Burberry Group plc

Good morning and welcome to Burberry's first quarter conference call. Slides are available to accompany this presentation on the IR section of our website. In today's presentation, I'll spend the first few minutes running through our retail performance in the quarter, sharing the progress we've made against our strategy, and then close with guidance. With me this morning is Annabel Gleeson, our Head of Investor Relations, and we will be happy to take your questions at the end. Turning to slide one, this quarter Riccardo Design Products became a meaningful proportion of our offer, building from 10% to 15% of the assortment at Q4 to around 50% by the period end. The customer response to the new product has been very positive. We saw strong double-digit percentage growth across runway, summer, and autumn 19 collections compared to the equivalent collections in the prior year. Sales from the new product were ahead of the prior year in all regions, with Chinese and Japanese customers delivering the strongest trends. Consumers reacted positively to the new aesthetic and the new Burberry house coats. Men's and women's benefited from the outfitting initiative with strong growth in tops and bottoms. And in accessories, we continued to build out our product architecture an increased emphasis on solid leather bag collections. Whilst the new product is performing well, lines of previous collections continue to weigh on the overall performance of the business, resulting in comparable store sales growth of 4%. Turning to the second slide, by region, Asia Pacific led the growth, delivering a high single-digit improvement year on year. Mainland China grew mid-teens as customers responded positively to the new product line and the country benefited from some repatriation of spend towards mainland China. By nationality, Chinese spending globally was up high single digits and marked sequential improvement on the low single-digit trend in the prior year. In Japan, we continue to expand our retail footprint gaining concessions in Hankyu and Isetan. On a comp basis, Japanese sales were up mid-single digits, which including the benefit of new space, Japan grew mid-teens, as our new product resonated well with fashion-forward consumers. Elsewhere in Asia, Korea grew low single digits, whilst Hong Kong was lower year on year, impacted by the protests. EMEA grew low single digits, with a mixed performance across countries. The UK and Italy both delivered good growth, while France was softer year on year. And the Middle East remained challenging, impacted by the macro situation. And finally, the Americas was flat year on year. The US grew low single digits, but was offset by Canada, which was impacted by a later markdown period. Turning to slide three, this slide shows the major components of retail sales. And again, you can see the 4% growth in comparable store sales. Space was minus two in this quarter, and we still anticipate space being flat for the full year. During Q1, we continue to invest in our store network, opening nine stores, including three larger new stores in China, IFC and IAPM in Shanghai, and China World in Beijing, and two additional concessions in Japan. Offsetting these openings were 12 closures, including four from the previously announced rationalization program. We also continued our store refurbishment program, which included completing store refreshes in Canton Road and the Ocean Center in Hong Kong. In aggregate, 23 of our stores are now aligned to the new creative vision and we remain on track for 80 stores to be complete by the end of the year. In 10-4, retail revenue was up 2% at constant exchange rates, and finally, currency had a 2% benefit this quarter, resulted in reporting sales of 498 million sterling, up 4% year-on-year. Now, before I turn to guidance, I wanted to talk you through some of the brand highlights in the quarter on slide 4. We engaged frequently with consumers through our monthly B-series drop and the newly launched monogram capsule, which continued our investment in the Thomas Burberry print as a new house code. The monogram collection resonated strongly with consumers, particularly with Chinese millennials. We supported its launch with high-impact activations, including pop-up stores and department store window takeovers. This was highly successful in driving brand heat, reaching 120 million consumers globally. And social posts of the Monogram product drove higher than average engagement rates. More widely, our traction across Instagram and WeChat continued to progress positively. We saw growth in the number of followers and double-digit gains in the engagement rate per post compared to the previous quarter. and we continue to innovate on new platforms like TikTok, Andoyin in China, and for example, Andoyin uses generated content, which drove over one billion views by taking up our monogram challenge. In addition, key influencers continue to organically endorse Burberry products, and our editorial return on investment was higher than an already strong Q4. Turning to slide five, I wanted to talk about the top line dynamics for the remaining quarters this year. Over the coming months, the new product will build from around 50% now to around three quarters of our offer by the end of the financial year. In terms of comparable store sales growth, mainline is expected to accelerate as the new product builds through the year. However, we anticipate this will be partially offset in the second half by reduced markdown inventory compared with the prior year. Now, turning to the outlook on slide six. With this top line dynamic in mind, we maintain our guidance for broadly stable revenue and adjusted operating margin at CER in full year 2020. As previously announced, we anticipate a more pronounced weighting of adjusted operating profit in half two relative to half one than the prior year. Cumulative cost savings of $120 million will be delivered by the end of the year, and our CapEx program is on track. And finally, turning to currency, we now expect a $15 million benefit to adjusted operating profits and a $45 million benefit to revenue as a result of the further weakening of sterling against major currencies. And this compares with prior guidance of a headwind of $7 million at operating profits. Turning to the final slide, in summary, this was a good quarter in our multi-year journey to transform Burberry. We continued to build out the proportion of Ricardo's products in stores. We continued our journey of aligning distribution to a luxury positioning and our new creative vision. And we launched our monogram capsule and improved brand heat and consumer engagement sequentially. The implementation of our strategy is on track, and we maintain our full year financial guidance. And with that, we're happy to take any questions.

If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. When preparing to ask a question, please ensure that your phone is unmuted locally. to confirm that star followed by one to ask a question. One moment for the first question. The first question is from the line of Elena Mariani with Morgan Stanley. Please go ahead.

Hi. Good morning, Annabel and Julie. A few questions from me, please. The first one is on the underlying moving parts of your like-to-like in the quarter. So I guess 50% of your retail sales are now growing strong double-digit. What about the rest? So how much is older collections and carryovers, and how much of this remaining 50% was discounted and perhaps going through outlets? So I'm trying to better assess whether – part of your comp was driven by higher discounting activity or whether the level of discounting was exactly in line versus last year. And then the second question, you seem to manage expectations on the like for like in the upcoming quarters, suggesting it might not be progressing in a linear way. Could you help us understand why this might be the case? If the new collection is growing high double digit and then it's going to represent 60% to 70% of sales by the end of the next quarter, in theory, you should see like-for-like progressing positively, given also that the overall like-for-like comp base gets easier in the second half. And then perhaps one final question on the gross margin guidance. You haven't changed it, and you're still talking about higher profits in the second half of the year versus the first half. But how should we tie in your gross margin guidance versus what you're expecting in your top line? Should we see the higher gross margin decline in the first half, the reflection of higher discounting, and then in the second half there should be less gross margin downside because you're going to discount less? So if you could help us understand this better, it would be great. Thank you.