Burberry Group Management Discusses H1 2013 Trading Update (Transcript)

Oct.15.13 | About: Burberry Group (BURBY)

Burberry Group PLC (OTCPK:BURBY) H1 2013 Trading Update Call October 15, 2013 4:00 AM ET

Executives

Carol Fairweather – CFP

Fay Dodds – VP, IR

Analysts

Thomas Chauvet – Citigroup

Warwick Okines – Deutsche Bank

John Guy – Berenberg Bank

Annabel Gleeson – Redburn Partners

William Hutchings – Goldman Sachs

Erwan Rambourg – HSBC

Fraser Ramzan – Nomura

Mario Ortelli – Sanford Bernstein

Vick Mohan – ISI Group

Rogerio Fujimori – Credit Suisse

Julian Easthope – Barclays

Luca Solca – Exane BNP Paribas

Allegra Perry – Cantor Fitzgerald

Operator

Good day, ladies and gentlemen and welcome to the Burberry First Half Trading Update Conference Call. Today, the conference is being recorded. At this time, I’d now like to turn the conference over to Carol Fairweather, CFO. Please go ahead.

Carol Fairweather

Good morning and welcome to Burberry's first half trading update conference call. With me this morning is Fay Dodds, our Vice President of Investor Relations. I will make a few brief comments on this morning’s announcements and then we will be happy to take your questions.

So before I turn to trading, you would have seen that Angela who has been the CEO since 2006 is stepping down in mid-2014 to take the newly created position with Apple. And that Christopher is to appointed as Chief Creative and Chief Executive Officer.

For Burberry, this demonstrates succession planning in action. Our strategies which have underpinned our success in recent years will remain unchanged as Christopher has been an integral part in developing these over the past twelve years.

This is a natural progression for Christopher and shows his dedication to and passion for the business. He is supported by a world-class experienced operational team, many of whom you know and for sure a seamless transition Angela and Christopher will continue to work closely over the coming months.

Turning now to Trading. This half is the first period where we have directly operated few geographic product divisions. You would have seen in this statement we have tried to set up clearly the performance of the existing apparel and accessories business and of the beauty business.

In the first half, total revenue grew 14% underlying, while 17% on reported rate and as we said this morning, we now expect adjusted PBT for the first half to be around the level of the prior year, better than down previously guided.

It is however worth noting that since we last spoke in July, Sterling has a pre-crisis against the dollar and dollar-denominated currencies, it’s current rates persist, this will negatively impact the translation of the second half revenues and profits compared to where we were in July.

Retail sales contributed 67% of revenue in the half and increased by 17% to constant FX rates. Although uneven comparable store sales growth was 13% in both quarters, with double-digit growth in Asia-Pacific and EMEA and high single-digit growth in the Americas.

Footfall remained soft globally offline and grew online with increased conversion in both and product mix and elevation increased average selling prices. We continue to be pleased with our performance in Mainland China underpinned by brand, product and real estate evolution. Although comparable store sales growth slowed very slightly in the second quarter, this was offset by Chinese customers buying elsewhere in Asia, especially in Hong Kong and in Europe and this is why we are focusing our investment in flagship markets, be it real estate, marketing or customer service resources.

The other market I would call out is the U.K. as London anniversaried the Olympics last year. We did see a nice improvement in comp growth in the second quarter, but remember the regions only went into comp to mid-September and nice which is still in non-comps. So it is still quite difficult market to read.

With the regions taking ownership of digital commerce in their markets, online sales continue to outperform globally and we are increasingly seeing our customers interacted across all channels. For example, collection stores – now in about fifty stores across EMEA and Americas.

Wholesale excluding Beauty, declined by 7% underlying which is marginally better than guided as we saw reorders globally reflecting strong momentum, as well as a timing benefit in the U.S. We are expecting a mid to high-single-digit percentage underlying increase in second half Wholesale revenue excluding Beauty, with our key markets at the Americas, Asia Travel Retail and emerging markets showing good growth again.

Before I turn to Beauty, a quick word on Licensing. Again, excluding fragrance from last year’s numbers, licensing revenue increased by 2% underlying, with double-digit growth from watches and eyewear and an unchanged performance in Japan as expected.

On Beauty we are pleased with the progress we made in the first six months of direct ownership. We have built a great team. We have managed through a complex transition period, especially in the supply chain and our first launch in September; Brit Rhythm for Men has been successful, supported both by innovative digital marketing and TV advertising which has only just started in the U.S.

All of which gives us great confidence that we can capitalize on the opportunities we have in Beauty over time.

In the first half, Beauty Wholesale revenue was 51 million pounds, with full year guidance remaining at around 140 million pounds. However, we now think that the mix of sales in this transitional year will be slightly different from our earlier plans. We are shipping less of the existing lines due to disruption in the first few months of direct operation, while we are planning to ship more of the new launches which will be supported by additional marketing investment.

We are still learning about this business and with the key sellout period still ahead of us, we will share out outlook for H2 as the year progresses.

Globally, we continue to execute against our five key strategies and to leverage the franchise we extended our digital leadership in luxury with innovative collaborations, with Google for Burberry for Burberry Kisses and with Apple where we use the iPhone 5s to film the spring summer 2014 runway show driving increased reach and engagement. And to intensify accessories, the penetration of solid leather bags increased year-on-year and key shapes performed well.

For example the crush is the top five shapes already having only being introduced in the Runway show in February. Under accelerate retail net growth we opened 14 Mainland stores and closed eight in line with our full year plans. We opened two stores in the flagship market of Shanghai and a full store in Japan in Roppongi Hills in Tokyo, selling the global collection as we prepare for the end of the license in June 2015.

In underpenetrated markets, we continue to build our presence in Central and South America both through own retail in Brazil and Mexico and via franchise in markets such as Colombia and Chile where our first store opened recently.

And finally, under operational excellence, as well as the huge effort of supply chain have put into Beauty, all digital fulfillment is now done in-house from our facilities in the UK and since August in the U.S.

In conclusion, as Angela said in her quote this morning, we are pleased with our first half performance, particularly in retail and have managed through a complex transition period in Beauty.

Looking forward, we expect the external environment to remain uncertain and currencies volatile. But we are excited by the growth opportunities available to us, globally in apparel accessories and now Beauty, both online and offline.

So with that, we’d now be pleased to take your questions.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Thomas Chauvet of Citi. Please go ahead.

Thomas Chauvet – Citigroup

Good morning, Carol, Fay. A few questions please. The first one, can you elaborate on the separation of responsibility of the senior management team now between Christopher Bailey to the design team working for him, John Smith, yourselves, what would you be – what would be the main changes in the way the company is ran on the day-to-day basis, understand the strategy likely to be unchanged, but there might be some fine tuning on the way its run.

Secondly, if we look at the evolution of regional a LFL, was there an underlying improvement in European local demand and deterioration in U.S. domestic demand in the second quarter? I understand China might be disruptive here and if Mainland China, a LFL was only high single-digit, what was the growth of the total Chinese clientele in Q2?

I was just also curious to know whether September like-for-like showed a deceleration relative to July and August as seen as your peers.

And finally on Beauty, you are talking about greater product launches in A&P to impact profitability, are you guiding for lower profitability than the 18% margin you have guided for – at the full year results? Thank you.

Carol Fairweather

Okay, morning. So first of all, in terms of the announcement about the Board change this morning, so, Christopher will be stepping up to Chief Creative and Chief Executive Officer. We are very excited for both Angela who is leaving to an exciting new role and for Christopher this is great succession planning in action. It is a natural progression for Christopher.

Your question about the team, important to say, he has a very strong creative team beneath him and a very strong executive management team working alongside to him from, with many of those members of the team having been in place for five years and more we’ve got very strong regional chief executives, many of whom you’ve met, strong Chief Marketing Officer, Supply Chain Officer, clearly, John Smith.

So, in terms of how it’s actually going to work, clearly will be working through the transition over the next few weeks, but really important to note that strong team beneath him, strong team alongside him and that no change to strategy, because, Christopher has been working now with Burberry for twelve years and has been absolutely influential in the strategy that we have set out as on organization in executing that and very excited about the opportunity to take that forward.

You want to do the regional question, Fay?

Fay Dodds

Yes, Thomas, you asked about the regional like-for-like. If you look at them, Asia-Pacific, that was basically double-digit in first quarter and the second quarter and EMEA actually accelerated slightly, but this, is very much at the margin and as Carol said, that was driven predominantly by the UK.

But do remember the regions didn’t come to the middle of the September and nice which doesn’t going to end of October, so I wouldn’t read too much into that. And then with the Americas, again there was a slight slowdown in comp growth in the second quarter, but nothing really scrolls up in terms of trends.

I think overall globally what we would say is that it’s still pretty patchy, pretty uneven. When you look at China, we are delighted with the performance in the second half which is still up high single-digits.

So what we did when asking the statement is that we do believe that during that quarter and particular there were more Chinese and luxury customers traveling, because we saw an acceleration in the rest of Asia, we saw robust growth in Hong Kong and we didn’t see a higher proportion of tourists, not the transactions from tourists in Europe in and out particular Chinese tourists.

Carol Fairweather

And then in terms of Beauty, as you would have seen, we are holding the 140 million revenue guidance and commenting the fact that that is now more skewed towards new product launches rather than existing products, partly because IP sold quite a lot of that existing products into the market prior to the transition and partly because supply chain as we anticipate it was a little bit bumpy in the early months.

But, very happy with the new launches but mindful of the fact that with that skew towards the new launches that does require the right amount of marketing investment particularly in this transitional year and therefore we are calling out that we may be shy now of the 25 million profit and therefore the 18% margin we had talked about.

But important to note that it’s a transitional year and that we will be looking as we always do to offset any shortfall resulting from that marketing investment elsewhere in the business adopting our pay as you go approach. So, no change other than currency which would flag to-date to the full year expected to our turn at this stage.

Thomas Chauvet – Citigroup

Okay, thank you, Carol. Just a follow-up on the like-for-like, I know you don’t comment on monthly like-for-like but lot of your peers have talked about a very soft month of September, did you noticed anything particular relative to July and August as well as you?

Carol Fairweather

I mean, again, you know we don’t comment on like-for-like, so I don’t think we’ll be changing that this morning.

Fay Dodds

I can expect to catching on it.

Carol Fairweather

Yes.

Thomas Chauvet – Citigroup

Thank you.

Operator

We’ll now take our next question from Warwick Okines of Deutsche Bank.

Warwick Okines – Deutsche Bank

Good morning. I have three questions from me as well please. Firstly, you talked about timing effects in the U.S. wholesale. Could you just explain what that was and maybe quantify what the effect was on your sales?

Secondly, could you give us a bit more help about your Beauty out turn for the first half? You have guided for a decline in profits, just wondering if you could scope out whether that’s a small decline or 10 million or what have you. And then thirdly, could you give us the H2 hedge rate for the yen please? It would be helpful to have that number.

Carol Fairweather

Yes, okay, so in terms of timing in U.S. wholesale we called out that around the H1 H2 causes and sometimes it’s just around when department store wants us to ship more than anything else, but actually part of that, sort of 8 million improvement we saw from minus 7 to minus 10 was driven by U.S. timing and probably around 4 million of the revenue level, something like that.

So not an upgrade to the full year, just timing around H1, H2. In terms of Beauty, we anticipated that Beauty would be at the PBT level dilutive in year one, this year in H1 compared to last year and that has been the case and I put a few million on it.

Fay Dodds

Yes. And then finally in terms of the hedge rates, if you look, so I can give you the first half and the full year, first half this year this about 129 yen to the pound against 125 last year. For the full year, it’s looking like about 137 against 127 last year. So you can see there will be more of an impact in the second half due to the yen started to move last October, last November.

Warwick Okines – Deutsche Bank

Thank you very much and just coming back on the Beauty profits, when we come to H1 results, are you going to give us that number?

Carol Fairweather

I think we’ll give you an indication of the impact in H1, yes.

Warwick Okines – Deutsche Bank

Great.

Fay Dodds

If you remember, it is a thing run as our fifth product division, so there is quite a lot of shared across as well.

Carol Fairweather

And only in this transitional year we will be calling that out because, nobody call it out, but it’s important it is a transitional year and that’s why it’s slightly lower.

Warwick Okines – Deutsche Bank

Great, thank you very much.

Carol Fairweather

We’ll now take our next question from John Guy of Berenberg Bank

John Guy – Berenberg Bank

Yes, good morning everybody. Just a couple of questions from me please. First of all with regards to the 13% LFL could you give us an indication in terms of the volume and value splits please within the LFL for the second quarter?

Also wanted to just take a look at the accessories’ underlying trend which seems to have some slips a little bit maybe you could comment on what you are doing within the accessories business and why that was a little bit softer? And finally, with regard to the – on the rest of Asia, I know that, you are obviously very pleased with the performance in Mainland China, I think that’s a pretty strong performance relative to what we are going to see from some of our peers.

But could you just talk about, maybe quantify some of the outperformance in some of the other areas to how Korea is performing? Singapore, and also you called out Hong Kong as well as being pretty strong. So maybe some numbers around those please? Thanks.

Carol Fairweather

I mean, in terms of the 13% like-for-like John, most of that did come from increase in selling prices driven effectively by product innovation rather than just like-for-like price increases.

So the majority of that did come from selling prices. I’ll just go to the rest of Asia and then Fay will come back on the accessories. In terms of the rest of Asia, we don’t always put out the numbers but, we should say, I mean, Hong Kong is looking very robust and again underpinned, I think by that traveling Chinese consumer, Korea in our business we are seeing that beginning to turn around, told you before about having had a new management team in place. So, overall, happy with the performance in Asia.

Fay Dodds

And in terms of accessories, I think what you’re doing is you are looking the half one number compared to half two last year. That’s again – this year in half one…

John Guy – Berenberg Bank

You got 2 million, 2 million changes is on …

Fay Dodds

Two million changes which is the feature or I should again say is, this year in half one, that discrepancies between retail and wholesale, the performance retail was up 17% wholesale was down 7%.

That probably impacted the growth rates you are looking at. We are hugely – if you look at our Mainland retail, very confident and largely because the strategies as Carol talked about is driven by solid leather, it’s driven by some of our key fashion shades.

We’ve got brilliant growth coming through from men’s accessories, really exciting festive offer coming out. So I don’t think there is anything to worry about, more than sort of the sum when you are looking at half one and half two last years.

John Guy – Berenberg Bank

That’s great. Thanks very much indeed.

Operator

I’ll take our next question from Annabel Gleeson of Redburn. Please go ahead.

Annabel Gleeson – Redburn Partners

Hi, I was just wondering, could you give us a little bit more of a specific deadline or timeline even on when Angela is leaving? I think Apple statement says, she is joining in spring, you are saying May 2014. What is actually the timeline there?

Fay Dodds

I think it’s just – when you calculate the U. S. call out spring versus the way we call out spring. So, I mean, we are absolutely working towards the transition in mid-2014. So around June time I think, but to be confirmed finally.

Annabel Gleeson – Redburn Partners

Okay, okay, thank you. And how involved does Christopher been to-date in kind of the running of the day-to-day business? And also in the planning for the Japan transition?

Carol Fairweather

I mean, Christopher has been – as I said at the beginning Christopher has been involved in strategies in the whole twelve years that he has been here. So in terms of the day-to-day business, and his role as Chief Creative Officer, everything you see and feel about the brand but also commercially a lot of initiatives we’ve been involved and Christopher has been heavily involved working alongside the regional Chief Executives, alongside supply chain.

So he has been very involved in the business to-date. And we’ve got a very strong team beneath him and as I said earlier, working alongside team in terms of the whole executive team, many of whom I think you’ve met Annabel.

Annabel Gleeson – Redburn Partners

Okay. Thanks very much.

Operator

We’ll now take our next question from William Hutchings of Goldman Sachs. Please go ahead.

William Hutchings – Goldman Sachs

Good morning. Two questions, one is on the change to the first half profit guidance and how we should disaggregate what’s going on with the currency implications for your profit, in particular on your gross margins versus your EBIT margin for first half? And in that statement that you say it will impact the translational second half revenues and profit. If you could just help us understand to what quantum on that?

And then the second question was about store openings. I know you are not changing your guidance for full year. But has anything changed in terms of your thinking about the space of openings and closures from what you’ve learned in the first half for the second half? Thank you.

Carol Fairweather

So, I mean, talking to H1 first, William, we did see a modest currency benefit in H1 in terms of reported PBT but we are early 15 days in, so we are just working through that. So we’ll come back and be more specific about that when we report the H1 PBT numbers.

But we are anticipating a small benefit from FX in H1. We see that then absolutely moderating going away in H2 and to give you some quantum, when we last spoke to you back in July, if we simply translate what we think the H2 may look like at this exchange rate versus what the exchange rates were in July, we see at the PBT level in excess of a 10 million pound swing adversely compared to where we were in July just to put some quantification on it for you.

Fay Dodds

And in terms of the store openings and we said at the pre-Olympics in terms of Mainland stores, we’d open about 25 and shut about 15 and that’s what the plan still is in the couple of stores that slipped that they always do. But, still very happy with our original plan with those openings what was the high potential market like China, Brazil, Mexico and India.

William Hutchings – Goldman Sachs

Okay. And no more openings in Japan in the second half?

Fay Dodds

Don’t’ think so.

William Hutchings – Goldman Sachs

Okay. Thank you very much.

Operator

Our next question is from Erwan Rambourg of HSBC. Please go ahead.

Erwan Rambourg – HSBC

Yes, hi, good morning. Three questions if I can please. First, maybe a naïve question on…

Fay Dodds

Oh, you are very cracklier. If you can be a bit clearer?

Erwan Rambourg – HSBC

Is it better? Can you hear me?

Fay Dodds

Just about.

Carol Fairweather

Go ahead; we’ll see if we can.

Erwan Rambourg – HSBC

Okay, I’ll try. So just, first the naïve question on – management, I think many times in meetings with Angela and yourselves when you were asked what’s the risk for the company, you appointed the key managers and the talent potentially leaving the company, as Angela steps down, mid-2014, what can you put in place to ensure you don’t have other talented managers leaving the company? I know this is a bit of a naïve question, but I think it’s important to get a sense of how you lock-in so to speak senior management?

Secondly, I was wondering if you could give a sense of what the range of real consensus if I can say is in terms of PBT for the year? And explain why despite slightly tweaking the H1 PBT guidance you are not touching the full year one. And then thirdly, if you can explain the shift in wholesale, the rebound you are expecting for H2, do we – should we understand that you’ve addressed most of the legacy issues in terms of distribution at wholesale? Thank you.

Carol Fairweather

Okay, to your first question on talent management, I think what you see today is absolutely a succession planning in action. So, as you would expect as the Board and of the management team, we are constantly keeping under review succession planning and Christopher has absolutely been our preferred successor for a number of years.

And so we are delighted that he has been able to step up him that role today. And that goes deeper in company than just for all of key executive roles. We regularly review at Board level, where the succession plan is coming from. So rest assured those robust succession planning emplace the talent.

In terms of retention, it’s around continuing to grow people, it’s around continuing to get them the opportunities and it’s coated to rewards as well. And all of those combined and the great opportunities we have ahead of us in Burberry, I think if you look at the key executive team that we are talking about today, working alongside Christopher, we are saying that many of us has been there working at Burberry were in excess of five years.

So I think that speaks to itself. Talking then to the range for consensus PBT for the full year, going into today we source as the average being around 472 with the range being 455 to 509, the second highest being 493 within that.

Given that we are not really changing any guidance today for the core business. We are not expecting consensus to move necessarily significantly other than for people who perhaps want to factor the impact of FX in to their models in H2, if they haven’t done so already. And Fay, in terms of the wholesale shift?

Fay Dodds

Yes, and I think what you are saying in terms of second half wholesale is really our customers globally having a less cautious approach to buying. So if you think the first half, they were in last November placed in orders when luxury got a hard and slowed and for the second half they were in May when if I’m probably feeling a bit earlier.

So I think we got less cautious buying by our customers globally and what you are seeing is the emergence of the U.S., Asia travel retail and emerging market franchise partners as our growth drivers. Europe still – there is still some continuing account rationalization but we are seeing also good growth in those accounts that we are working quite closely with. So it’s more about the mood of the wholesale customer than there is a swing in sort of account rationalization.

Erwan Rambourg – HSBC

Okay, thanks a lot. So you can hear me well, thank you. Very clear.

Operator

Our next question comes from Fraser Ramzan of Nomura. Please go ahead.

Fraser Ramzan – Nomura

Hi, good morning. I’m just – really a follow-up question on the 13% comp you have posted in the quarter. I guess that number was delivered against a backdrop of negative store traffic. And I know it was the business you think of digital enabled sales rather than online sales per se. But how important were sales generated online to that 13% comp in the quarter, i.e. not ones that were done by your associates in store, but instead, customer-driven online sales?

Carol Fairweather

I mean, Frazer, as we have talked before, increasingly, we are becoming agnostic as you referenced about how the customer likes to shop. So, we are quoting out that digital did outperformed within that comp numbers that we talked to you today.

Ipad sells in stores and collects in store were very successful, but within that we are still very happy with the balancing contribution that came from people accessing from home or the office or wherever. So very happy with the momentum we’ve got in our digital business making sure we can service our customer however they want to shop.

Fraser Ramzan – Nomura

I guess the reason I am asking the question is I am just trying to understand as your space contribution number moderates relative to what it has been previously part of that strategically in the landscape is obviously the customers choosing to shop in different ways and sales generated digitally become increasingly more important.

So while you may not quite have the space you’ve had previously actually that can be sort of mitigated or offset more than offset by sales generated digitally and particularly by the customer themselves, going forward?

Fay Dodds

Yes, and I think, there is two answers to that. The first is – that’s again this year is relatively smooth by a cycling program given based what we have done in the last couple of years. So I think we pointed to ask in May just so remember, we have had two years of almost growth and in this year, it’s just a way of timing it’s much lower. I think the point about this move, one of the things that we are thinking about a lot internally how, we are agnostic about how the customer will shop, but we do believe that as a luxury goods company we will still need those stores because the customers still want that in-store experience, if you are spending 1000 pounds on a French coat…

Fraser Ramzan – Nomura

Now understood.

Fay Dodds

Buying, baby gifts, or Wellington she can do that online. So I think, it’s a very good challenge and that’s one that we are working through internally.

Fraser Ramzan – Nomura

Great. Thank you very much.

Operator

Next question is from Mario Ortelli of Bernstein. Please go ahead.

Mario Ortelli – Sanford Bernstein

Good morning. We should expect a less involvement of Christopher in the designing part of his role. So, should we expect a less involvement of Christopher in terms of development of entry-level collection like the Brit, less involvement in defining the guidelines for the advertising campaign and the definition of a store count that or even definition of the online marketing initiative and moreover, should we expect any change in the organization of your creative department with Christopher as to having to dedicate less time to this part of his role?

Fay Dodds

No, so the answer to your question Mario, in terms of – Christopher has an incredibly strong team beneath him. They absolutely still retain oversight influence over everything that we do creative for this organization as he always has done from the collection, to the marketing campaign, to the stores. So no change, but he has a very strong team beneath him.

So he gives that design direction and then he executes to their strategies. So we don’t anticipate any dilution of that whatsoever. And in terms of organizational change, again, over the last few years, in fact many of his designers have been with him almost the whole time he has been here. So he has a very strong team. So not expecting any organizational change in the team beneath him although today.

Mario Ortelli – Sanford Bernstein

Can you remind me how many people do you have in your design department?

Fay Dodds

About 70, something like that and also Mario, it’s not just about the design team, bit’s about the wider organization and the strength we’ve got in the whole executive management team. Again many of us having been in place for five years plus.

Mario Ortelli – Sanford Bernstein

Thank you.

Operator

Our next question is from Omar Saad of ISI Group. Please go ahead.

Vick Mohan – ISI Group

Hi, thanks. This is Vick in for Omar. There was some news out yesterday that the UK may be easing Chinese tourist visa requirements. Just wondering how you think about this and how you think this could affect your business.

Carol Fairweather

I mean, we always talk about – we’ve been very focused on making sure that we can service the Chinese consumer wherever they want to shop, be that in their home market or in our flagship markets all over the world which is why we’ve continued to invest in those flagship market.

So that said, it is pleasing news to hear that the restrictions may be lifted for the UK. So we were pleased to hear the news yesterday, but important that the Chinese are important all of our flagship markets.

Vick Mohan – ISI Group

Thank you. And in terms of the mix shift to some of the higher-end collections, is this continuing and how much farther do you think it has to go?

Carol Fairweather

Yes, I mean, there has been the shift over the last few years and I think we are broadly happy with the shape of the pyramid as it sits today. That does change sometimes half-on-half but not expecting any significant changes going forward.

Vick Mohan – ISI Group

Thank you very much.

Operator

(Operator Instructions) We will take our next question from Rogerio Fujimori from Credit Suisse. Please go ahead.

Rogerio Fujimori – Credit Suisse

Well, hi, everyone. I was just wondering if you could give us an idea of the present size of the distribution network for fragrances and Beauty compared to the set up under the previous arrangement and the planned clean-up of an appropriate point-of-sale done in the first half.

And secondly, to grow Beauty coming years how do you plan to overcome the barrier to entry of distribution controls from leading brands like Chanel to make Beauty a sizeable business for Burberry? Thank you.

Carol Fairweather

Yes, I think in terms of you are talking about the distribution network, I mean, as we said, we pretty much stepped into the shoes of IP with the distributors they were working with. So at the moment, there has been no significant change, clearly over the coming years, we may look to do something different.

The only change really was where we stepped were IP was currently distributing themselves as a wholesaler and there we’ve signed a distribution agreement with BPI for the U.S., Spain, France and travel retail. So no significantly changes at the moment.

And in terms of the – I think your second question, it was difficult to hear – was around the opportunity in Beauty and how we build to the scale of something like Chanel I think you called out. I mean, we shared with you before the size of our Beauty business versus our Apparel business.

And we see significantly opportunity as we begin to build business to scale focusing around those pillar fragrances of which Rhythm Men that we just launched with the first one under our own control.

Rogerio Fujimori – Credit Suisse

Thank you.

Operator

Next question from Julian Easthope of Barclays. Please go ahead.

Julian Easthope – Barclays

Thank you very much. Good morning everyone.

Carol Fairweather

Good morning.

Julian Easthope – Barclays

I've got a couple of questions on Japan and one on Beauty if I may. The first on Japan is just regards to the new openings. And first of all, how the existing openings are faring currently? Within your medium-term forecast of mid-single-digit growth coming through from new space, does that actually include some Japanese openings in there?

The second question is a fairly simple and I guess it’s – the current rates on the yen is like 157 yen to sterling and it looks like you're averaging 133 yen for last year. So could we assume that the license fee will just be translated back at 20% less for next year?

And the third question really is within the Beauty side of things. One of your key pillars is Burberry Body. I just wondered how the original Burberry Body has actually trended and whether or not the new Burberry Body tender has taken over volumes from that?

I think, one of the concerns of Beauty is that product lifecycles tend to be relatively short and they are only really kept up with very high marketing costs. I guess some of the things you mentioned today sent one or two alarm bells going. So I just would be interested to know how the original Burberry Body was performing. Thank you.

Carol Fairweather

Okay. So in terms of new openings in Japan, I mean, we’ve had in the last year or so doing quite nicely, remember that the global collection, we are not putting a lot of heavy marketing or anything behind at this stage. So early days, but we are very pleased with what we are seeing.

Medium term in terms of when we talked about space guidance so that we are not guiding on space going forward, as we’ve been rolling up our plans for the next two or three years, clearly we are expecting some further rollouts of the store portfolio in Japan as we begin to take that business back. So that is included within our internal space guidance if you like for the next two or three years. In terms of the performance of Body, Fay, do you want to just make a comment in terms of?

Fay Dodds

Yes, clearly, we’ve been going through – as Carol said, a quite complex transitional period and we’ve had some supply chain hiccups on the way. So it’s quite difficult to get a clear passing at the moment and we launched Body very successfully a couple of years ago we did then go into sort of the negotiations went into platforms that they didn't give it the support it deserved.

So I think we’ve been quite which is a tail-off a little bit. We had a very successful launch around Burberry Body Tender that’s going into new markets and I think that will reinforce that fragrance going forward. Clearly where the investment is going for the second half this year is around Brit Rhythm for men which is launched in September and then Brit Rhythm for women which is a February launch.

Carol Fairweather

And Julian like to get to over your points on the yen rate going forward. So, yes, I mean, as you think about next year, clearly we are hedging now for next year. So that movement in the Yen rate from the 157 to 133 you should factor into your plans for next year. We are locking into that now.

Julian Easthope – Barclays

Thank you very much. Thank you.

Operator

The next question is from John Guy of Berenberg Bank. Please go ahead.

John Guy – Berenberg Bank

A couple of follow ups please. Just with regards to the online and offline sales, this is obviously a metric that you've been focusing on a little bit more over the course of the last few years. But could you just talk about the percentage sales mix now between online and offline so, how you look at that and the implications around, I guess, future space expansion, if you're continuing to see a stronger online presence.

Can we assume, going forward, that there should be some bigger opportunities in terms of cost management obviously; a lot of your OpEx is driven through new retail stores. So can we think about starting to see a slow progressive downturn of that pretty high OpEx as a percentage of sales number? Thanks.

Carol Fairweather

In terms of your first question about how we look at online versus offline. I mean, as you said John, we are constantly evolving the way we are thinking internally now we are just not fixated on that front. We do report the numbers internally between online and offline but we are not calling that out today, because we are completely agnostic about how people shop particularly given the really nice uptake we’ve seen with the iPad sales in stores click and collect.

So, online is outperforming globally. We pull that out but we are not giving a specific number in terms of percentage of mainline. In terms that we are very mindful of the rollout of the store portfolio, very much still focused on flagship markets for all the reasons we’ve talked about in terms of traveling luxury consumers. So we will continue to share with you our plans but absolutely you can’t look at each of these in isolation. You need to look at them together.

John Guy – Berenberg Bank

Yes, but I think there is clearly, an implication when it comes to costs if you're not driving out a significantly greater bricks format going forward over the next three to five years and there is a greater transition online then there should be some cost and leverage opportunities. So…

Carol Fairweather

And we’ll look at, as we always do, as each of those top proposals come up, we will look at those and evaluate them against our IRR making sure they got the right adjacencies they are consistent with our flagship market strategy. But to Fay’s point earlier, people are agnostic, so it may be the online is growing.

But it maybe because they are actually enjoying the experience of going into the store and seeing the products there. Some of the customer service click and collect has been very successful but you need to have a store for them to go and actually collect in. So working through all of that in our plans as consumer preferences continue to evolve.

John Guy – Berenberg Bank

Okay, thanks. And maybe just one final follow up from me, just with regards to North America. I know that you've talked about a transition or a change in buying attitudes today. But you are looking at some of the recent U.S. retail trends; if you like they all look pretty soft.

So is this just more a retrospective comment in the sense that the wholesale attitude has obviously improved and the sentiment has improved but that was, effectively, looking back over the course of the last quarter or so but now, looking forward, have you noticed any significant, I guess, downward shift in consumer sentiment in the U.S.?

Fay Dodds

I think there are three things and we were to say that wholesale is a lacking indicator because of the order – that we are talking about – second part was collected largely in May and everyone is clearly relatively jolly compared to November and I think as I said earlier, if you are actually looking at retail trends in the U.S. as a whole it’s a really difficult market to read.

John Guy – Berenberg Bank

Thanks very much, Fay.

Operator

Next question is from Lucia Solca of Exane please go ahead.

Luca Solca – Exane BNP Paribas

Yes good morning.

Fay Dodds

Good morning Luca.

Carol Fairweather

Good morning Luca

Luca Solca – Exane BNP Paribas

Good morning. I was just wondering, a number of investors are doing their homework and trying to anticipate how the business is going to look like and how the P&L is going to look like and Beauty in the after years.

And Beauty development seems to be a key element in replacing licensing revenues from Japan, and the license will expire in mid-2015 as we know. So I was wondering 18% looks pretty punchy as an operating profit margin for this year. I wonder if there are any one-offs, and if it's fair to expect a significantly lower operating profit margin as the business moves more to a steady and ongoing basis.

Secondly, I was wondering if you expect any change as far as Chinese tourist purchases are concerned and Chinese tourist trends are concerned, in the phase of legislation changes in China on packaged tours prices that were implemented on the 1st of October, do you see any change as far as the number of tourists you receive in your stores, either in Hong Kong and Macau, or even in Europe?

And last but not least, I just wanted to understand. Angela is moving on to Apple. You said it's a newly created position. I understand this is the position that was held at one point by John Browett, former CEO of Dixons. Do I understand it correctly? Thanks very much.

Carol Fairweather

Luca in terms of the Beauty questions, I mean this year, remember it’s a transitional year. We have flagged it whereas we talked before about 140 revenues in 25 million of profit delivering that 18% margin. We may be shy of that 25 million looking for offset elsewhere in the business as in this transitional year we have a lot of fixed cost in the first half where revenue was beginning to build. So don’t think of this is as a normalized year.

But going forward, we then need to factor in what the plans look like as we begin to build make up as we go forward. So we do see Beauty as a significant growth opportunity for us and we’ll come back and share more with you about margins as we refine those plans looking to years two and three.

In terms of the change in legislation regarding trips, Fay do you want to?

Fay Dodds

Yes, I don’t think it’s very early days you came on the 1st of October and it’s very early days for us know if there is going to be any impact. I don’t think internal ally what we are wondering about is, whether it’s really going to impact the true luxury customer, is it aimed much more at the market for the tourists and is it more likely perhaps to impact travel retail and our own Mainland stores. But early days, but we are mindful of it.

And lastly to your question about Angela and Apple, it is a newly created role where we are actually very delighted that she has got this opportunity but it’s not for us to comment on the specifics of the role.

Luca Solca – Exane BNP Paribas

Thank you very much indeed.

Operator

Next question is from Allegra Perry of Cantor Fitzgerald. Please go ahead.

Allegra Perry – Cantor Fitzgerald

Hello, can you hear me?

Carol Fairweather

Yes, Allegra. Hi.

Allegra Perry – Cantor Fitzgerald

Hi, good morning. I was wondering if you could give us a little more color on the increase in AUR, specifically within the handbag category and maybe a sense for how that moved over the last couple of years.

And if possible, just a sense for how it's moved within the markets where it's moved the most. And then, lastly, how much logo is as a percentage of the handbag sales today globally, please? Thank you.

Carol Fairweather

Okay, I mean, in terms of what’s happened to the AUR, we have seen it now just slightly as solid leather and key shape become a bigger part of our portfolio within the accessories category. Delighted with the content in terms of how much of our mainline growth is coming from those large leather goods. So that has actually helped nudge up AUR. In terms of how much logo products left now? Fay, I think…

Fay Dodds

It’s still the majority over our large leather goods, but we’ve done a lot of innovations you’ve seen when you come into the store room around those core iconic checks. I think the trend we are seeing probably with our peers is increasing penetration with solid leather across the industry trend.

Allegra Perry – Cantor Fitzgerald

Okay, can you give us a sense of how leather has increased in the penetration over the last couple of years?

Fay Dodds

Over the last year or so, it’s practically doubled.

Allegra Perry – Cantor Fitzgerald

Okay, great. Thank you.

Operator

There are no further questions on the telephone line at this time.

Carol Fairweather

So, thank you all for your attention. As I said earlier, we are pleased with our first half performance and are focused in the coming weeks and months on building on the strength of last year’s all important festive period while capitalizing on the brand momentum we have in Beauty as shown by the existence of the recent launch of Brit Rhythm Men.

And I am excited to be working with Angela and Christopher and the team as they transition over the coming months. So we look forward to speaking to you again on the 14th of November when we announce our interim results. Thank you.

Operator

Ladies and gentlemen, that will conclude today’s conference call. Thank you for your participation. You may now disconnect.

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