Burberry Group (BURBY) Q4 2016 Results - Earnings Call Transcript

| About: Burberry Group (BURBY)

Burberry Group Plc (OTCPK:BURBY) Q4 2016 Earnings Conference Call April 14, 2016 4:00 AM ET

Executives

Carol Fairweather - CFO

Fay Dodds - VP, IR

Analysts

Helen Brand - UBS

Thomas Chauvet - Citigroup

Antoine Belge - HSBC Global Research

Luca Solca - Exane BNP Paribas

Charmaine Yap - Jefferies

Rogerio Fujimori - RBC Capital Markets

Julian Easthope - Barclays

Elena Mariani - Morgan Stanley

Melanie Flouquet - JPMorgan

Dan Gianera - Macquarie

Operator

Welcome to the Burberry Second Half Trading Update Call. [Operator Instructions]. I'm now handing you over to your host, Carol Fairweather, to begin today's conference. Thank you.

Carol Fairweather

Good morning and welcome to Burberry's second half trading update conference call. With me this morning is Fay Dodds from our customer relations team. I will make few brief comments on this morning's announcement and then we will be very happy to take your questions. As we said in the statement earlier today, the external environment remains challenging for luxury. Against this background, total revenue in the second half was down 1% at both underlying and reported rates and we expect adjusted PBT for the year to March 2016 to be broadly in line with analysts' expectations. Retail which accounted for 75% of our revenue, was unchanged year on year, with comps down 2%, going from unchanged in the third quarter to down 5% in the fourth, with the shift largely being volume led. The most significant change in trend between quarters was in continental Europe, where sales by the traveling luxury customer declined sharply, particularly from the Chinese, although we did see growth from domestic customers. Overall, with the UK and the Middle East remaining difficult markets throughout the period, the EMEIA region delivered broadly unchanged comps for the second half. The Americas also slowed in the fourth quarter to give a marginal decline in comps in the half.

As we've been saying since the start of the last financial year, demand from the U.S. domestic customer has been uneven and this continued. And spend from the traveling luxury customer was also down double digits. We were, however, pleased with a strong performance from our Burberry private clients team, leveraging our customer insight data to contact customers in a more personalized and effective way. And finally, in Asia-Pacific, performance was consistent across both quarters, with a mid-single-digit decline in comps. Hong Kong declined by over 20% for the third consecutive quarter, as footfall for the sector remained weak. Excluding Hong Kong and Macau, comps for Asia-Pacific were up mid-single digits for the half, led by growth in mainland China, Korea and Japan. Our retail revenues in Japan have more than doubled for the full year as we build our direct luxury business and we now have six mainline stores and 30 concessions. As we said in the statement, other channels performed in line with guidance.

Wholesale revenue in the half was down 1% underlying, with a 6% decline in apparel and accessories and beauty up 11%. And finally, licensing declined £16 million in the half, largely reflecting the planned expiry of the Japanese Burberry licenses. Globally, we continue to execute against our six key strategies and let me just highlight progress on three of these today. First, under-realized product potential. Accessories were more resilient than apparel in the second half, led innovations in scarves, ponchos and runway rucksacks. Within beauty, we continue to elevate our image through focusing on our key fragrance pillars, with both product extensions, such as My Burberry Black and the launch of our new male fragrance, Mr. Burberry. We're also pleased with the performance of makeup in Sephora online and in store and are planning to expand the physical distribution beyond the 40 current doors or so during the coming year. Second, under optimized channels, digital again grew in all regions, supported by investments in new initiatives, including the rollout of the single pool of inventory model, now covering all 44 online countries, personalization initiatives, such as the scarf and the rucksack and new payment methods, including China UnionPay and PayPal.

Digital also continues to see the benefit of our prior investment in mobile which represented the majority of digital growth in the half. Third, under unlocked markets, we continue to reposition our store portfolio in China, where we finished the year with 63 stores. A particular focus for now is Beijing, where we have several projects planned to elevate our retail positioning in this key flagship market. Looking ahead to FY 2017, we have said in the statement that we currently expect adjusted PBT to be around the bottom of the range of analysts' expectations which as of today we see it around £405 million. This includes around a £60 million benefit to profit in FY 2017 based on current exchange rates compared with FY 2016 rates.

So let me explain some of the factors behind this guidance. Firstly, we expect the demand environment to remain challenging. Second, we expect H1 wholesale to be down around 10% underlying, due to significantly tighter inventory control by our U.S. wholesale customers, continued cautious ordering globally and the elevation of beauty distribution in key markets. And thirdly, as you're already aware, there will be a further step down in full-year licensing revenue of about £20 million, primarily due to the planned expiry of the Japanese licenses. In response to this, we're, as you would expect, taking actions. Firstly, we're increasing our tight control on discretionary costs, having saved over £25 million against our original plans this year. However, cost inflation pressures persist, such as year-on-year rent increases which will contribute to an underlying mid-single-digit percentage increase in our OpEx in 2017. Secondly and important to note, this guidance excludes the benefits to come from our productivity and efficiency agenda.

As we announced in January, we have accelerated this work, especially looking at our ways of working. We're also addressing how to optimize future organic revenue growth opportunities, the resulting investment plans and our capital structure. As Christopher said this morning, we're making good progress and will share our plans, as well as the short and medium term benefits at the preliminary results in May. Meanwhile, I'm pleased to say that brand momentum remains strong, digital continued to outperform and innovation in new products is resonating well with our customers.

And so, with that, we'd now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from the line of Helen Brand from UBS. Please go ahead. Your line is open.

Helen Brand

Three questions from me. So the first one, just on the 5% negative like for like in Q4, obviously, the delta mainly volume led. But can you break out what you saw between ASPs, footfall and conversion in the quarter? Secondly, on the H1 wholesale guidance, are you seeing any impact from the move to one brand on how the wholesalers are ordering? And also, how do you expect to manage with the wholesale partners as we go through the year, the impact of this kind of see now, buy now from the fashion shows?

And could you also break out beauty versus the underlying in the H1 guidance? And then finally, just around the PBT guidance at the bottom end of the range in 2017, can you just clarify your assumptions for performance-related pay within that? And also, within the £60 million of FX guidance, how much of that comes from hedging? Thank you.

Fay Dodds

That was four.

Carol Fairweather

Anyway, so first of all, in terms of the 5% negative like for like, we're saying that footfall did continue to decrease as we went through the fourth quarter, predominantly in EMEIA and as we said, that was largely tourist driven. Conversion was up in Q4, but the rate of growth slowed slightly and as we said this morning, I think that we saw some growth, small growth, from ASP, but it was largely a volume-led decline. In terms of your question on wholesale guidance, the negative 10% for H1, absolutely nothing to do with the one-label strategy, because that really only impacts the second half of this year as people come into market in May to buy for the second half. And as we said before, so far, that has been positively received by our wholesale customers in conflict and we'll see what happens as we close the order book for H2. And in terms of the change to runway, remember, it's only a tiny percentage of our business, largely in our own retail anyway and will be with selected wholesale partners, but no significant impact anticipated certainly on wholesale from that change, although very exciting, obviously, from a brand point of view.

In terms of beauty, we're saying that beauty will be broadly flat across this year, split evenly across H1 and H2 and that reflects underlying growth in beauty, partly offset by the cleanup or the elevation of the distribution in one of our key markets, effectively here in the UK, where we've taken a decision for brand reasons to actually reduce distribution and elevate going forward. And then your question on PBT and what's included for PRP, as we've said as we've gone through this year, we've achieved around £65 million worth of savings versus a £60 million to £70 million worth of savings versus last year, split broadly between bonus and long term incentive plan. Within that, there is an underlying cost of share schemes in every year around £20 million and that cost in this year has been masked by credits relating to prior-year share scheme changes, as we have trued up to reflect the latest vesting assumptions. And therefore next year's number, the guidance we've given today, includes that £20 million charge next year.

And then your last question on currency, it does reflect - as you know, we hedge forward our euro procurement and as we look forward to next year, we won't have the same degree of benefit on procurement that we had this year, because obviously rates have moved against us from a procurement point of view but do benefit us from an overall translation point of view.

Helen Brand

So within the £60 million, that's purely the pound benefit then or is there any hedging benefit within that?

Carol Fairweather

Well, we always guide inclusive of everything. I think others sometimes split out hedging. We guide including all the hedges that we have in place which is why we put out at the moment the anticipated rate based on spot rates and any hedging we have in place on euro and U.S. dollar procurement is incorporated with £60 million guidance.

Operator

Our next question is from the line of Thomas Chauvet from Citigroup. Please go ahead. Your line is open.

Thomas Chauvet

Three questions, please. Coming back to the £4 million, £5 million PBT guidance for March '17, not sure I understood the £20 million PRP. So can you just confirm what bonus costs and also cost savings you factored in that guidance compared to the £60 million cuts in bonuses and £25 million discretionary OpEx savings?

Secondly, on the FY 2017 revenue and profit guidance, can you perhaps detail what assumptions you made in Japan and whether there's been any change versus last time we spoke on the delays in retail expansion? And could you give us just a couple of numbers, sales and EBIT margin, perhaps, for March '17 in Japan. Are you seeing in Japan, like some of your peers, softer tourist demand in recent weeks on stronger yen? And finally, on Europe, if we look at the deterioration in like for like, it seems largely due to tourist flows from Chinese into continental Europe.

Have you seen the loss of that business recouped elsewhere, be it mainland China, Japan, Korea? I would have expected perhaps these three markets to accelerate sequentially if you've lost some Chinese tourism business or do you think it's effectively what is lost is lost and not recouped elsewhere? Thank you.

Carol Fairweather

Okay, so your first question in terms of PRP, so I'm saying we saved around £60 million versus the prior year. Within this year's £60 million of - within this year's numbers, there's an ongoing charge for existing LTIP schemes of around £20 million, but that has been offset by credits in this year relating to accounting true-ups. You always true up your LTIP schemes which vest over several years and so this year, the underlying charge of £20 million has been offset broadly by credits relating to prior-year charges where schemes will now not vest. So I'm saying that as we look forward into FY 2017, that underlying charge of £20 million which was in this year's number but was masked by the credits, is incorporated within our guidance for FY 2017. But there is nothing in for new schemes that the remuneration committee may or may not decide to grant in May for either EMEIA bonus or LTIP, depending on what they deem to be an acceptable level of performance for PRP to kick in.

And then in terms of the £25 million, we took out actually £25 million and a little bit more, as we obviously saw difficult conditions through Q4. That robust cost control absolutely continues. The £25 million plus that came out this year stays out. As we put our budgets together, we took further robust measures in terms of discretionary cost savings and that's baked in, but not withstanding that, we do see this underlying increase in OpEx driven by non-discretionary spend which is largely the rent increases and the annualization of stores that we put down in this year. And all of this is before the benefit that you will see from the productivity agenda work that's going on at the moment, where we'll update you on both the short term benefits and the medium term benefits in May.

Thomas Chauvet

Okay. So how does the £25 million in March 2016 compare to the savings you've identified in March 2017 and can you tell us what these savings are?

Carol Fairweather

So in March 2016, we didn't spend £25 million of cost that we had planned to saw when we saw the difficult trading conditions. That cost which was cost of orders, it effectively stays out of next year, so it's on a like-for-like basis there's been no increase in discretionary cost in the budget for next year. There may and we'll talk about it in May, be further cost savings to come in FY 2017 as a result of the productivity agenda work and as we said, we'll update you on all of that in May. So the robust ongoing cost control persists and we have taken that forward into FY 2017, but there is this inflationary pressure around annualization and rent increases and all of that's incorporated in our guidance.

I'll just do the question on Europe and then maybe, Faye, you can just touch on Japan. So as we said, the biggest change in trend we saw during the quarter was in continental Europe, where we saw tourism go from double-digit growth to negative and that was principally the Chinese across all of our continental European markets. Your question about where did we see that business going, we still saw continued growth in mainland China, mid-single digit which we were very pleased with and we also continued to see positive growth in Japan and Korea. But remember, for us, Japan and we'll come onto - Fay's answer in it, Japan's a much smaller business for us than for many of our peers. And therefore, if the Chinese were traveling more localized within Asia, we wouldn't necessarily see all of that pick up to the same extent that others may have done. But we were pleased that in mainland China that we continued to see growth in the quarter.

Thomas Chauvet

Okay, so the trend is not accelerating in these Asian markets where the Chinese are potentially repatriating some of their tourist demand in Europe back into Asia.

Carol Fairweather

We're saying that the trends in Asia were broadly unchanged quarter on quarter.

Fay Dodds

And if you look at the spend by the Chinese consumer globally for us, it was down in the third quarter and it's softened a little bit in the fourth quarter, but really importantly, as Carol said, we've had that continued cost growth in mainland China. And then turning to your question on Japan and we've been very pleased with the performance this year. It was slightly softer in Q4 than in Q3, but still over 30% growth in the second half and in terms of our plans going forward, no real change to what we've said before and we currently have six stores and 30 concessions, including 10 small children swear concessions. Over time, we're probably looking for six to eight mainland stores, 30 to 40 concessions, excluding children swear and as we look forward, really still expecting to get to about £100 million of revenue and £25m of profit in financial year 2018.

Operator

Our next question is from the line of Antoine Belge from HSBC. Please go ahead. Your line is open.

Antoine Belge

It's Antoine Belge at HSBC. Three questions, please. First of all, following up on the previous question about Chinese consumption globally, could you be a bit more specific in terms of how much it was down in Q3 and how much further down it was in Q4, as it's quite clear that what was lost, for instance, in Europe wasn't compensated elsewhere? And also, on this, are you doing any surveys? I'm trying to understand, is it just a question about threat to travel, etcetera or is it, I don't know, something a bit more profound than this?

Second, on wholesale, especially in the U.S., you highlighted that you're cautiously delivering to retailers there. Can you comment specifically on what type of - there are different types of retailers in the U.S. and shouldn't you also be streamlining the number of doors there? I think it seems that many players have issues with U.S. retailers at the moment. And finally, on beauty, the elevation strategy, is it a bit of a legacy from is the past i.e., from when [indiscernible] was running the business or are you actually closing some doors that you had opened since you took over? Thank you.

Carol Fairweather

Okay, so on Chinese consumption, we're saying that we did see - in Q3, we saw Chinese consumption negative and we saw that just accelerate the cash further negative in Q4. And again, the major shift as we looked at it market by market was in EMEIA, where we went, as I said, from double digit positive across continental Europe to negative as we went through Q4, all significant countries in continental Europe impacted. Hong Kong and Macau, we said no change in trend and likewise in China, we saw continued mid-single-digit growth. In terms of surveys and travel patterns or whatever, clearly, we've got our customer insight data that we used to understand where the Chinese consumer is shopping which is how we can give you these facts here. But I think it's a little early to say in terms of specifically what impact longer term the events in Europe may have on tourism. In terms of the U.S., in terms of the cautious outlook on wholesale, so we're saying overall we're guiding to H1 wholesale down around 10%.

The biggest section of that is in the U.S., so there is cautious ordering globally, both in EMEIA and in Asia around travel retail. But the U.S. is the most significant portion and there, you reflect I think what the difficult market conditions that the U.S. wholesalers are seeing - for us, that's principally four or five big accounts. And we have been on this journey of elevating our presence in U.S. wholesale for some time and to your point, we certainly wouldn't want to encourage or look for the U.S. wholesale account to take any more inventory than we think they can appropriately sell. And therefore, that is what they believe they can sell. It wouldn't be appropriate for us to push that any harder, given that we want to continue to elevate our position in U.S. wholesale.

And then on beauty, the elevation there, it is absolutely a legacy issue related to the business that we took over and I think I said in answer to the previous question, it is principally in the UK, our home market, where with the very successful launch of My Burberry and now Mr. Burberry, it feels entirely appropriate to only be in the real luxury doors. And we're delighted with the position we now have inherent in the black room there or whatever and so that needs to continue. So it's the UK that we've taken the decision on this year.

Antoine Belge

Actually, I've got two follow-ups. First of all, so if we realize the 5% delta going from overall comps flat to minus 5%, is it fair to say that the decline in Chinese consumption that would be a bit more than half of that? And then maybe local consumer, especially in the U.S., explaining the other half? And the second follow up would be on U.S. wholesale. So I understand that you don't want to push more inventories, but I understand in your stores, you always have a lot of new products. So what happens to the older inventory? Do they have to sell it before they sell the new products? I don't really get that.

Carol Fairweather

So your comment on what was the impact of Chinese versus locals, I haven't got the data cut that way. But if you think about what we're saying, we're saying we saw a significant decline in continental Europe which explains most of the movement in the comp in continental Europe is principally Chinese driven and then the other change in trend we refer to within the U.S. domestic market, where that was probably broadly about half and half, I would guess, but I haven't cut the data that way.

Fay Dodds

We'll have a look at it, Antoine. We'll get back to you.

Carol Fairweather

And then your comment on U.S. wholesale, I'm not quite clear. Every season, they come in and they will by an element of replenishment product and an element of newness and that continues. And it's just their absolute pound millions or dollars of buy that has been reduced and I don't think there's anything to call out between replenishment or fashion.

Fay Dodds

I think historically what we've done, if we haven't liked the number that's come out of the order book, we've gone back to the department stores and perhaps encouraged them to buy more than they wanted to. This year, we've been very, very clean, because as part of the elevation strategy, we would just much rather they bought what they think they can sell through at full price rather than then having to put it into markdown either in their mainline stores or increasing in their off-price stores.

Operator

Our next question is from the line of Luca Solca from Exane. Please go ahead. Your line is open.

Luca Solca

First question, to understand the nationality mix, so that we can make heads or tails of the trend by geography. At one point, you mentioned that the Chinese consumers were represented about 40% of your sales. I wonder whether for the just-finished fiscal year, this is still the case or whether they went down by 1 or 2 percentage points. The second question relates to the productivity agenda and your current PBT guidance. I wonder whether it's just by a measure of prudence that you're not including it at the moment or because you're still working on the agenda and whether you anticipate that this could potentially be material for fiscal year 2017 in supporting the PBT results that you will achieve.

And thirdly, I was wondering whether you could give us a ballpark assessment to where you stand in the fragrances and beauty business and ideally how much this is contributing to your results, if you may. Thank you.

Carol Fairweather

Okay, so in terms of Chinese, I think we've always said around 40% from the Chinese across our retail business - not of retail, wholesale. And I think that may have been a tad over 40% and it now may be closer to 40%. I don't think there's been a really material shift. It's still around that amount. Clearly, we always quote to the nearest round number. I don't think there's anything else significant to call out on that. In terms of the productivity agenda, when we spoke to you in January, we said that we had accelerated that work and we would come back in May and share all of our plans around that both for future growth drivers, top line and operating efficiency, both of which would drive bottom-line growth.

And we committed then to coming back in May. That work is ongoing and making good progress, as Christopher said this morning. And so we look forward to sharing both the short term benefits and the medium term benefits when we come back in May. But the impact on this year, obviously, we'll be partway through the year. It won't be a full-year benefit, but we'll be updating you on the number in terms of the extent to which it will impact this year and importantly, future years, when we come back in May.

Fay Dodds

And in terms of the beauty profitability, you know we don't split that out, but we've traditionally said it's around about the same level as the Group retail wholesale margin. And one of the reasons that we don't split it out is well illustrated by the recent launch of Mr. Burberry, where the advertising campaign is not only about the fragrance but is also really supporting our menswear business.

Operator

Our next question is from the line of Charmaine Yap from Jefferies. Please go ahead. Your line is open.

Charmaine Yap

Charmaine Yap calling from Jefferies, I have three questions, please. The first one, in terms of your full-year 2017 guidance on PBT, that's very helpful, thank you, but are you able to share what assumptions you have included for comp store sales growth?

Carol Fairweather

No. We've given you the normal guidance that we would give at this point, but we're saying is that clearly the demand - the environment for luxury remains very challenging and that's all we're commenting on today.

Charmaine Yap

So a similar run rate to where you are currently.

Fay Dodds

No, we're not guiding, Charmaine.

Charmaine Yap

Okay, sorry. And then, perhaps a second question on price adjustments, are you seeing any narrowing in the market in general between regions? Are there more activities in Europe or U.S. to narrow the gap versus Asia, for example?

Carol Fairweather

No, we talked this time last year when pricing was obviously very topical and we did talk about the fact that we did adjust prices some down in China and Hong Kong and likewise took prices up in Europe. As we tracked to last year, we got our strategic pricing policy. There has been no change to that fundamentally and therefore, I don't think we have anything new to say in terms of any price adjustment today.

Fay Dodds

No, we're clearly listening to what our peers are saying, but we've yet to see any material adjustments from them.

Charmaine Yap

And the third question was just if you have any views on the recent new tax regime in China in terms of tightening the customs, borders of people buying products abroad and bringing back to China. Have you seen any impact or do you expect just a gradual shift more towards spend in mainland China?

Carol Fairweather

No, I don't think we're seeing any material impact at all, because it is really just on cross-border e-commerce, so to date, no material impact. And don't forget, we have a very strong digital and retail presence within mainland China and we saw comp growth in the second half.

Operator

Our next question is from the line of Rogerio Fujimori from RBC. Please go ahead. Your line is open.

Rogerio Fujimori

Two, just a clarification on your plans for beauty, how should we think about your distribution in terms of total number of doors in fiscal 2017? You refer to further elevation of beauty in the UK, but you also announced recently partnership with [indiscernible] and Sephora, so I just wondered about the net global footprint. And your retail guidance, could you give us extra color on your 15 store openings, in addition to your plans for Beijing? Just wondering how many are planned for Japan, in Japan and just include any selective closures in Hong Kong, Macau among your planned closures in the next 12 months? Thank you.

Carol Fairweather

No, so in terms of beauty, what we're guiding on sale, Rogerio, is the fact that we expect beauty revenues to be broadly flat year on year, H1, H2 weighted. As I said, that's due to ongoing growth in the business, offset by the rationalization of our distribution in the UK. We don't guide specifically by doors. What we're pleased with, as we said on the call just now, is that somewhere like in Sephora in the U.S., we've seen launches there with digitally and we've launched beauty accounts within Sephora and we expect that to continue to grow and roll out further.

We've talked about early progress we've made with [indiscernible] in Japan in terms of beauty counters there. And so we will continue to carefully monitor the rollout to make sure that we protect the distribution whilst delivering growth. It's really about quality as much as it is about quantity, so it's a balancing act as we go through this year and future growth, but we're seeing growth in the underlying business.

Fay Dodds

And in terms of the store portfolio, I think we said in the statement that we're going to open about 15 mainline stores and close roughly the same number. And that's the trend that's really been going on over the last couple of years. If you look at the openings in 2017, it's predominantly as we evolved the portfolio in China, particularly in Beijing and there's a couple of small openings in the Middle East which we see as a long term growth opportunity and really some relocations, as well and nothing really much to call out in terms of closures. And specifically on Hong Kong, I think Carol has said, consistently, that all of our stores in Hong Kong remain profitable. We're clearly seeking to reduce rents there. We're clearly seeking to work more closely with the local customer, but that is still a very profitable market for us.

Rogerio Fujimori

And just one quick follow up in your wholesale guidance, any comments about the - what is implied in terms of Asian travel retail in that minus 10%? Thank you.

Carol Fairweather

So Asia travel retail is probably down mid-single digit within that. As I said, the lion's share of that wholesale guidance really does relate to the U.S.

Operator

Our next question is from the line of Julian Easthope from Barclays. Please go ahead. Your line is open.

Julian Easthope

Just I've got three questions, as well, if that's okay. In terms of your one brand, I had one of your U.S. department stores who happened to be on their list emailed me the other day saying 20% to 25% off Burberry on the Brit and London ranges. And it suddenly occurred to me, as you move to the one brand, is it likely there's going to be some disruption from let's say you have to get rid of the old sort of branding? And is that an issue for the first half? The second area is from OpEx. Your mid-single-digit growth, I think you said it was a mixture of rents and salaries. Just how big a concern is salary growth, particularly in the emerging markets? Because I think there's still 20% plus in some areas. Is that the main area of you OpEx growth? And there's not really a lot you can do about that, I guess.

And lastly, in terms of the delta between Q3 and Q4 of the minus 0.5%, I think you specifically said the seasonal product was extremely good running into Christmas. Can we assume therefore that your core product range is therefore - have kind of been consistently down 4% to 5% from Q2? Is that the right way of looking at it? Thanks.

Carol Fairweather

So in terms of the one brand comment, Julian, absolutely not. We're not expecting any change in promotional discount policy due to the label strategy at all. So we've been very clear with U.S. department stores that this was coming. They will have planned that in their buys, both in our own retail and in U.S. wholesale. We expect to be able to manage through that in terms of the inventory label as we move away from the current labels and go to the one label strategy. So there's nothing I'm aware of from the one label strategy that should affect discounting. Clearly the U.S. is a promotional market and we have seen that impacting. And that's why we're trying to be very pure in what we're doing. But I don't think one label has anything to do with that at all. In terms of the OpEx guidance, I would say that the rent inflation is probably more of a pressure than the salary inflation.

We do broadly just look to give inflationary increases. We don't look to do anything over and above that across our region. And that will vary market by market. And it's the net of all of that. But I would say if anything it's the impact of the annualization. Remember this, the year we've just finished, we've opened some pretty large flagship stores in Japan, in Korea. We've relocated Soho and New York. So we've got the annualization impact coming through, contractual rent increases and then this - probably what is on average low to mid single-digit salary inflation. And as I said, all discretionary - any discretionary headcount increases or pay rises have not happened in the budget year. And then Q3 into Q4 in terms of product, what we're calling out is that accessories was more resilient than apparel in this quarter or across the half. Certainly we saw growth in scarves, in certain aspects of large leather, ponchos. We're saying that outerwear for us was more difficult.

We hate talking about the weather, but we do know that around the key festive period that may have been the case. And then offset by - I think what is encouraging is the newness, the emerging categories like dresses, the lightweight cashmere trench coats, off of a small base, we're seeing nice growth there. So it's been a mixed bag. But I would say that unusually for us that in this half accessories was more resilient than apparel.

Julian Easthope

I could have one follow-up, mainly because I was too embarrassed to ask four questions outright. But in terms of your license fee on Fossil, is it around £5 million, most of which will be in 2018?

Carol Fairweather

Yes. We don't split it out specifically year on year. But what we're saying is that within the £20 million now, the way in which the termination arrangements with Fossil have materialized, that's contributing to part of the £20 million in this year versus last year. But the lion's share of that, again, is the Japanese license income. But there is a small impact in that £20 million from the termination of Fossil.

Julian Easthope

But it is around £5 million, is that right? Or is it--?

Carol Fairweather

It's something broadly like that, yes.

Operator

Our next question is from the line of Elena Mariani from Morgan Stanley. Please go ahead. Your line is open.

Elena Mariani

Actually I have just two follow-ups. The first one is on your productivity and efficiency agenda. It's just a clarification. What should we expect in May? Is this going to be a detailed plan around productivity initiatives, efficiency initiatives with a clear, concrete quantification of what these would imply? And is this going to be a three-year plan, a two-year plan? If you could clarify that, it would be great.

And then with regards to the short term benefits, so if I understood correctly, you're going to share a new number for the PBT for fiscal year 2017 which is going to include these benefits. So I was wondering why didn't you wait until May to give full guidance for the year which includes these initiatives as well. And the second follow-up is about the £60 million FX benefit. Can you share with us how much of this is actually locked up, maybe because of previous wholesale sales so it's not going to actually change over the year? And how much is the part that is going to continue to vary according to how much FX moves? Thanks very much.

Carol Fairweather

Okay. So your first question on the productivity and efficiency agenda. We have said consistently since January that we'll come back and share our plans with you in May. Those plans will give a degree of detail around where we see the growth opportunities and the efficiencies coming from. But you'll have to wait until May. And clearly we will give you an indication then as well about how those benefits will materialize over both the short and the medium term. And that will be laid out to a certain level of detail in May, that will enable you to be able to understand how much will come in 2016 and 2017. You said why didn't we wait until May. As part of our normal H2 trading update, we would always talk about our normal guidance on licensing, wholesale, FX. And that is what we have done today.

The only piece we haven't been able to do in this year where we have got this agenda on productivity running, is to guide as to what the benefits may be - the short term benefits that we may see in 2016 and 2017, because it feels more appropriate to do that as a joined-up package when we've finished the work and can give you the total picture in May. And then in terms of the £60 million FX benefit, most of that in the coming year is - first thing to say it's based on spot rates at March 31. And a lot of that benefit in this year is coming from translation rather than from procurement. And therefore the only piece that we've locked in is part of the procurement benefit which is reasonably small in this coming year. The biggest piece is mostly coming from translation. And there it will depend on what the exchange rates are at the month in which we book the revenues and profits as we track through the year. So broadly I wouldn't bank on any of it being locked in. What we can say is that at those spot rates at March 31, it would come out at around £60 million.

Operator

Our next question is from the line of Melanie Flouquet from JPMorgan. Please go ahead. Your line is open.

Melanie Flouquet

It's Melanie at JPMorgan. I have three questions actually. Sorry. On U.S. wholesale, can you confirm to me that I understood this right? Are you saying that the wholesale partners are ordering presently or that you are delivering cautiously, i.e. are you actually delivering them less than what they are asking for? That's my first question, because I suspect it's an important one in reality. Number two is in Japan, could you give us an idea of the size of this business today in sales and profit terms compared to the £100 million, £25 million profit by full year March 2018?

And the last one, just so I get that clear, but I think Elena's question was already answering this, in full year March 2017 when you guide for £405 million, you have in there £60 million FX. You have underlying cost pressure of mid single digit. You have sustained discretionary spend cuts of roughly £25 million still in. And you have basically a long term intensive plan reinstated at £20 million. Can I just confirm there is no accrual on bonuses in there for full year March 2017? And on the most positive side, there is no incremental productivity gains which you would announce in May? Thank you.

Carol Fairweather

So in reverse order, absolutely. So yes, your summary is exactly right, Melanie. So we've put in everything that we would normally guide other, other than we have not yet - we've got the fixed charge for PRP in there. And then if there's any new award under either bonus or LTIP from the RemCo in May, then that would have to be factored in. Likewise, we have not incorporated any short term benefits that will come from the productivity agenda. Again, we will guide on that in May.

In terms of U.S. wholesale, we're saying that that is based on the orders that they have come in to market and given us which reflects their tight inventory management given that we know that the wholesale market in the U.S. is pretty challenged right now. Our comments were more around that is the level at which they've ordered. We haven't reduced their order. But in other seasons we may look to see whether we can increase their order. We certainly wouldn't be doing that because we do not want any inventory in the U.S. wholesale chain that we don't believe they can sell through in a brand-appropriate way. So it's really about continuing to protect the brand. And then in terms of Japan?

Fay Dodds

Yes. Basically if you look at the retail revenue, it's double-digit, about £60 million.

Melanie Flouquet

Okay. And could you share with us - I know it's not a profit call, but the profit impact of that roughly?

Fay Dodds

Yes. Given the level of investment that we're making in some of the flagship stores that Carol referenced, it's broadly breakeven.

Melanie Flouquet

And there seems to be a pretty big issue in U.S. wholesale of U.S. department stores being involved in pretty big off-price activity and also some shipping back into Asia actually. I was wondering, I'm surprised that they would actually - it sounds like they're actually asking for more because they resort to all of these activities. So how do you explain their soft ordering? And do you not want to even get it further down than what they're actually ordering given the environment?

Carol Fairweather

Okay. So we have a very close relationship with U.S. wholesale. As I said, we've been on a journey to elevate the brand in the U.S. department stores. It's part of our long term strategy. We work closely with them. And based on the orders they believe they can sell through in the first half of this year, that is the number that we have guided to today. So we work closely with them. We're not looking to force that number one way or the other. We're keen to make sure that we believe that they can sell through and that is why we've accepted this double-digit decline in ordering from them for H1. And I'm not aware of any - we do know that the U.S. wholesale market is very promotional. And certainly we wouldn't want to do anything to jeopardize our brand in any way by trying to encourage them to take any more.

Fay Dodds

Especially to put in their off-price channel.

Operator

[Operator Instructions]. We have another question from the line of Dan Gianera from Macquarie. Please go ahead with your question.

Dan Gianera

My first question is specifically the UK trend and how did Q4 perform versus the third quarter. In addition, do you expect an improvement on the back of the new visa scheme for Chinese and the weaker pound? The second question, if you can please give us an update on the rollover of this single inventory pool versus plan. And what is your learning from it so far? It's a few months already. And moreover on this, whether you seek the highest benefit from it, it's more an efficient inventory level, is it gross margin or we should expect lower OpEx from that side too and then obviously it would be additional to the discretionary costs that you are making? And the last one is just a clarification. Can you please give us more detail on the eight stores that you have been closed on the - over the quarter in terms of location, please? Thank you.

Carol Fairweather

Okay. So in terms of the UK trend, we said that the UK trend continued. So it was negative in Q3 and that continued into Q4. Again, we believe that was tourist-driven. Clearly the restriction on the visa requirement is potentially good news for us, likewise with sterling where it is at the moment. That said, we need to understand what the impact of recent events in Europe will have on tourist patterns. So I think we can't guide specifically in terms of what we think is going to happen into the UK. In terms of the single pool of inventory, as I said earlier, we're delighted with the progress we've made there.

So we're saying that it did have a meaningful uplift in terms of our digital sales because what we've effectively done is opened up, when you look on our digital website, all of our store that are involved. And I think we're up to something like 75 stores now globally. And you see not only the inventory in the distribution center, but also in those 75 stores. So it did have a nice benefit. And the benefit principally for doing this was to make sure that we optimize sales. Clearly it will also have a benefit on inventory management. But it was done in response to the customer to make sure that they could access that inventory wherever it was in the world and we didn't disappoint them. And we did see that that contributed to our digital outperformance in the quarter.

Fay Dodds

And if you look at the eight store closures in the second half, a couple of them are in China. A couple of them are in the U.S. And there's the odd relocation but very much normal part of business.

Operator

We do have a follow-up question, it's from the line of Melanie Flouquet from JPMorgan. Please go ahead. Your line is open.

Melanie Flouquet

Yes. Sorry if I missed it, but just a small clarification. You updated us on what you expect for the ForEx gain for full year March 2017. But for full year March 2016, I don't think I saw the update and I suspect it's slightly higher than the last £10 million.

Carol Fairweather

Yes. Melanie, obviously the number that we report in May will be based on the final profit number. We're clearly going through our year-end closed process at the moment. The way rates have moved, I would expect that there would be a £1 million or £2 million benefit perhaps. But don't forget also the last time we guided, it was on the volumes that we were expecting for Q4 and so therefore any reduction in sales, the benefit from translation won't come through. So I think I'd expect a small benefit from rates, maybe offset a little bit by business performance. So, I wouldn't go much above the 10.

Carol Fairweather

Okay. So thank you all very much for your attention. And we look forward to speaking with you again on May 18.

Fay Dodds

Thank you.

Operator

Thank you for joining today's call, ladies and gentlemen. You may now replace your handsets.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!