Earnings Transcript for BRBY.L - Q4 Fiscal Year 2021

Marco Gobbetti: Good morning, everyone, and thank you for joining us for Burberry's preliminary results presentation. In terms of our agenda today, our presentation will be structured into 3 chapters before moving on to Q&A. I will start with a review of the first phase of our strategy, then cover our vision and plans for the next phase. After this, you will hear from Julie who will cover our financial results and guidance. I want to start today's presentation with a review of the first phase of our strategy and what we have achieved to date. Fiscal year '21 has been an exceptional year with the COVID-19 outbreak continuing to impact livelihoods and industries globally. In the last 12 months, we have focused on prioritizing the safety and well-being of our colleagues, partners and customers, contributing to the relief efforts to support our communities globally, continuing to create a more sustainable future for luxury through our ambitious sustainability agenda and protecting our business to deliver a strong financial performance. Stepping back to 3 years ago, in 2017, we announced our vision for Burberry. Our goal was to firmly establish our position in luxury fashion, and to inspire customers with our unique British attitude. We set out 2 phases to reach our vision with clear objectives for the first phase. We wanted to reenergize our brand, renew our product, evolve our communications and transform the customer experience. We also set out to maintain sales and profit broadly stable while undergoing this transition. And I'm pleased to say that in the last 3 years, we achieved what we set out to do and transformed our business. Starting with communications, in 2017, we said that we would reenergize the brand. By placing product at the heart of our communications, reimagining content with a curated, edited approach and investing in meaningful experiences. And we have achieved this by completely redefining our brand image, renewing all brand touch points and elevating our position towards luxury and fashion. One of the very first steps we took was to redefine our brand image, and we did this by refreshing our logo and creating the TB monogram, along with introducing new house codes, which gave new energy to our brand. We presented our new collections in fresh and exciting ways. For example, by showing our spring/summer '21 collection outdoors in a beautiful English forest, and by introducing dedicated men's and women's presentations for autumn/winter '21, which we made available for everyone to experience digitally during lockdowns. Throughout this journey, we focused on the most relevant channels for the luxury consumer, particularly social media through video led content and activations on Instagram, WeChat and TikTok, as well as occasionally surprising our audiences in totally unexpected ways. We also amplified our brand voice through others, including culturally relevant influencers and communities that have been advocates for our brand and impactful press titles across every region. As a result, we have elevated the brand and significantly increased our visibility and engagement with luxury consumers. On social media, for example, which is a good indicator of brand heat, we are seeing continuous traction. On Instagram, where we have achieved double-digit growth in both earned reach and engagement, and on WeChat, where our reach has also grown double digits and our engagement levels by triple digit. In terms of product, our ambition was to renew our offer by increasing fashion content, injecting newness and transforming leather goods. In the last 3 years under Riccardo's new creative direction, we have achieved these objectives, transforming ready-to-wear to a new elevated fashion offer, building our leather goods business, diversifying outerwear in line with luxury consumers preferences, as well as rebuilding our evergreen offer. In ready-to-wear, we elevated our collections, presenting a more luxury and fashion-forward offer, upgrading our products with higher quality materials supporting higher price points. Additionally, we diversified and elevated outerwear, transitioning from a largely cotton based offer to luxury pieces with a higher share of technical and Eco-fabrics, such as nylon, down and quilt. In terms of leather goods, we also made a significant transition. In fiscal year '17/'18, our top-selling handbags were the Banner, the Rucksack and the Buckle Tote, a basic offer with an entry price proposition. Today, our top-selling handbags are the TB, Lola, Pocket and Title, and you can see these shapes represent a real luxury leather offer with a step change in quality of materials, hardware and finishing, supporting higher prices. They are also distinctive shapes, covering different functionalities which are resonating well with consumers, like Pocket, which has received great response from our younger customers. More recently, we have introduced Olympia. First revealed on the Autumn/Winter '20 runway, a name after Olympia, London where the show took place. It's a unique, recognizable shape with its crescent curve and made in beautiful calf leather. Thanks to the integration of Burberry Manifattura, we have achieved high-quality and speed in delivery, resulting in margin improvement for this category. Through our efforts, we have seen great traction and sales growth in our core categories, leather goods and outerwear. As you can see from this chart, performance has been strong, particularly in the last 2 quarters of fiscal year '21, with double-digit growth in full price sales for leather goods and outerwear. And since these are our highest AUR categories, as a result, we have seen an improvement in AUR every year with high single-digit growth across mainline and digital last year. In terms of distribution, in 2017, we said we would transform the distribution experience by reducing exposure to non-luxury channels, building a luxury network in line with our brand, upgrading our stores and transforming the in-store experience. And in the last 3 years, we have reset our distribution, focusing on luxury doors, upgraded our stores' look and feel and introduced a new store concept, transformed our store experience and launched industry-leading digital innovation. We reset our distribution network in 2 phases. This allowed us to shift our network to a higher quality base while maintaining stable revenue and profit. In Phase 1, we exited non-luxury wholesale accounts and doors in EMEA and Americas, closed nonstrategic stores, opened new stores in luxury locations and refreshed our stores' look and feel in line with our new brand image. In Phase 2, we took steps to reduce markdown activities and designed a new store concept, which embodies our updated brand image. The images you see here illustrate our old store format and the step change we have achieved in look and feel by creating new luxury omnichannel spaces, supported by impactful windows and visual merchandising activations. In digital, over the last 3 years, we launched multiple industry-leading innovations, securing our leadership position in this space. We reimagined burberry.com with a strong focus on product storytelling and inspiration and inspired consumers with our activations and games. We launched our social retail pilot in Shenzhen Bay bridging social and physical channels to innovate the way customers experience and shop our brand and focused on creating a seamless integration of our online and offline customer journeys. Additionally, we partner with growing digital platforms to reach digital multi-brand consumers. As a result, from a strong base, we have achieved double-digit growth in full price digital sales in the first 3 quarters of fiscal year '21 and triple-digit growth in the last quarter. As a result of these efforts, we have set solid foundations and have built a new Burberry. First and foremost, we have repositioned the brand with external consumer research confirming that our brand is now firmly considered as luxury. We have attracted a new customer, gaining traction with young, influential fashion-forward consumers, while at the same time, driving growth in our existing customer base. Importantly, in the last year, we have seen traction with our local customers, thanks to innovative selling formats during lockdowns. We have built a high-quality business, both in terms of revenue, where growth is being driven by full price sales. And you can see from the chart, the momentum we have been having over the past couple of quarters. And in terms of profit, with good progress in gross margin, now broadly in line with pre-transition levels. Performance has been strong across the key regions for luxury. In China, we delivered strong double-digit growth every quarter last year, well above industry average through our significant local efforts. You can see some examples here of our dedicated Lunar-year campaign in capsule, as well as our digital activations with Tmall and Tencent. In the U.S., we have also seen strong performance, again, above industry average, which has been supported by our focus on building cultural relevance, content partnerships and visibility with key global influencers. Throughout the transition, we are focused on building a sustainable future with significant progress across 3 areas

Julie Brown: Thank you, Marco. I will now take you through the financials and guidance. We will start by recapping on our objectives we set out in November 2017. The targets were to hold revenue and earnings broadly stable for 2 years as we built the foundation for growth; investments in both product and distribution will be financed with the benefits of this cost-saving program. And we've achieved this. The first 2 years were broadly in line with plan and, in fact, would have been ahead of our target, has it not been for COVID impacting the final quarter last year. We delivered cost savings ahead of the original guidance at £150 million, and we've since brought cumulative benefits to £185 million, including the COVID related program. As Marco mentioned, whilst the targeted acceleration in revenue was disrupted this year, we used this period to strengthen the brand further and drive full price sales. We have built a better quality business and with improved revenue and earnings composition. We also set up a robust financing platform with an investment-grade credit rating. And we were the first luxury fashion company to issue a sustainability bond. We managed the COVID crisis well, produced a good financial outcome in the year, and we are well on track to see good acceleration, driven by full price sales from this point. Slide 49 takes us through the main financial figures. Looking at the results for the year, I'm referring to year-on-year changes at constant exchange rates, total revenue was £2.3 billion, down 10% with a strong recovery in the second half. Adjusted operating profit was £396 million, a decline of 8%. The revenue fall of £289 million resulted in an adjusted operating profit decline of just £37 million. The normally high level of operational gearing was partially offset by the actions we took to manage the cost base with both permanent and temporary reductions. This resulted in a margin improvement to 16.9%. A higher tax rate and finance costs resulted in the adjusted diluted EPS falling 14%. And free cash flow in the year was £349 million, up significantly from last year, and we have returned to paying a full year dividend at 2019 levels. Given confidence in our strategy and strong cash position. Slide 50 shows the main moving parts within our Q4 performance. Full price sales performed well, rising 12% on a 2-year comparative. We continued our strategy of materially reducing markdown volumes and shortening sale periods, reinforcing the equity of the Burberry brand, resulting in a 3% headwind to Q4 comp sales growth. COVID-related store closures increased this quarter, rising from an average of 7% in Q3 to 16% in Q4. And tourist destinations continue to see the most significant impact on trade, particularly in Europe. Turning to Slide 51, this shows the quarterly progression of our retail sales on a comparable store basis. Comps saw a 9% decline in the full year that started with a 45% decline in Q1 and closed with 32% growth in the fourth quarter. From Q4 full year '21, we entered a period of low comparatives as we started to anniversary the initial impacts of the pandemic. For this reason, we have shown the results against Q4 2019 as we believe the 2-year comp is more representative of underlying performance. This shows a decline of 5% in the fourth quarter. But turning to the chart on the right, we believe full price sales are the best parameter of the underlying brand strength, and we are encouraged by the improving performance. Full price sales closed up 7% for the full year, despite an average 18% of stores being closed and accelerated each quarter with Q4 up 12% against 2 years ago. Moving on now to Slide 52, where we show the quarterly regional performance with Q4 against 2 years ago. The Americas robust performance continued with a 15% comp and a 43% full price growth. Within this, the U.S. was particularly strong with a full price growth of up to almost 50%, driven by attracting new and younger consumers to the brand. Asia Pacific grew 17%, with full price up 21%, with a standout performance in China and Korea. Mainland China accelerated and grew more than 50% with full price up almost 70%. Korea also showed a strong performance of around 50% with full price over 60%. This was partially offset by Japan and the rest of Asia Pac that continue to be impacted by reduced tourist spend. EMEA fell 44% in the fourth quarter, impacted by around 50% of the stores being closed and a significant reduction in tourist travel. EMEA was the region most impacted by the pandemic. Both Continental Europe and the U.K. fell by more than 50% compared with 2019, whereas the Middle East increased by a mid- single-digit percentage. The quarter also saw continued strength in digital, with strong double-digit growth against 2 years ago with China up triple digits, Asia almost doubling and Americas and Europe up double digits. Slide 53 shows the group revenue summary, with retail sales down 9% and group revenue down 10% at constant exchange rates. All areas of the business were up in the second half, except licensing. Wholesale was particularly strong, up 7% in half 2, and this represents a good recovery, given the impact of the pandemic on Asian travel retail, given this typically accounts for almost 1/4 of our wholesale business. As you can see from the previous slides, while 2021 was challenging, we managed through the crisis effectively. We saw a good recovery in financials and delivered higher-quality revenue and earnings from full price sales and a streamlined operational cost base. We show the income statement in Slide 55 where there are a number of key areas to highlight. Gross margin increased by 270 bps at CER and adjusted operating profit margin increased 50 bps, and I will discuss both of these in more detail shortly. We saw a net credit from adjusting items of $125 million with a major cash item being £54 million related to rent rebates negotiated with landlords. The effective tax rate rose to 25%, due to the geographical mix of profits. Adjusted EPS fell 14% as a result. Slide 56 looks at the main moving parts of the gross margin, which increased to 70%. Around 2/3 of the increase is due to business benefits from full price, positive channel mix and regional mix as the business shifted towards Asia. The gross margin also benefited from COVID provisions taken in the prior year by around 80 basis points. Following the step change in gross margin in full year '21 to 70%, we believe this level will be sustained in full year '22 with a medium-term opportunity based on scaling the business, product categories and full price mix. So I'll provide further clarity on the adjusted operating profit margin. We show the bridge on Slide 57. The decline in profit was due to reduced revenue, partially offset by an improved gross margin and OpEx reductions. The cost reduction programs delivered £60 million this year, bringing cumulative benefits to £185 million. Property savings are enhanced by a £43 million reduction in amortization charges following the store impairment taken last year. Please note, however, that the benefits from rent rebates are greater than this at £54 million and have been treated as an adjusting item and therefore, not included on this profit bridge. We also have internally paid U.K. rates and did not take the U.K. furlough foregoing a further benefit available. In summary, whilst there were reduced charges this year due to the COVID provision in 2020, they have been more than offset by the cash benefits taken as adjusting items below the line, meaning this is a good quality trading outcome for the group. This brings us on to adjusting items that represent a credit of £125 million this year, as shown on Slide 58. This stems from 2 main sources. Firstly, COVID-19 related items of £137 million. We have mentioned the £54 million of landlord rent rebates, and additionally, there were £9 million of government grants also taken as exceptionals. In addition to this, our COVID provisions last year were taken at the height of the pandemic and trading in certain regions has improved considerably since that point, particularly in the U.S. We have therefore revised some impairments based on current and expected future trading below the line within adjusting items. Secondly, restructuring costs and a profit on disposal netted to a £12 million charge in the year. We have shown the income statement split by half 1 and half 2 on Slide 59, given the very different performance. Revenue in half 2 increased 8%. Gross margin increased significantly, leading to a 15% increase in half-2 gross profit. This, together with our focus on operating costs, resulted in a strong half 2 margin, with an 8% growth in sales converting to a 48% increase in profits. Going into full year '22, we expect the operating cost base to normalize as stores reopen and social distancing restrictions lift, allowing the more normal cadence of client engagement. We shall review the cost dynamics later to help you formulate your forecast. Having seen the robust performance in the income statement, we now take a look at how this converted to strong cash generation during the year and liquidity management. This year, we have seen exceptional cash conversion with free cash flow of £349 million, resulting from lower lease costs and prioritized CapEx, together with reduced tax, under close management to working capital. Inventory, in particular, was well controlled, with gross inventory 16% down from last year and 7% below 2 years ago, benefiting from improved sell-through. Cash conversion was strong at more than 100%. Turning now to our cash position on Slide 62. As mentioned, overall, our cash increased by £0.3 billion in full year '21. Importantly, we took a number of measures to restructure our financing sources. We obtained an investment-grade credit rating to provide easier access to the debt capital markets and issued our first sustainability bond to provide medium-term financing. We also repaid the RCF and the government-backed CCFF. As a result, we have £1.2 billion of cash at the end of full year '21, comprising £0.9 billion of our own cash and a further £0.3 billion from borrowings.With a further £0.3 billion available through the revolver. Since 2017, our financial policy has been to maintain a strong balance sheet with solid investment-grade credit metrics, and this has placed us in a strong position throughout the pandemic. Our target remains at a net debt to adjusted EBITDA ratio of 0.5x to 1x. And at March 2021, we had low leverage of 0.1x. Have the dividend being paid during full year '21 at the level declared today, the net debt increases to 0.4x on a pro forma basis. Today, we have announced the reinstatement of the full year dividend back to 2019 levels. To recap, we have 4 priorities for the use of our capital

Operator: [Operator Instructions] The first telephone question today is from the line of Louise Singlehurst from Goldman Sachs.

Louise Singlehurst: I've got 3 questions, if I may. The first 2 for Marco and then one for Julie. Mark, I wondered if you could just talk a little bit more about the markdown activity. I suppose that's a surprise factor this morning and the fact that there is still a mid-single-digit headwind for this year. I was under the assumption that we're a bit further along in that? Just to confirm, is that the end of the markdown activity? And where those still are in terms of the work that needs to be completed? And then secondly, you talked about new customers and customer loyalty a little bit in terms of the slides. I wondered if you could just talk to us about where you're most excited, what the new customers are in like a profile, what they're coming in, what they're really looking for. Is it the core on the apparel? Is it the streetwear? Obviously, we touched on the leather goods as well. And then finally, for Julie, just in terms of margin, we've talked a lot about meaningfully expand the margin over time for Burberry. And in Slide 66, you do give us a little bit of a path for the future. Are we right in interpreting that should be a kind of 20% plus margin medium term?

Marco Gobbetti: Louise, for the first question in terms of markdown, the markdown, it was expected. It was always a plan that we would exit markdowns, we will be exiting markdowns from our mainline stores over a couple of years. We have done a good part of this work last year. We will have another important part that will happen, in particular in the first quarter of this year. And then it will be less of an impact in the third quarter of the year going forward. And I think this is obviously a very qualitative step that we're taking. In general, what we have seen, we have seen that we have prioritized and have been successful in developing very, very high-quality revenues. As Julie and I have mentioned in our slides, there is a very strong full price growth. Markdown has been reduced and has been phased out. And we are managing inventory very well and sell-throughs are high. So there is less inventory going into outlets, which also means, again, that our mix and our quality of sales is very high. With regard to the second question, in terms of customers, actually, we are seeing a broad spectrum of new customers coming from different geographies. In Asia certainly, we have seen significant strength in China and in Korea. There are new customers that, in those countries I have to say, that leather goods and outerwear, but in general, all over, they have over-performed. So those are our key categories. That's where we focused our efforts, and it's performing extremely well. It's both new customers, young, fashion, educated really fashion customers. But at the same time, we have kept and we have developed very well also with our existing customers, who are also up double digits in terms of sales. The other, I think, very good region has been America, where I think we're seeing quite a change in somehow in the landscape of customers. I think we're seeing a new generation of customers, young customers. Again, fashion is becoming part of their culture, part of their way to express themselves, a little bit like in China, has been for a while now. And we're really hooked in into the local culture there. And I think we're benefiting from that, and we're attracting a lot of new customers. But equally, in America, we have kept our existing customers. They have bought into the new products, and I can call out in America, I think, in particular, in handbags is really accelerating now. Shoes have been a very strong driver of growth for us. And of course, Ready-to-Wear in both categories. So I think it's been quite an interesting year in terms of customer recruitment and new customer recruitment. Julie?

Julie Brown: Thank you, Marco. Thanks for the question, Louise. So in terms of profit, yes, in terms of margin, we've got a number of major drivers of margin increments over the medium term. So the first one is underpinned by gross margin strength. We've got the pricing opportunity, as we mentioned, together with the clear out-performance of full price. We've seen that already coming through this quarter versus last, last year, and this is the way we are driving the business. So the full price growth within the guidance in terms of revenue of high single digits is outperforming. The third area relates to the sales densities, improving the store network, as Marco outlined in his presentation. Digital penetration is the fourth lever. And then the fifth lever is, of course, the cost control and the enabling cost areas, what you might call the back office cost areas are being very tightly controlled, which gives us the leverage opportunity. So your question around, obviously, do we equate this to around the 20% margin improvement over the medium term, yes, this is absolutely our ambition. Now the one thing we have flagged really on the final slide is that we do see that we've got a golden opportunity for Burberry given the strength that we've come out of the pandemic with to invest in the business. So we've got a period in full year '22 of cost normalization and investment in the business in terms of marketing, visual merchandising, digital. These front end drivers will give us a more sustainable positive margin going forward. But yes, your ambition that you stated at the beginning was spot on.

Operator: Next question is from the line of Thomas Chauvet from Citi.

Thomas Chauvet: I've got 3 questions, please. The first one on pricing, as your markdown reduction exercise ends in H2, where do you feel the ASP of bags and outerwear compared to your key competitors, Vuitton, Gucci, Prada, for instance? We've seen a return to pure pricing, like for like pricing in the last 12 months in the industry. Will you then be able to increase prices for the carryover business? And is that captured within your high single-digit revenue guidance? Secondly, on capital return, you've returned to the FY '19 dividend level, 42p. Now that year, there was also £150 million buyback and in the prior 2 years as well. With a net cash position of a billion, close to £1 billion above '19 level, what prevents you from launching a share buyback today? Should we just assume this is another gap year, buybacks will resume next year or maybe even during the course of this year? Maybe today would be a good day to purchase a bit of share. And thirdly, related to that, on your capital allocation chart, Julie, would it make sense to allocate this cash pile if you don't use it otherwise to do what you call strategic and organic investment? For instance, the acquisition of another luxury brand that may address new categories, new customer segments, or are you, Marco and the team, just too busy with the multiyear plan for the Burberry brand that you have no time or lacks time for M&A?

Marco Gobbetti: Okay, shall I take the first one, Julie, on pricing? Thomas, look, on pricing, I think we said that in particular for handbags and leather goods, our strategy was to rebuild the architecture of the offer, which we did. And to start to get traction in the market on CER shapes, which we have now before we would somehow look at pricing opportunities. We know, and we know that the value of the products we have in the market today is quite high compared to the pricing we have. So we know that we have opportunities there, and we will take those opportunities as we -- and when we are confident that we have solid traction there. Clearly, that will give us also margin opportunity in the category. As I said, we are seeing real traction is focused on 5 families with the Olympia now join, and we have our expectations for that bag so also from a margin and replenishment point of view, I think, it's exactly what we wanted to achieve. We wanted to achieve volumes in a limited number of families. So we are there. I think in outerwear, it's kind of a similar thing, except we are already a big player in the outerwear world. So we have, as you have probably seen, we have renewed the offer, we have created new evergreens, we have created new replenishment and carryover items. They are working, they are working with also some of the new codes that we have created for the brand. I think our level of pricing may warrant for us in the future, taking some price increase. But at the same time, I think we do want to maintain a high-volume business there. We have very strong traction, particularly in Asia, Korea, China. The traction has been phenomenal on this category. So we haven't taken a lot of price increases. We have taken a little bit. So to summarize, there is probably opportunity going forward.

Julie Brown: Okay, shall I take capital allocation, Marco?

Marco Gobbetti: Yes, yes.

Julie Brown: Yes, so thanks, Thomas, and thank you for the question. In terms of the decision, we've restored the dividend, as you know, but we decided at this point, given the overall macro environment, that we would not commence the buyback immediately. We do -- we're very pleased with the cash position that we have. And as you quite rightly point out, we've got very low leverage. It's actually 0.4 on a pro forma basis, but it's still at a low level. And therefore, what we will do is we will consider this as part of the interims. We expect to return to an interim dividend at that point, and we'll also look at the buyback situation. In terms of future uses of the cash, we're continually assessing the situation in terms of inorganic opportunities for the business, together with opportunities for further returns to shareholders by way of buybacks or specials. And I think it's going to be driven in terms of where we're up to. The areas we focus on mostly, as you've seen, is really vertical integration opportunities when we bought the leather goods design and manufacturing facility in Italy about 2 years ago. So it's those types of opportunities you'll probably see us doing initially because we believe the biggest value driver for Burberry is the Burberry brand itself. And the pursuit of an organic -- a clear organic strategy to maximize and optimize the value of our brand.

Operator: Next question is from the line of Ashley Wallace of Bank of America Merrill Lynch.

Ashley Wallace: I have 3 questions, please. First of all, are you able to give us any color on Q1 trading through April on a 2-year stack, both in terms of the full price business and the revenue overall? My second question is just around the cost inflation coming through in FY '22, especially considering the cost savings plan that you had in place the last few years. If you could use FY '20 as a base, could you please help us with a bridge on OpEx inflation up to FY '22? And I guess within that, can you please confirm how much spend or incremental spend will be reinvested back into the brand? I think you already outlined £55 million of brand reinvestment, funded by cost savings last year, but what's the total amount in FY '22 versus FY '20, please? And then the last question is just on the medium-term guidance for both top line and margin. And can you please confirm if management LTIPs also based on the same target.

Marco Gobbetti: Julie, you want to take that?

Julie Brown: Yes, I'm happy to take it, yes, absolutely. So Julie, Ashley, good to speak to you. Yes. Just I mean, we -- in terms of trading, we have seen very positive trends. I mean, the business was growing very strongly as we exited the fourth quarter. In terms of full price, as we mentioned, the U.S. was trading at full price at plus 50%. And these are last, last year growth rates. China full price was approaching 70%. Korean full price was just over 60%. So very powerful growth rate. And we've seen a continuation and strengthening of those trends. So yes, we're very pleased with the current trading picture. In terms of -- it is important to flag, Marco mentioned this, around the markdown. So this will be a mid- single-digit impact for the full year. And we're anticipating a more pronounced impact of high single digits in the first quarter. So that will affect the comp. But as usual, we'll give the full price growth, which continues to be on a very good trajectory for the business. In terms of the cost base. So if we take a look at full year '22, it's been characterized by 3 major changes within the cost base. One will be the acceleration of variable commissions and variable rent as we -- the sales improves considerably. This is over full year '21. And then there's going to be a combination of cost normalization and also acceleration of expenditure in marketing-related areas, visual merchandising. And the growth in those 2 latter areas is broadly equal. We've got around investment levels at 50% of the increase, BAU or normalization is about 40% of the increase and variables around 10 -- just over 10% of that increase. I can say, it is an opportunity. This is an opportunity for us to focus on investing in the brand to drive the growth. And as you've seen from the cost-saving program that we put in place almost 12 months ago, that has been really targeted at the back office parts of the business, all designed to drive the commercial front end. I think the final question was around top line management. Could you just.

Ashley Wallace: It was just around the medium-term guidance on top line and margin. Just if you could confirm if the management LTIPs based on the same target.

Julie Brown: Yes, thank you. We've moved actually over to a Burberry share plan. Marco, did you want to comment on this one?

Marco Gobbetti: No, no, no, go ahead, Julie.

Julie Brown: Yes, we moved over to the Burberry share plan, which is based on -- so the LTIP levels were lowered and it's now based on a 3-year picture. And Marco and I, our incentives are supported with underpinned, of which one of those is revenue and the other 2 relate to brand sustainability and return on invested capital. So those are our metrics.

Operator: Next question is from the line of Elena Mariani from Morgan Stanley.

Elena Mariani: Marco and Julie, a couple of questions from me as well. The first one is on your top line guidance. I was trying to better understand the building blocks. And you've been focusing a lot on leather goods and outerwear in your message. So is it fair to say that you expect these 2 categories to grow faster than your medium-term targets? So perhaps at a low double-digit rate versus the rest of the business growing a little bit slower. And still on the top line, so is this high single-digit growth pretty much in line with what you expect for the market? So what is the basis for you in terms of benchmarking your sales to? Is it the overall luxury market? Are you focusing particularly on the apparel segment plus leather goods? So essentially, is this guidance implying that you're going to grow in line with the market or perhaps losing a little bit of market share or gaining a little bit of market share? And then second question is about your investment behind the brand. We're trying to better assess the magnitude of these investments. So perhaps, could you share a little bit more details around the marketing expenses and whether perhaps before your plan, you thought you were under-indexing the industry, which pretty much is investing in high single-digit in marketing as a percentage of sales. And now going forward, you're going to be more aligned with the industry. Just because many of your competitors have stepped up materially in their marketing spend. So we were just wondering how confident you are to further increase your share of voice.

Marco Gobbetti: Then shall I take maybe the first question and introduce the second and, Julie, maybe then you can speak about the investments behind the brand. Elena, in terms of the top line and over the medium term, what is important to say is that full price growth will significantly outperform the high single-digit guidance that we are giving for 2 reasons. The first reason is the exiting of markdown; and the second reason is that as we will focus more and more on our mainline stores and as we are driving leverage and better performance in terms of sell-throughs and inventory management in the mainline area, we will have less inventory to exit through outlets. Therefore, you will see mainline full price grow faster than the aggregate, high single digit guidance. Within that, certainly, our core priorities are in terms of product as you said, leather goods and outerwear. And we have a very strong focus, as you saw in our business plan on those 2 categories. So as we see now, then over-performing, we expect and we wish this to continue. At the same time, I have to call out that we have other opportunities and other categories that are growing very fast. One above all is the shoe category, which is driving incredible growth in a number of markets. In terms of our gross versus market, having explained the quality of the growth that is behind the high single-digit we refer to the luxury industry, and we refer to studies that call for 4%, 5%, roughly of growth over the next few years. And so we think that with high single digit, we think we will over-perform the broader market. And in all of this also, I think that the digital component is going to be really significant because we are really stepping up our programs in digital. And I shall call it actually in our omnichannel ambition, which is a project where we are investing a lot of energy and resources starting to beginning to bear fruit. There is a lot to come in the future and that will certainly be an area that will help us to achieve and hopefully, will be on our goals. Julie?

Julie Brown: So I'll take the third part of the question just relating to investment behind the brand. I mean, we have, over the last 3 years, completely reshaped the cost base in the business towards the front office of the business in terms of the marketing spend visual merchandising and away from the more administrative areas of the business. And in terms of the customer-facing areas that we're very focused on, in terms of targeted investment, it includes digital marketing, as I mentioned, visual merchandising events, together with pop-ups and pop-ins and the store refurbishment program that Marco outlined, which is very ambitious this year. In terms of the allocation of the spend or the adequacy of the spend, we believe this is now with the full year '22 plan is going to be at absolutely the right level. We'll continue to focus on it, but it's all about really driving heat by focusing on creativity and engaging content. And what we do in the business with our marketing team is we're always looking at maximizing the return on those investments. So -- and as you say, the £55 million cost reduction program that we announced last year has been targeted to exactly those areas. So hopefully, that puts you -- you might at ease with that question.

Operator: Next question is from the line of Luca Solca from Bernstein.

Luca Solca: Three questions for me, too. I was wondering about the rebound you're experiencing in the fourth quarter, in the first calendar quarter. That seems particularly strong in the U.S. I was wondering if there's anything that prevents you from having an even stronger rebound with Chinese consumers, given your higher exposure to Asian consumers and whether there's anything material coming from the recent uproar about Xinjiang cotton? I guess the question would have to come on this front. Secondly, very strong progression of gross margin. However, you didn't highlight that in the presentation, if I understood correctly, but I wonder if there's any component in this coming from product cost efficiency. You mentioned in the past, a better ability to understand and dissect cost structures, especially leather goods, but I wonder whether you managed to achieve product cost efficiencies in other areas of the business. And last but not least, there seems to be quite a significant opportunity to shift to a full price sales mix. Just to give us a ballpark, is it fair to assume that you're moving from a 60/40 mix in terms of full price versus discount of price? Or is that a way of the right mix? Thank you very much, indeed.

Marco Gobbetti: Okay, so Julie, maybe I'll take the first one, and I'll introduce also the second on product, cost efficiency, and then I'll hand it over to you for more detail on that. Luca, in terms of your first question around the rebound in the U.S., we are having a very strong rebound in the U.S., as Julie pointed out, in Q4 in the U.S., in particular, our growth against '19, so not against last year, but I guess '19 million was close to 50%. As I said, we are seeing a new breed of customers that is joining the ranks of fashion customers in the U.S. and I think was going very well with them. But as I said, at the same time, we have kept our customers and we have developed them. You are absolutely right, it is an opportunity. We want to go after this opportunity. One of the reasons why we want to increase our investment this year in consumer-facing areas, in particular, marketing inspiration stores is because we feel that the momentum for the brand is very strong. And actually, as a matter of fact, this has started pre-COVID. Because back in January of last year, we were already seeing double-digit growth in full price in our business. It was paused by COVID when our clients could not really or would not given the level of pandemic at that time going to the stores. But as soon as that started with, we have seen that our growth and our momentum has picked up from exactly where it had been posed, and it has accelerated through the quarters. And we are seeing, actually, in the beginning of this next quarter, we are seeing also the continuation of the same trend. So yes, absolutely. America is an opportunity, and yes, we will invest to maximize on the strength we have seen. Leading into China, as I said, we -- this is -- the Chinese has been -- this situation has been part of a macro environment. And we, like other brands have to head to and will continue to navigate through that. Having said that, our performance in the region is strong. The numbers have been very good. Even though it's a bit early to comment on current trading, but we are pleased with the start of the year. And I can say that the impact has been relatively limited and it doesn't modify our overall expectation. China is a primary focus for us, will continue to be. We think we can create enormous value out of China. We will continue our investments in our clients, in our partners, in innovation, in localization, in everything that we were doing we are continuing to do. So we remain extremely, extremely confident about the opportunity of that market. Turning to gross margin progression, there has been certainly cost efficiency. We are starting to see in certain areas, for example, of leather goods, we are starting to see the benefit of, first of all, having built a new architecture; and second, of starting to drive volumes, focused in key items and in a few families. So we have started. It's just the beginning, but we have started to scale some margins there. I think we have quite an opportunity there as our numbers grow and are growing fast in the category. And again, as we will continue to strengthen those families. More product is going into, as you called out, into replenishment and evergreens. And the same thing, we can say that it's going to apply in other categories. Eventually, it's maybe too early, but eventually, in shoes and in outerwear as well, where we have renewed our offer we consider that we have the opportunity to improve on our entry margin, on our gross margin there, particularly now that our sales are shifting more and more towards full price, better sell-through's, controlled inventories. Maybe this lead into the full price sales mix. Julie, if you want to.

Julie Brown: Yes, yes, absolutely. So just in terms of -- I think the only thing in addition on the gross margin, in addition to what Marco mentioned, is, of course, the pricing opportunity that the move and emphasis on outerwear and leather goods in terms of the overall price point of those ranges, the luxury positioning and the pricing opportunity that, that gives us. To complement the areas that Marco just mentioned.

Marco Gobbetti: Absolutely, Julie.

Julie Brown: Yes, so in addition, regarding the calculation you did it for price, we don't disclose the split of the business. But it's higher than your first indication suggested looker. And when we finished the markdown, the exiting of markdown in mainline stores by the end of full year '22, we'd anticipate it to be considerably higher than the level that you indicated in terms of the full price/mix in the business and the total retail business.

Operator: Next question is from the line of Antoine Belge from Exane BNP Paribas.

Antoine Belge: Antoine Belge from Exane BNP Paribas. I've got 3 questions, actually all on the outlook, but ranging from the medium-term to the more short term. So more medium-term I understand the reference to the 20% because that's what you gave back in 2017. But when you look at the on the level of margin you already achieved in H2 of 23%, where the gross margins are now at 70%, actually, isn't really the sort of journey more to go to low to mid-20s margin rather than just 20%. Any reason why it couldn't get there? Second question relates to the outlook for this year. I think you mentioned this high single-digit for the entire period. And versus full year March '20 and also mentioning this headwind. So can the high single-digit be achieved, which would mean sales of around £2.9 billion, this year? Or should we then deduct that headwind and then maybe the sales would be closer to maybe 2. 7? And finally, or regarding the quarter. I think you mentioned no real impact on China of the cotton topic and also sort of exit rate, which are strong. And I think that actually in Q4 last year, you already had a headwind from markdowns. So any reason why the first quarter sale couldn't be broadly on par with what they were 2 years ago.

Julie Brown: Okay, would you like me to take those, Marco? Or did you want to comment?

Marco Gobbetti: Sure, no, no, go ahead.

Julie Brown: Okay, so thank you, Antoine, for the questions. So taking the first one, we are very confident of achieving the margin ambition that we've laid out and really is the case of reiterating the original guidance this morning. There is potential upside to this, there's no question. However, we're conscious of the macro environment at the moment. And we've basically gone with what we know we can deliver for the reasons that we've outlined, largely driven by the gross margin strength we've talked about, the full growth trajectory. We see the sales densities, the digital penetration and the cost control, and this brings that margin up to the levels you've indicated. And yes, we could overachieve that ambition, but obviously, we don't want to call that at this point in time. It's too early, and we're conscious of macro. The second point about the level of sales. We're not deliberately, not guiding on retail revenue. We've guided on the first half of wholesale just because we've got visibility of the order book. But we wanted to give and focus the audience and our investors on the medium-term for the business, the medium-term opportunity for the business rather than a single year in question. But as far as we can see, in terms of the opportunity for high-performance of the mainline and the full price is certainly there. And if you just allow for the mid- single digit impact, due to the exit of the markdown in the mainline stores, then you'll have the comp, I think in terms of where we see it, driven by the categories Marco has mentioned. Yes, I think just in terms of I think the final piece of your question was all about the China impact, which I think Marco already probably covered that.

Marco Gobbetti: I can restate the fact that we have seen a limited impact in China for the time being, that our rate of growth is strong and was strong, also against LLY. And so we remain very confident in that market. And we will -- as I said, we will continue to focus and invest in that market.

Antoine Belge: Actually, I was -- but I was mentioning China, just to say that I was trying to look for any reason why in the first quarter, retail sales couldn't be on par with what they were 2 years ago, implying a sort of 80%, 8

Marco Gobbetti: No, no, Julie. I think you're getting into the details of the numbers. And as you know, we can't give a short-term guidance over the next quarter. So as I said, we are very pleased with the trend that we are seeing at the beginning of the quarter. The trends are continuing, confirming I don't think we can say anything further than that.

Antoine Belge: And maybe just a little follow-up, if I may. Because you mentioned online as an important driver. What will be the share of third-party online providers in that strategy?

Marco Gobbetti: Third-party is definitely going to be an important part of our digital ambition plan. We are -- first of all, we have very strong partnerships with a number of partners. We're focusing, we're focusing on a few key partners. We have started -- we've done a lot of innovation and we'll continue to do. We -- just now on Tmall, we were the first brand a few weeks ago to be the first to have a super brand day, we're on social commerce. So you will see us doing more and more partnership. And you will see us also tightening the relationship with them and moving more and more into real partnership and not just arm length transaction. So they are a key player. They cater to a clientele that we are interested in, and is a very fashion clientele, in particular, in a number of the players. And so they will play a role. It is going to at our dotcom, but is absolutely also real partnership with a few players. There is also a lot of consolidation, a lot of movement in this space, so it will be our focus again here.

Julie Brown: Looking at the time, we're conscious of your time. We may just take 1 more question, and then we're happy to have follow-up calls subsequently.

Operator: Next question is from the line of Rogerio Fujimori from Stifel.

Rogerio Fujimori: Marco and Julie, 2 questions. Marco, you flagged the retail productivity opportunity for Burberry. Could you talk about how your current levels of retail productivity compared to pre pandemic and the long-term potential you see for the business given your exposure to apparel or your projected mix in accessories, you're improving store network? Just to give an idea of how you can help just kind of drive the ratio for OpEx sales down over time. And then just a clarification on pricing. I understand the interesting pricing opportunity. But could you comment on the recent pricing actions, especially in bags? I understand the bag prices increased in April. So if that's the case, what was the scope and magnitude? And have you changed prices in outerwear and other categories in the start of the year?

Marco Gobbetti: Okay, Rogerio, in terms of the productivity of our stores, we definitely -- I called it out. And I said that this is one of the drivers for us is to increase the productivity of our stores and the sales density. Look, I think we are going to -- we have a number of actions that we have in place in order to do that. I think I listed a few of them, but I think it's worth recapping that. I think, obviously, traffic is the first lever. Obviously, traffic has been impacted by COVID. But in the markets that are easing out of COVID, we're seeing traffic coming back. And driving brand heat and scaling our CRM capabilities on which we are investing significantly are going to be 2 important drivers as well as our omni-channel efforts, which is aimed at making customers shop seamlessly across the -- both online and offline. And so moving from inspiration, that happens most of the time on dotcom online moving customers to our stores. Then again, we have in place also a very strong activity with our top standing elite customers. And with our local customer. As we called out, it is going to be about developing local basis of client. Well, we have a drive behind conversion, we have a very strong retail excellence and recollection and training and plan in place. And as I said, omnichannel would also help us to scale conversion. ATV, so pricing will come back later to the pricing, which is not only pricing opportunity, but also the focus on our categories, the 2 categories of leather and outerwear are going to drive AUR increase. They -- we also have cross-selling that is possible. We have categories that are recruiting new customers, for example, with shoes, and we have seen that we have successfully then taken them across into purchasing and selecting other items. In general, we are focusing a lot on appointments and appointments with our customers has driven a lot of our growth, and we will continue in that way. Clearly, then it's going to be a full-price business as we are going to exit our markdowns. And obviously, this is going to increase our productivity in our stores. And finally, I want to call out the new store concept. I think we are all going to see it close to us here on Sloane Street, I think it's going to be transformational, both in terms of the luxury environment that it will create for a product that is real luxury today. And for the fact that it's also built on precise ideas around how we want traffic to move in the store, the key categories and so on. So there is a very strong and robust plan in place to increase the productivity of the stores. In terms of bag prices, handbag prices, Julie, you want me to take this or you want to take this?

Julie Brown: Yes, I can do it, yes, absolutely. So in terms of pricing opportunities, as you mentioned, we did implement a price increase in the first quarter, just gone. This is affecting a sizable proportion of our leather goods business. And a fairly significant price increase in the order of high single digits. And we continue also just to make periodic adjustments relating to foreign exchange to maintain the global price architecture. So I think, as Marco mentioned, we're seeing some significant opportunities given the change in the brand and the perception of the brand to both focus on the higher value categories, but also in certain categories, ensure that we have appropriate price increases put through and this is exactly the strategy. I think you mentioned the outerwear specifically, I think no immediate change at this point, but as we continue to validate the product, we would anticipate there being some price increases at a later point.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Marco Gobbetti for any closing remarks. Please go ahead.

Marco Gobbetti: Thank you. I just want to thank you, everyone, for attending and for your questions. Thank you very much, and we look forward to the next session of trading announcements. Thank you.