L - Q3 Fiscal Year 2017

Executives: Julie Brown – Chief Operating and Financial Officer Charlotte Cowley – Director-Investor Relations

Analysts: Helen Brand – UBS John Guy – MainFirst Thomas Chauvet – Citi Thomas Forte – Maxim Group Zuzanna Pusz – Berenberg Louise Singlehurst – Morgan Stanley Warwick Okines – Deutsche Bank Rogerio Fujimori – RBC Capital Markets Erwan Rambourg – HSBC Mario Ortelli – Bernstein Julian Easthope – Barclays Peter Testa – One Investments Carole Madjo – Haitong

Julie Brown: Good morning and welcome to Burberry’s Third Quarter Trading Update Conference Call. My name is Julie Brown and I’m Burberry’s new Chief Operating and Financial Officer. I’m delighted to be joining Burberry today. This is an exciting time for Burberry as we implement our five key strategies and position ourselves for future growth. As this is my first day, I’m going to hand you over to Charlotte Cowley, Director of Investor Relations, who will take you through this morning’s update and answer your questions. I look forward to meeting you in due course and to speaking with you again in April. Over to you, Charlotte.

Charlotte Cowley: Thank you, Julie, and good morning everyone. Firstly, as you would have seen from our announcement on Monday, we’re delighted that Marco Gobbetti is joining us as Executive Chairman, Asia Pacific and Middle East, next week and will become CEO on the 5th of July. Turning to this morning’s announcement, retail revenue for the third quarter was up 4% underlying and up 22% at reported FX. Comparable sales were up 3% with the balance from net new space. Mainline footfall remained down year on year but less so than in the second quarter and improved conversion more than offset the footfall decline. Looking at comparable sales by region, Asia Pacific returned to growth, up low single-digit percentage. The key drivers of this were acceleration in Mainland China delivering high single-digit percentage growth with both better footfall trends and improved conversion. Beijing continued to be impacted by the work we’re doing to elevate the store portfolio in the city. Excluding Beijing, Mainland China comps were up about 15%. In Hong Kong we also saw an improvement in performance. While still negative, the comp sales decline was a low single-digit percentage compared to the double-digit percentage decline we saw in Q2. Traffic remains weak, down double digit, but continues to be offset by improved conversion. Next, EMEIA delivered double-digit percentage comparable sales growth led by the continued exceptional performance of the UK which, boosted by tourism, saw comparable sales up about 40%. And we continue to see growth from domestic UK customers as well. Continental Europe remained weak with a decline in both domestic and tourist spend. However, we did see an improvement in France compared to Q2. Finally, in the Americas, comparable sales remained down by a low single-digit percentage. Trends were similar to the first half with uneven spend from domestic and traveling luxury customers. However, global spend from American customers increased year-on-year. In mainline, conversion remained strong with the Americas’ Burberry private client teams delivering significant client engagement and revenue growth. The U.S. market was a very promotional environment with the majority of businesses going on sale earlier than in previous years. As you know, we are taking strategic actions to elevate our brand positioning in the U.S. and we chose not to accelerate sale in response to others’ moves, and also reduced our participation in promotional events held by our wholesale partners. Next, let me give you a few highlights of operational and strategic progress we have made against the plans we set out to you in May. Firstly, a couple of comments on our brand and marketing; we saw record engagement with our festive campaign this year with 22 million views of the film globally, more than double last year. With better data and analytics, we shifted our marketing spend to higher ROI channels, particularly in digital, to improve our marketing effectiveness. I’d also like to highlight our festive partnership with Harrods here in London which we were delighted with. We had 18 sites in store and 29 windows focused on Burberry for festive. There was strong brand messaging and visibility throughout the store and on their online media channel. This resulted in very strong sales growth for us in the store and also delivered fantastic reach and positioning for the brand. Second turning to product, fashion once again outperformed replenishment as customers sought innovation and newness, which was clearer to see in-store given the 15% to 20% SKU reduction we made for the product that landed in-store in November. We also saw great commercial results from the Runway collection following the exceptional response to the show in September. In terms of product performance, our strategic focus on bags resulted in continued outperformance in the category and a strong response to the festive assortment, supported by a book of gifts, produced good growth in small leather goods with a high percentage of those SLGs being personalized by monogramming. Thirdly, underproductive space

Operator: [Operator Instructions] Our first question comes in from the line of Helen Brand of UBS. Please go ahead.

Helen Brand: Hi, good morning, and Julie welcome. Good to have you onboard. I’ve got three questions this morning. Firstly, what did the Chinese consumer grow globally in the quarter following flattish in Q2 when you put Hong Kong and the international spending together with that accelerating Mainland China number? Secondly, within the 3% like for like, can you break down ASP versus volume within that? And then finally, you said that handbags were strong in the quarter. Can you quantify what growth at retail you saw and how that broke down between ASP and volume? And what price point and products specifically on handbags are outperforming, given the strategic focus there? Thanks very much.

Julie Brown: Hi, Helen. Yes, so, if we look at Chinese growth globally, if you look at our total Chinese spend, that was basically flat in Q2 and it grew to a high single-digit percentage growth in the third quarter, when you look at their total global spend. The 3% comp, AUR average price is flat so it was all volume. And in terms of bags, the products that were really performing, again it’s the newness, it’s the newness that’s performing both across accessories and apparel. But particularly in bags, the banner is still the number one, the rucksack and the solid leather buckle tote, part of the buckle family. So we’ve been talking about building new families of bags and so nice to see that performing well as well.

Helen Brand: And any quantification on what the handbags grew in the quarter at retail?

Julie Brown: No, I don’t think we can give a firm number on that.

Helen Brand: Okay, thanks very much.

Operator: Our next question comes in from the line of John Guy at MainFirst. Please go ahead.

John Guy: Good morning, Charlotte, and welcome Julie. A couple of questions from me, please. First of all with regards to the Americas, you flagged still a relatively volatile market there. Could you talk about how you see U.S. wholesale and in particular, I suppose, wholesale, broader wholesale, going into 1H 2018. So that’s my first question. The second question with regards to the product performance, looking at fashion over replenishment. From a mix perspective, given the fact that you’re talking about small leather goods outperforming and some accessories outperforming, given their gross margin is it fair to say that gross margin mix is relatively positive during the Christmas period? I mean, typically when fashion outperforms replenishment, I would think that the mix would be slightly diluted, but given your comments, could you maybe just flesh out your views on the margin mix? And finally with regards to the French market, you talked about a small improvement. We’ve seen a roughly 10% increase in footfall coming back into Galeries Lafayette and a few other areas in Paris. Could you maybe just give us a little bit more quantification in terms of the relative improvement there? Thank you.

Charlotte Cowley: Hi, John, yes, so Americas and U.S. wholesale. No, I haven’t seen much sort of positive news coming out of that market recently. I mean we’re in the middle of closing the order books. I haven’t got anything firm to say on the first half of next year. But clearly, you saw that in the first half of this year the U.S. wholesale business is down over 20%. We said we’ll expect a similar trend in the second half of this year and there might be still a bit more work to do there; and with us clearly thinking about the elevation of the brand in the U.S. and doing that particularly in wholesale. So that’s wholesale. Product gross margin, really I don’t think there’s that much to think about in terms of the bags and the SLGs; it’s much more about the fashion and the replen mix and that fashion being a headwind. So I wouldn’t be thinking that was particularly favorable in terms of mix on the gross margin. Clearly there’s an opportunity for us to improve the productivity across the product piece. What was great, we’re seeing the good response of fashion. We talked to you about the SKU reductions. So actually now that’s live in store, the fashion, the newness, can really shine through to our customers and also the one label working in-store in terms of simplifying that shopping experience. So that's probably product. France, it was better, clearly we talked, I think, about there was a near double-digit decline in the past and it's clearly improved from that but I don't think we're going to dig into the number in particular.

John Guy: Okay, great. Thanks, Charlotte. Maybe just one follow-up on the one label with regards to the Americas in particular. Could you just talk about how you're seeing at the moment the third party retailers react to that one label in terms of ordering. What sort of – in conjunction with you not participating in heavy discount. Can you give is a little bit more in terms of how the third party retailers are reacting to that change?

Charlotte Cowley: Yes, we've had great response from our partners in terms of the one label and where we've got single destination space in stores it's performing really well. So it's been very well received by those partners as well as, clearly, our own retail customers.

John Guy: Great. Thanks very much.

Operator: Our next question comes in from the line of Thomas Chauvet of Citi. Please go ahead.

Thomas Chauvet: Good day morning Charlotte and Gobbetti. I’m Thomas from Citi. I have three questions, please. Firstly on fashion versus replenishment, it's been several quarters now that we've had newness outperform. On the weakness of replenishment products, for instance, your heritage trench coat business, is it a problem you think of price points being too high, lack of innovation, greater competition? Have you taken any recent initiatives to address that? Secondly, on the Chinese demand, up high single digit globally, if I understood correctly; is it fair to say that the bulk of the improvement sequentially is actually captured in that UK LSL axle rating [ph], and in China was there any recent price initiatives or store closures you want to highlight? Thirdly, on beauty, I know you've reiterated the wholesale guidance, but could you just comment on how the business has evolved in the important Christmas quarter in terms of selling [indiscernible], and whether you expect to start FY’18 with a bit of a clean sheet in order to grow that important business again. Thank you.

Charlotte Cowley: Okay, hi Thomas. So on heritage, clearly you've called out, other categories had a better quarter than heritage. What we're excited about, we've got some really great innovation coming down the track in the next couple of months or so on trench. Clearly can't update you on that now, but look forward to talking about that, talking to you about that in April. Yes, everywhere is the fashion and the newness is performing, so clearly innovating in that category. Chinese demand, still about half of their spend is at home, and so you did see that acceleration in Mainland China, so you saw that high single-digit percentage comp there. If you strip out the impact of the Beijing stores, because still that work is ongoing, so in the quarter we opened another couple of spaces in the Shin Kong Place Mall. We've now got three stores open in the Mall, the men's, the women's and accessory space. They're performing really well, so ex that Beijing piece as I said earlier, China was up about 15%. Then on beauty, the pillar fragrances continue to perform really well. We're gaining share in the key fragrance market, so really pleased with their positioning and how they're performing. Then clearly making sure that we've got the positioning right, and elevating the positioning in key markets for beauty.

Thomas Chauvet: Thank you very much. Thank you.

Operator: Our next question comes in from the line Thomas Forte from Maxim Group. Please go ahead.

Thomas Forte: Yes good morning. Thank you for taking my questions. Just two questions. One, can you give us an update on your plan to launch in mobile app and thoughts on what that could do for your sales? Two, in the United States was there a difference in your comp performance for local versus tourist? Thank you.

Charlotte Cowley: The app, we're in, we're testing the app with a select group of users at the moment, we want to make sure it's absolutely right. It's all about building a good connection with our customers. So that will be launching, planned by the end of the year. You should see an update on that. In the U.S., we still saw tourists were weak and there was a bit of unevenness as well in the domestic spend. I'm sure you saw on the front page of the announcement that if you looked at global spend by the American consumer, it did grow so it's a change in where that customer shopping floor is, the brand and the products still resonating with the consumer.

Thomas Forte: Thank you.

Operator: Our next question comes in from the line of Zuzanna Pusz from Berenberg. Please go ahead.

Zuzanna Pusz: Hi good morning. Hi Julia, Charlotte. Just two questions from me. First of all, in terms of the pricing; given ongoing FX volatility what is your view on the pricing right now, are you currently more or less happy with your architecture, or can we expect any additional cuts following the changes you introduced in October/November? And secondly, maybe if you could comment on the U.S. retail business, are you seeing an outperformance of the outlet stores, anything worth mentioning in there? That would be very helpful. Thank you.

Charlotte Cowley: Okay, hi Zuzanna. On pricing, you know that we always keep our prices under regular review. We have our strategic pricing architecture; there's nothing to update you on today. You saw we made some moves in November; I think we talked to you about those at the interims. The FX markets continue to move and so we continue to keep an eye on pricing. In terms of retail, we never let split out the performance. I think what was great, we saw conversion improve again in our mainline business in the U.S. Our BPC teams do a fantastic job there. They're very developed in terms of building good strong relationships with customers and driving the returning spend from our top customers in the U.S.

Zuzanna Pusz: Perfect. Thank you so much.

Operator: Our next question comes in from the line of Louise Singlehurst of Morgan Stanley. Please go ahead.

Louise Singlehurst: Hi morning Charlotte and a big welcome to Julie. I think we are very much looking forward to 2018. But probably most importantly seeing what [indiscernible] you will no doubt be carrying. A couple of quick follow-ups from me. Mainland China, can you just give us the impact of Beijing, or more importantly when the effect drops out, so when we get to a normalized point for the store rationalization going into full year 2018. And just secondly, to clarify on pricing, were there any other changes aside from the UK in the quarter? Thank you.

Charlotte Cowley: Beijing, it will be clean by Q2 next year, so that's when. And it's quite a big impact if you think that including Beijing, China was up high single digit, and if you strip it out it was up 16%. So it is still having quite a bit impact on the comp in China. We are clearly delighted with the performance of the elevated stores, but it is really muddying the waters in terms of the comp number, but only a couple, a few more quarters to go on that. In terms of pricing, yes, we did make some further adjustments in November as we always do. We tend to make those adjustments when the new collection goes into stores, and there are a few more adjustments in Asia. Of course, we talked to you about the moves we made in the UK.

Louise Singlehurst: Just remind me on Asia, Charlotte, sorry?

Charlotte Cowley: Yes so Asia we tend to target, so if you're thinking about China, Hong Kong, if you're 100 at home, you're tending to look to be about 115-odd into Hong Kong. We're a little bit higher than that at the moment, but due to the way rates have moved, we took about another I think it was sort of 5% to 10% reduction there. And In the UK it was up 7% to 10%-odd in November.

Louise Singlehurst: Great that’s very clear. Thank you.

Operator: Our next question comes in from the line of Warwick Okines from Deutsche Bank. Please go ahead.

Warwick Okines: Hi good morning. Two questions, actually one, the first one, just follows on from your comments around pricing in Asia. Are you seeing volume growth in Hong Kong now? I think from what you just said that is the case. If so, where are you finding that volume from, what type of consumer, what type of products? And secondly, on gross margins, are you currently experiencing a procurement headwind, or is that headwind, because of hedging, more likely to hit the next financial year?

Charlotte Cowley: Yes so on the volume, yes, I think we did see volume growth in Hong Kong, seeing the tourist is still a little weaker as you'd expect given the footfall is still down double digit; but good performance with the local customers in Hong Kong. In terms of product, it's the same story everywhere, it's all the fashion that's outperforming the strength in bag, so that's consistent whichever market you look at. In terms of procurement, yes, if you're thinking about next year then, yes, you certainly will have the headwind of the COGs into next year. You're going to have the revenue benefit in terms of the FX and then offset, particularly in Q1, the COGs and then the OpEx.

Warwick Okines: Right, but the procurement wasn't really an issue for this quarter?

Charlotte Cowley: Not really for this quarter, no.

Warwick Okines: Brilliant, all right, thanks very much.

Operator: Our next question comes in from the line of Rogerio Fujimori from RBC Capital Markets. Please go ahead.

Rogerio Fujimori: Hi Julie and Charlotte. Two quick questions, there was no comment in the release about Japan and Korea. Could you update us on most recent like-for-like trends? My second question is on ecommerce, in your strategic plan ecommerce is expected to drive one-third of total sales growth. Could you give us an idea of how much ecommerce outperformed at global level, and especially in the U.S.? Thank you.

Charlotte Cowley: Hi Rogerio. So Japan still did better than it was in the second quarter, and still pleased with the performance of the domestic consumer in particular, but impacted by the tourist in Japan. In Korea, again a small negative; local sentiment a little bit subdued I think in terms of what's happening in Korea at the minute. Also declines from the Chinese, even though the Chinese are a small part of our business because we tend to see them in the duty-free channel, which is wholesale for us rather than retail, but certainly you saw that impact the retail business in Korea. Ecommerce, I think comment on ecommerce is it's great that it is outperforming the rest of the business. We've said it's an area of strategic focus. We talked about the opportunity for mobile conversion; we've seen that start to change and that's that growth in this quarter. Also the Asia localization, so great that the new China site launched, and seeing great growth out of that direct-to-consumer business in China.

Rogerio Fujimori: But is it fair to say it's driving more than one-third of total sales growth?

Charlotte Cowley: I don't think we're going to split out the numbers to be honest right now.

Rogerio Fujimori: Okay thank you.

Operator: Our next question comes in from the line of Erwan Rambourg from HSBC. Please go ahead.

Erwan Rambourg: Yes hi good morning again Charlotte and welcome Julie. Most of my questions have been answered, so these are just quick follow-ups. Calling out nationalities, the American nationality, so U.S. sales were slightly down, but I think you mentioned that American customers were actually up globally. Is it fair to assume that sales to American citizens are in line with group average or is it still slightly lower than that? Secondly, can you give us an update on the Japanese footprint? Where are you in terms of retail expansion, number of stores and what you’re targeting over the next few months? And then finally, sorry to labor a point on prices. In the UK you’ve seen a surge. I understand continental Europe outside of France is a bit subdued, probably because a lot of customers are actually coming to London to benefit from what is a very attractive market. Is there any willingness, ability, intention to increase prices further in the UK because it seems that a lot of your peers are continuing to increase prices and it doesn’t seem to affect their business that much. So that’s the three questions I have. Thank you.

Charlotte Cowley: Hi, yes. So the Americas, yes, positive, but slightly below the average for the group so it still the majority of spends from the U.S. consumer does occur in the U.S. So, as you say, that was slightly negative but very strong growth from them as a tourist nationality. Japanese footprint, we’ve got six stores and 31 concessions, all of those in great luxury locations and really pleased with how the business is working with the domestic customer in Japan. Nothing new, I think, on footprint. And UK pricing; we keep our pricing under regular review, monitoring what our peers are doing and looking at FX rates but nothing to update you on today.

Erwan Rambourg: Okay, all right. Thank you.

Operator: Our next question comes in from the line of Mario Ortelli from Bernstein. Please go ahead.

Mario Ortelli: Good morning. Three quick questions. The first one, if you can give us an idea of the performance of world sale in 3Q and which percentage of the world sales is done in the U.S. The second one is what was the performance of beauty in this quarter and when you have got planned the new launches of – any new launches in beauty going forward? And last but not the least is Mr. Gobbetti will start soon with regional responsibility and in July he will take the position of CEO. In the meanwhile, while he has got these responsibilities, is he involved in decisions as CEO or Mr. Bailey is keeping all his current responsibilities? Thank you.

Charlotte Cowley: Hi, Mario. I don’t think I’m going to be particularly helpful on your first two because it’s only a retail update today and we said in the statement that no change to our guidance for wholesale. And beauty, I think, somebody else just asked. We’re pleased with the way the pillar fragrances are performing so nothing else really to say on that. With Marco joining, he is joining, as you say, as Executive Chairman of Asia Pacific and the Middle East. That will be his role until July when he becomes CEO. So, yes, you’re right, Christopher remains our CEO until that July transition.

Mario Ortelli: A clarification on beauty? Have you got any launch plan for the next month that you can disclose with us?

Charlotte Cowley: Not that I can share with you but obviously you would expect us to continue to build our pillar fragrances.

Mario Ortelli: Thank you.

Operator: Our next question comes in from the line of Julian Easthope of Barclays. Please go ahead.

Julian Easthope: Yes. Hi, good morning [indiscernible]. First, three questions as well. In terms of the one label Burberry rollout, I know that the pilot store that you – did actually extremely well. Because this was actually only introduced really across the board in November, I just wondered whether or not you could have an update in particular on how well that has actually gone from that point. Second question, the tie-up with Kris Wu in China. It was the Kris Wu Edit collection which I think was on about five pieces. Just wondered how important that particular tie-up was for your Chinese sales. And just a point of clarification. In terms of the FX for 2018, there’s quite a big translation benefit, at least from my numbers. Will that all be net off from the gross margin or will you still expect to see some benefit from the FX with transactions as well as translation? Many thanks.

Charlotte Cowley: Thanks, Julian. Yes, so the one label, I think you’ll remember when we talked about the pilot, don’t extrapolate a pilot because pilot stores are always managed to within an inch of their lives so they always tend to outperform. But clearly we were pleased with the response from both customers and, actually, the efficiencies we got back of house in terms of putting the one label in store as well, that simplification. So nice to see it performing but I wouldn’t necessarily base something going forward on that. Kris Wu in China, yes, really delighted with that partnership. We, of course, synced up the relaunch of the China site to coincide with that so that all tied in nicely together. And we’ve got this ongoing relationship with him and he’s clearly a great ambassador for the brand in that market. And then 2018 FX, as you say, big translation on the top line. And I think some of it will net off to maybe like £20 million to £30 million or so at the bottom line by the time you’ve thought about the gross margin and the OpEx. And, of course, that will be H1 rather than H2 and we’ll see what rates do for the next couple of months of this year.

Julian Easthope: Okay, brilliant. Thanks very much.

Charlotte Cowley: Thank you.

Operator: [Operator Instructions] Our next question comes in from the line of Peter Testa at One Investments. Please go ahead.

Peter Testa: Hi, thank you, very much. Maybe just quickly on the FX point, that £20 million to £30 million number you gave, is that a positive number or a negative number? Then a couple of questions on traffic, please. If you look at continental Europe, I was wondering if you could give us some understanding of what you’re seeing in terms of store traffic trends and then maybe domestic versus tourism. And on the Chinese traffic, the extent to which you see the age profile matching the Kris Wu relationship. And then lastly, you made a comment earlier on wholesale space that your customers were performing well where there was unified space for Burberry wholesale. I was wondering if you could give us just some understanding what proportion of your sales in wholesale come from customers with unified space.

Charlotte Cowley: Right. Okay. So the £20 million to £30 million, yes, that was positive, not negative. I’m sorry, I wasn’t evidently clear enough on my first answer. So thank you for doing the clarification. European traffic; so if you look at EMEIA as a total, it was positive but that was influenced by the UK so if you took the UK out of it, then a footfall decline. And domestics and tourists, we saw continental Europeans negative at home but actually as a group, positive, because again they were shopping in the UK and similar again with the tourists. Age profile of customers; actually, it was quite tricky for us to know the age of our customers. It’s one of the things that is difficult to ask but nothing really to call out on that in terms of age profile. And wholesale single destination space; it’s quite small at the moment but clearly, where we get the space, it’s working well and so we’ll see where we can transition where we can.

Peter Testa: Thank you very much for the answers.

Operator: We have another question come in from the line of John Guy at MainFirst. Please go ahead.

John Guy: Thanks, Charlotte, I was actually trying to get myself out of the queue because you answered my question on FX. Thanks.

Charlotte Cowley: Perfect. I was [indiscernible] have to come back. Great.

Operator: Our next question comes in from the line of Carole Madjo from Haitong. Please go ahead.

Carole Madjo: Hello, good morning. It is Carole Madjo from Haitong Securities. A quick question from me on the retail excellence. Have you seen any improvement in terms of the retention of your sale force? That’s my first question. And the second question on Hong Kong. Should we expect any positive signs improvement, maybe positive comps, in Hong Kong for full year 2018? Thank you.

Charlotte Cowley: Okay. So first, I think the retention stat I would focus on is the fact that we’ve had great returning growth in spend from returning customers and we’ve clearly been investing in our sales staff in terms of training and that, I think, is one of the factors that’s helped drive the uplift in conversion in the quarter. Forecasting Hong Kong comps; we’ve been looking at comps over in Hong Kong for a while. Pleased – I think all we can talk about is that we’re pleased that the fact that it was just a low single-digit negative this quarter and we’ll just have to see how we trend through Q4.

Carole Madjo: Okay. Thank you.

Operator: We have no further questions coming through. So I shall hand you back over to your host to conclude today’s conference.

Charlotte Cowley: Super. So thank you very much for your attention and your questions. And I look forward to speaking to you at our next update which will be our H2 trading update on April 19. Bye-bye.