Burberry's (BURBY) Q2 2017 Trading Update Call (Transcript)

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Burberry Group Plc (OTCPK:BURBY) Q2 2017 Trading Update Conference Call October 18, 2016 4:00 AM ET

Executives

Carol Fairweather - Chief Financial Officer

Charlotte Cowley - Investor Relations

Analysts

Helen Brand - UBS

Antoine Belge - HSBC

Luca Solca - Exane

Thomas Chauvet - Citi

Julian Easthope - Barclays

Annabel Gleeson - Redburn

Mario Ortelli - Bernstein

Melanie Flouquet - JPMorgan

Roger Fujimori - RBC Capital Markets

Carole Madjo - Haitong

Charmaine Yap - Jefferies

Julian Easthope - Barclays

Carol Fairweather

Good morning and welcome to the Burberry's First-Half Trading Update Conference Call. With me this morning is Charlotte Cowley from our investor relations team. I will make a few brief comments on this morning's announcement and then we will be very happy to take your questions.

Total revenue for the first half was down 4% underlying, up 5% at reported rate to £1.2 billion with growth in retail offset by decline in wholesale and licensing driven impart by strategic brand elevation.

Retail accounting to 74% of revenue, grew by 2% underlying with comparable sales improving to 2% growth in Q2 versus a 3% decline in Q1, resulting in comparable sales being unchanged in the half. The most significant change in trend was in EMEIA where performance in Q2 was led by the UK, which accounted for about 40% of the region's retail revenue.

Comparable sales in the UK were up over 30% for the quarter with growth from both tourists and domestics. In Continental Europe, growth from locals was more than offset by decline in tourists. Over Q2, EMEIA delivered the high-single digital comp growth versus a low-single digit decline in Q1 resulting in the low-single digit percentage comp growth from the half.

Within Asia-Pacific, there was a similar performance across both quarters. Comparable sales declined by a low-single digit percentage, but were positive excluding Hong Kong and Macau. Mainland China improves, delivering a mid-single digit percentage comparable sales growth in Q2. As we discussed in July, our performance is currently being impacted by the planned elevation of the store portfolio in Beijing, our largest market in the country. Excluding Beijing our China comps were up double digits in the quarter.

In Hong Kong, once we saw a very slight improvement in the second quarter, we continued to experience negative footfall. This is partly offset by improvements in conversion and overall comparable sale to down double digit for the half. In terms of pricing in the region, you may remember that in April 2015, we reduced prices on our heritage trench coats and scarves in Hong Kong and China.

As part of our budgeting process for this financial year, we planned similar price reduction to other product categories in these markets, which we implemented as planned at the start of September.

And finally in the Americas, although comparable sales were down by low-single digit percentage in both quarters, we did see a slight improvement in trend in Q2. We continue to experience uneven demand from domestic customers and spend from the travelling luxury customer, which accounted for about 20% of the region's revenue in the half, remained down double digit.

Wholesales and licensing performed broadly in line with guidance and impart reflected ongoing strategic brand elevation. Wholesale revenue was down 14% underlying. Excluding beauty, EMEIA and Asia were largely unchanged year-on-year whilst the Americas saw a significant decline reflecting tighter inventory control by our customers coupled with our own actions to manage brand elevation. Beauty was down nearly 20% reflecting cautious ordering from distributors and strategic brand elevation including the rationalization of distribution in key markets. And finally licensing revenue declined to £13 million in the half, largely reflecting the planned expiry as a Japanese Burberry licenses.

So let me update you on the initiatives we set out in May to deliver enhanced revenue growth and improved productivity, which is now well underway. Firstly, we were delighted with the brand reach from the September runway show, where for the first time the entire collection was available to purchase globally both in-store and on-line immediately after the show. In particular, we saw a good early response to the Bridle Bag, the number one selling item in the collection.

Turning to products, we continue to see customer response positively to innovation and newness and fashion outperformed replenishment in our mainline too. Growth in bags, an area of strategic focus for us was led by the runway rucksack and the new buckle bag collection. Dresses and ponchos also outperformed. Under retail excellence, we're making good progress and investments in this area. Our growing team of private client sales associates now stands at over 230, providing improved in-store retail experience and delivering a significant increase in private appointments in the half. And in the summer for the first time, we brought together our global store management team for training, focusing on enhancing customer service and retention.

In e-commerce, we continue to invest. The redesign of burberry.com for desktop was launched globally in September as well as improved payments option, the launch of a store stock lookup and increased product personalization for heritage scarves. And we're making good progress to launch our customer app in the next few months. Digital continued to outperform in the half and grew in all regions.

Turning to operational excellence and our plans to improve efficiency, we remain confident in delivering the planned savings of around £20 million this year and are on track to deliver our target of at least a £100 million annualized savings by FY19. And finally in terms of the share buyback, we completed £34 million of the initial £100 million program which started in July.

Turning to guidance, there is no change to retail space or licensing revenue, and as usual we have provided guidance for wholesale in the second half which we expect to be down mid-teen. We see similar trends to those seen in the first half in both fashion and beauty, again, in part, reflecting strategic actions. As regards FX using September exchange rate for the FY17, retail wholesale profit would benefit by about a £105 million compared to last year's rate. This compares to a benefit of £90 million when we spoke in July.

Clearly, exchange rates are volatile and given the significant movement in exchange rates since the 30th of September. We estimate that the benefit using the 12th of October rate would be at least £20 million higher than the £105 million. And we'll update you as usual when we report in November. Our expectations for the full year adjusted PBT on an underlying basis remain unchanged.

So, in conclusion, we remain focused on implementing the initiative we announced in May. We continue to invest and take action to deliver long-term outperformance for our brand and business against the luxury sector. And finally, and what remains a challenging external environment, we continue to closely manage the business day-to-day to ensure we're well placed for the all important second half of the year.

So, with that, Charlotte and I would now be keen to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first one comes from the line of Helen Brand from UBS. Please go ahead.

Helen Brand

I've got three questions if possible. My first one is that you've guided that you're pretty happy with the underlying fiscal '17 consensus PBT today, despite downgrading the wholesale guidance. And this does suggest some additional cost control for the year. Can you talk about specifically where that's coming from? Should we expect underlying OpEx to increase below the mid-single digit guidance? And can you also update us where you are on the review of performance-related pay? Secondly, on the U.S. market, like-for-like didn't see any material improvement this quarter. That's despite much easier comps. What plans do you have in place to turn around the U.S. business from here? And in terms of U.S. wholesale, my estimate suggests down over 30% in H1. How much of that reflects the underlying market; and how much is due to the move to one brand or further actions perhaps on rationalization you're taking? And finally, can you give us a bit more detail on the magnitude of the price reductions that you implemented in September in the Greater China and across what percent of your offer? And any reaction that you've seen from the consumer since those price cuts?

Carol Fairweather

Okay, Helen, I'll take the first couple and then Charlotte can talk about pricing. So in terms of, yes, we’re saying, we’re holding underlying PBT despite the fact that wholesale is coming in a little softer then we had previously guided to. You're absolutely right; we are able to hold the number because we have taken action on costs again this year. Remember, we’re doing two things here, we're absolutely confirming that we're on track to deliver the £20 million of strategic cost savings that we talked about in May. But we're also continuing to manage the business very closely day to day. So make sure and what does still remain a reasonably uncertain external environment, that we're doing the responsible thing.

So, it’s really across all areas of the business, so as we talked about it last year, it’s about being very thoughtful about replacing people when they leave; it's about looking at T&E again. It’s about every area of discretionary spending. But important, Helen, that we're not cutting cost in those areas that we talked about investing in. So, I talked about things like the retail conference for our store staff managers. Of course, we let them travel, because we need to balance investment to the future with tight and responsible day-to-day cost control. And you asked about PRP, so no change from our guidance where we talked about year-over-year effectively a £40 million increase year-over-year versus the zero charge in last year.

In terms of the U.S., in terms of our plans to turnaround, clearly the U.S. market does remain very challenging. It’s an 80% domestic market for us and both domestic and tourist remain down. That said, we did see, and I said just now, we did see a slightly improvement in Q2, but we are still down low single digit. Again, we’re focusing on what we can control. So conversion is pleasing up in the U.S. We continue to invest in our Burberry private clients. We know that we have seen, in what remains very difficult market conditions and outperformance where we do engage with customers through that Burberry private client service. So very much all about retail initiative and product initiatives, longer term will obviously benefiting the U.S.

And within U.S. wholesale, we’re saying it’s down around 25%, and important to note that none of that relates to the label consolidation because obviously it didn’t impact in H1. What we all seeing, is that U.S. wholesale market, I think the U.S. department stores, I think it's been well reported are experiencing quite difficult conditions. And what we have done is very strategically said that we won't push any more inventory into that market, so not intending to allow them to have any inventory to put into their off-price channels or encouraging and through offering extra discount, because we want to continue to elevate the brand in the U.S.

So nothing to do with one label, partly driven by underlying department store performance and partly driven by our own actions to continue to be very clear in that market. And I think just to confirm, I said yes, we’re down about 25%. And then on pricing, Charlotte?

Charlotte Cowley

Yes, so on pricing as Carol said, these were decisions we made when we budgeted back in March in terms of the pricing. Really, you remember, we took it is about to the 10% decrease on rainwear and cashmere scarves back in April last year, so similar order of magnitude from the 1st of September. In terms of the product, really the rest of outerwear bags and shoes, and the majority of the rest of the product categories. And then in terms of performance, I mean pretty early days, and we went in the 1st of September, when we've done this in the past, as I said, we've been quite pleased with the response by the time we get down to the bottom line.

Operator

The next question comes from the line of Antoine Belge from HSBC. Please go ahead.

Antoine Belge

Three questions if I may. First of all, actually following up on the U.S. wholesale, I understand your initiatives. What is happening when those U.S. accounts do not respond in the way you want them to respond? Has there been any sort of streamlining outlook or, actually you taking the decision not to do business anymore with any major account in the U.S.? Second question regarding more the first half results, could we have some at least qualitative comments about the gross margin evolution in the first half? First of all, on sort of an underlying basis and then we are taking into account the FX impact on it? So how you see PBT evolving in the first half? And finally, if you look at the UK performance, I think was up more than 30%. In terms of tourists, is it mostly Chinese tourists that you see? Any sort of color about the components of that surge in tourism in the UK? Thank you.

Carol Fairweather

Okay, so your first question, Antoine, regarding how our U.S. wholesale partners respond, I think they understand and we've worked in partnership with our U.S. wholesale accounts over the last two years as we have elevated the brand position. And therefore, it's an ongoing conversation with them. I think they understand what we’re doing. And therefore, this is the number they wanted to come into market and buy. We allowed the number to land where it did. And I think, they're very clear that we're not interested in doing anything else to fuel any off-price or brand inappropriate activity. So, it's a partnership with U.S. wholesale. I think they understand fully where we’re coming from and that’s why the number is, what it is.

And in terms of H1 clearly, this is a trading update, but just in terms of gross margin, it's too early to call probably and be specific on guidance for the first half. And that said, we do say that we wouldn’t necessarily expect, we saw gross margin moderating overtime and not expecting it to increase. We’ll come back and update you. I would expect that there should be a benefit from FX on gross margin on a reported basis, but not, certainly not expecting any increase on an underlying basis. And we’ll come back and talk to you in detail of gross margin when we get to the half year in November. And in terms of the UK?

Charlotte Cowley

Yes, Antoine, in terms of the UK tourist groups, there is really strength across all tourist groups. So, yes, certainly growth from the Chinese, but also in terms of continental European coming in for the UK, Middle Eastern customers, and remember also we did see growth from domestic in the UK as well in the quarter.

Antoine Belge

Maybe just a follow-up so, if you look at the Chinese consumer cluster as a whole globally, how did that cluster trend sequentially Q2 versus Q1?

Charlotte Cowley

Yes, so it got better from the performance in Q1. Most of that really -- you do know that half of our sales for the Chinese consumer still within Mainland China, so the strength that we saw in Mainland China in the quarter was probably the biggest driver of that.

Operator

The next question comes from the line of Luca Solca from Exane. Please go ahead.

Luca Solca

Yes, good morning, Luca Solca from Exane BNP Paribas. Maybe just following up on Chinese demand strengths, your peers were reporting a significant acceleration in the third quarter in comparison to the first half, when we look at it in calendar terms. Would you be able to put a number or a broad number in terms of the improvement that you saw in sales to Chinese consumers worldwide? Second question, on the category mix that you're reporting in the first half, this seems to be quite de-averaged with children's providing a very strong contribution to growth while women's seem to be on the back foot. I wonder what you make of that and accessories also being slightly negative in underlying terms. Third, beauty is quite significantly negative. You say you are satisfied with the progress in this category. I wonder what reference and what goals you are looking at and why is it that you're happy with this progress? And last but not least, I wonder whether you have any clearer visibility on the new CEO arrival? Thanks very much.

Carol Fairweather

Okay, so in terms of Chinese trends, Luca, what we are seeing is we just seeing an improvement in our second quarter, both at home and when they were travelling. So China, as I said was up mid-single digit or up double digit excluding the rationalization or evolution of the portfolio. Overall, we were still down because of the impact of Hong Kong and Continental Europe. But we did see an improvement, I think we were down something like mid-single digit versus a more significant number in the first half or we were down more like double digit. So, yes, an improving trend in Q2 specifically in China and when travelling and obviously, the vast majority of that in this quarter came in the UK. We did see a little bit of improvement in the U.S. Continental Europe, not much improvement, and again, a tad better in Hong Kong, but not significant.

In terms of categories, just talking about childrenswear, you'll remember this time last year, we transitioned from a license model on childrenswear in Europe to a wholesale models that what you seeing that is the strength in childrenswear coming through because they were reporting as wholesale in the first half of this year.

And in terms of your comments on women and accessories, so yes, accessories, again, has been impacted by the wholesale number. When we look to accessories in our main line channel, then we saw strengths in bags particularly, again, the rucksacks where we continue to innovate, the buckle family, where we have now rolled out from the belt bag, the patchwork bag, and now to the buckle tote. And again, the Bridle Bag is very successful, so we're seeing strength in accessories in our own retail. Women's was a little weaker, tends to be more of an outwear business which, in this quarter did not perform as strongly as accessories, so I wouldn't read too much into that mix.

Beauty, you asked about. We're satisfied. But I think beauty you need to again strip out the own actions from the total number. We're saying that the -- remember why we bought back the beauty business; it was to get control of the brand and to launch and sustain key pillar fragrances. The response we've seen to My Burberry and then the extension we did in terms of My Burberry Black, this August has been very strong, and likewise the launch of Mr. Burberry in April. So, the new fragrance is performing very well. This year is about cleaning up distribution in the UK.

We've gone from 3,000 points of sale to something like 35, so that's obviously had an impact on the number. And no different to U.S. wholesale, where we have let the number -- there has been an element of destocking by distributors globally. And we're letting the number settle where it settled rather than pushing inventory into that market. We're making market share gains in the U.S. and Italy, and the successes of those icons is why we're happy to say we're satisfied with the progress we're making on beauty. And then in terms of Marco, nothing new to announce today; still expecting him summer of next year.

Operator

The next question comes from the line of Thomas Chauvet from Citi. Please go ahead.

Thomas Chauvet

I have three questions please; the first one on wholesale. A lot of the weak performance is self-inflicted. Are you comfortable that the clean-up and brand elevation for both apparel and beauty will be over by the end of fiscal '17 so we can have maybe a bit of growth next year in that channel? Secondly, I was wondering, what was the growth in LFL for large leather goods in the second quarter? And how far would you say you are in the rejuvenation of this category? You presented a lot of initiatives and making leather goods one of your key priorities last May at the full year results. How far are you? Has the team been reinforced, maybe ahead of your new CEO joining next year? Or should we expect more clarity on the leather goods strategy after he joins in summer next year? And finally, can you clarify just what FY17 PBT expectations you're comfortable with now? So, if 415 million consensus during Q1 was the number, post FX of 35 million that should be around 450 million. Assume you are still comfortable with 450 million for next year? So that would be flat year on year in FY18 or is that too early to talk about this? Thank you.

Carol Fairweather

So, in terms of wholesale you say have we -- will we have finished the elevation and brand clean-up by the end of this year? No, I don't think so. We've said -- we've always said, we've got a little way to go still in the U.S., and honestly we've got a little way to go in terms of other lines, other than My Burberry and Mr. Burberry in beauty. When Christopher spoke in May, we talked about the fact that our growth initiative around retail product and digital where we expect to be able to return to outperforming sector growth, will allow us to continue with the clean-up and brand elevation still be delivering good top line and bottom line growth. So, to manage your expectations, a little bit more to do, we'll do as we always do, in the responsible way as we move forward.

Charlotte Cowley

And then in terms of bags, I don't think we're going to start drilling down in terms of growth rate from different categories, but suffice to say we're very pleased with the performance of bags in the second quarter. As Carol said, the commercialization of some of the runway shapes, the performance of the rucksack, taking the buckle bag now and introducing that into a nice solid leather tote in store and the early indications from the Bridle Bag down the runway, that was, as Carol said, as that our number one selling item from the September collection. And then available in all our stores, immediately after the show. In terms of the timing, yes, we’re working through the category management piece. With bags, I think we're being much more strategic in the way they are thinking about the category, so I'd expect to see more of that coming through into next year. And on the profit, yes, your math absolutely works. So through the first quarter consensus was about 415 and the only new news today is the incremental FX.

Thomas Chauvet

So, it's still 450 for next year?

Charlotte Cowley

Well, next year I think it's very early, we haven't even started putting the budgets together. Thomas, on that yet, but we're --

Thomas Chauvet

Sure, but no major changes in terms of how you think about --

Charlotte Cowley

Not that I can think of at the minute.

Operator

The next question comes from the line of Julian Easthope from Barclays. Please go ahead.

Julian Easthope

Three questions from me if I may. First of all, in terms of the see now, buy now revenues, do you think those revenues are actually just brought forward into this quarter? Or do you think they're cannibalized or they're incremental? And are they actually meaningful in the Group context? Second question in terms of one Burberry, obviously, it's still probably quite early, but you've now got the stores based on the one Burberry with the lower SKUs. And I think you said that your original pilot saw mid-single digit or reasonable growth anyway. I just wondered whether you've got any further update on that. And just looking at your second quarter, you've obviously done a 3% growth in terms of retail. With the Chinese cluster down, I just wondered, if you look at your clusters globally, who are the people that are actually performing on a global basis? Is it the Europeans or the Americans globally? It would just be interesting to know where the growth is coming from. Thank you.

Carol Fairweather

Okay, so in terms of see now, buy now, I mean we were delighted with the first implementation of our straight-to-consumer runway show. It is, as you say, I mean if you think about it, after the runway collection, is about 5% of our sales globally. And remember, the show only happened towards the back end of the quarter. So, I wouldn’t say, I had a meaningful impact on the sales number in the quarter. I do think that we were really pleased with the response to the show across every dimension, so be it brand reach, be it share of voice, magazine covers. But in terms of sales even that the small, Julian, it exceeded our own internal expectation, men's and women's both. Because remember, it was first time we have combined the men's and women's shows. I would call bags is probably the Bridle Bag was available in every single, one of our retails store globally, being perfect execution by the supply chain, straight after the show. And it has already risen to become our third biggest selling categories. And likewise, the whole military theme across both men's and women's has proved very successful. So small in terms of absolute numbers, but I think in terms of very successful implementation, we were delighted at every level about the halo effect that it brings to the brand.

Charlotte Cowley

And then in terms one label, yes, so the new label products are starting to land in stores, all the new product coming in the November will be the new label product. And I will also reflect the SKU reduction we've put through in the main market. You'll remember we reduced SKUs to improve the visibility of newness and fashion in stores. So that will come in November. In terms of modeling any improvement, remember when we said, tested it in the pilot stores, remember pilot stores are always managed within an inch their lives, so they always tend to outperform. So it wouldn’t factor in a significant an upgrade from that. But suffice to say, we were pleased with the performance in pilots stores, which is why we’ve decided to roll that our lately. And then your point on customers, yes, the groups who grew in the half, we certainly saw growth from the U.S. consumer globally, and good growth from European consumers globally, and another Asian consumers you know offsetting that decline from the Chinese.

Operator

Thank you. The next question comes from the line of Annabel Gleeson from Redburn. Please go ahead.

Annabel Gleeson

Just three question. The first is, could you quantify in wholesale what’s the impact of the destock versus sort of the activity that you’ve taken? The second one is it seems that you are underperforming the Chinese consumer globally. I think I’ll be talking about double digit. So I was wondering why do you think that is. And the third one is given that you sort of have this amazing headwind from the see now, buy now. Did you sort of see a sequential improvement through the quarter? Was the exit rate actually a bit higher than the whole quarter itself?

Carol Fairweather

Yes, so in terms of your question on wholesale, Annabel. In terms of I mean, the way we’re saying is that, that’s the demand was the demand that they alter. They would have been waiving which we could have improved on that position, which would have meant we were down less. We chose deliberately not to do that, so it's quite difficult to actually unpick that. There is an element, as we have been doing over the last few years of ongoing elevation in the wholesale account. And what we thought in this half was the fact that they came in and bought considerably less of what we chose to do, was not to engage any conversation to try and improve on that number, which we could have done through improving the discount channels, giving enhanced markdowns because we really wanted to control inventory into that market.

Annabel Gleeson

Sorry, is there any element that you’ve lost space, if I put it like that?

Carol Fairweather

No, we’re happy overall in terms of space. This is about their own demand in terms of just what is happening in the U.S. wholesale channel, and I am saying we could have potentially offset quite a lot of that had we have been prepared to do something around putting more inventories into that market, but not something we will prepare to entertain at all. And that’s why we continue to take this balance of strategic action to make sure that we continue to elevate and protect the brands in that market where we still got a little way to go to get to the level that we’d like to be at in terms of our luxury positioning.

In terms of the Halo effect, I mean as I said the show was a great success. Remember, it was only mid September. And therefore, given that, one, the percentage of sale, but also in terms of your footfall it drove to the store too early to we don't talk about trends throughout the quarter, so nothing specific to call out. But just to say, we were very pleased with the response we saw as the show across every single as I mentioned.

Charlotte Cowley

And then in terms of the Chinese consumer, and remember that about half of our sales for the Chinese consumer still occur in Mainland China. So that number would be depressed because of the work is going on in Beijing, because when we talk about our customer growth, we are talking about on a comp basis, so that will be maybe a fact of that. And about quarter to spend is in Europe and of course we talked about the strength of that in the UK, and then you still got about 15% all of that spend from Chinese consumers in Hong Kong and Macau. And we did say that although we saw a slight improvement in the quarter that was still down double digit.

Operator

The next question comes from the line of Mario Ortelli from Bernstein. Please go ahead.

Mario Ortelli

The first question is about pricing. Which pricing action are you planning for the second half of the year? Are there reductions that you see as well or selective price increases? The second one is about outlets and off-price. We've seen the general market of luxury that the sale of outlet and off-price are growing much faster than the broader market. What did happen in the first half of the year for you, the sales of your outlet shop were increasing more than the full-price shop? And what is your outlet strategy going forward to some brands are announcing some selective closures of some outlets; some others are increasing. And last but not the least, Hong Kong. We have seen many, many quarters of negative performance in Hong Kong. What percentage of your current sales is done in Hong Kong? And what action have you done to decrease the cost base there? Are you closing shops? Are you decreasing surface of some of the shops? Are you decreasing the rents with the landlords? Thank you.

Carol Fairweather

Yes, so in terms of pricing, as I mentioned earlier, we did adjust prices down as we have planned to in China or Hong Kong in September. We keep pricing under constant review, as I said, we don’t make immediate reactions when FX may change. That said, we keep it under constant review, but we got nothing else to update on specifically today, other than to say we will obviously watch it closely over the coming months as we always do.

And then in terms of outlets and off-price, we don't actually split out our outlet as a percentage of sales. What we do say is that the raison d'etre for our outlet is simply to exit, in a brand appropriate way access inventory. That remains the rationale over the life of our plan, and financial ambition for the next few years in the same way that we would expect to see further elevation in U.S. wholesale and look to reduce that, as our mainline full price sales continue to increase. We would naturally expect outlets to reduce the percentage of sale. Plus, as our productivity increases, there will be less inventories dropping down to outlet. So, I would expect to see outlets decreasing as a percentage of sales going forward. But I imagine, we would always not have an outlet business in order to exit the inventory appropriately.

Charlotte Cowley

And in terms of Hong Kong, it's now probably about 8% or so of the Group revenue. Remember, we have got seven Mainland stores in that market, I mean, has similar and to the pairs. We have cost cut, tightly manage cost. We've talked in the past about managing headcount in the retail stores and also talked about achieving some rental relief from some of the stores. We have also talked during the last, we told you about the fact we were reducing the space of our Pacific Place store. That will start I think it's towards the end of this year in terms of space reduction. But all the stores are still profitable. As with every store, when every store comes to the end of lease, we'll look at the store on its merits and decide what to do. But all stores are still profitable in Hong Kong.

Mario Ortelli

And sorry, just one clarification about outlet, in the first half of the year, the sales of your outlet increased more of the general retail sales of Burberry or not?

Carol Fairweather

No, we don’t retail -- we've have never discussed our outlet performance as percentage of the total, Mario.

Mario Ortelli

No, it was a relative performance; I didn't ask which percentage of the total.

Carol Fairweather

I don't think we're going to be drawn.

Operator

The next question comes from the line of Melanie Flouquet from JPMorgan. Please go ahead.

Melanie Flouquet

My first question is regarding Asia Pacific, sorry, on the like for likes. I'm trying to square down the fact that Mainland China improved even if you take account of Beijing to mid-single digit. Hong Kong and Macau remain difficult, Korea probably stayed the same. What actually deteriorated in Q2 for the trend to be exactly the same in Q2 as in Q1 or broadly the same?

Carol Fairweather

I mean in terms of Asia Pacific, you're right. China was up. Hong Kong marginally better but still double-digit. Korea, no real change. Japan and the couple of the other smaller markets did decline for us in Q2. So, I think that's why the overall level there was no change, that's really increased in China offset by smaller decreases across two or three other markets in Asia.

Melanie Flouquet

And if I took out the Beijing reshuffling, your Mainland Chinese cluster, what would that look in Q2?

Carol Fairweather

It'll be up double-digit, Melanie.

Melanie Flouquet

No, that's Mainland China; local, the cluster. I mean I suspect the answer is roughly 2.5 points higher, no?

Carol Fairweather

Something like that yes. Yes, hope low-single digits I would have thought.

Melanie Flouquet

And then sorry, I'm going back to this Americas question. Some of this was the demand was weak; some of it is you decided strategically to not restock this market. Overall, Americas, though, as we stand back, over indexes on wholesale in your business. Do you think that moving forward you should be more in line with your exposure to wholesale worldwide?

Carol Fairweather

Yes, I mean I think what we'll be looking to do, Melanie, in the U.S. going forward is to reduce those lesser brand-appropriate wholesale presence in certain stores. But we would like to see growth in the wholesale channel in the good doors and also, we see digital wholesale as an opportunity. So I think not being prescriptive on how we see wholesale changing as we look forward, but I would say that what we're doing is looking to elevate, so to reduce in the brand-appropriate and elevate in terms of brand-appropriate presence, and also the opportunity in digital wholesale. I think it was something like 70% retail in H1 in the Americas. So, it's reducing effectively as a percentage of sales.

Melanie Flouquet

But exactly, it's reduced by 25% to get to the 70% retail.

Carol Fairweather

Yes, yes, yes.

Melanie Flouquet

So is this a rebasing in effect that we should assume will stay on? Clearly, it's been done through a lower demand, but ultimately, your strategy is to remain at 30% wholesale?

Carol Fairweather

Yes, I mean I think we've always said that we -- in terms of the wholesale channel, if that is the way in which U.S. department stores want to operate with us, and we'd love to do concessions, we can't at the moment, then U.S. department stores will continue to be an important channel for us. And therefore, it's about us managing. It's very much about how we continue to elevate in that channel and therefore we'll control demand as best as we can as we move forward in order to make sure that we get the right presence. We believe that we do need to be in U.S. department stores. We need to be in U.S. department stores online, but it's about how we manage through that over the coming years. And that's why we've been so pure this half in terms of not pushing that number. And therefore I think it'll be a combination of underlying demand enough continuing to elevate.

Melanie Flouquet

So my next question is on prices. If I'm not mistaken, you tend to move prices in April and October, so twice a year linked to your collections; whereas some of your peers do it more regularly in the year because they're not exposed to ready to wear as much and to collections as much. So October has already been done and it was a price cut in Greater China. Why didn't you decide to increase prices in the UK? Because faced with the same challenges last year, quite a lot of European companies increased prices in Europe.

Carol Fairweather

As I said just now, we keep pricing on the cost of review and the timing can change a little bit, year on year. There is nothing we have to announce today, we as you say, we don't just adjust prices sort of ad hoc as we go through seasons, but we all looking at it strategically. We look to see what peers are doing because we want to keep the relative benchmark against them. And we will review it; keep it under review going forward. And it's when we something to announce, we’ll obviously do that.

Melanie Flouquet

So you could do something in between October and April basically, is it?

Carol Fairweather

Yes, we're saying that the China ones were planned for September that was very strategic as part of trying to realign the pricing architecture in China. And as I said before, when FX rate moves we do look to maintain, as best we can, the global pricing architecture, but we don’t move them day to day. So we’re keeping it under constant review and watching it closely.

Melanie Flouquet

And my last question, sorry, is the store network. I notice that you mentioned that there will be a slight increase in space growth linked to 15 store opening and an equivalent number of stock closures. But can you tell us a little bit more about these openings and the closures? Geographically, are you reallocating your stores; is this just getting to better locations? How should we read this plus 15, minus 15?

Charlotte Cowley

Yes, so there's no change to that, Melanie, So that's what we've been talking about all year. So they're still working through some of the store portfolio in China, for example. There's been a little bit of work in some other markets in Asia, so it’s the same story of moving to slightly better and on average slightly larger locations, but nothing really in terms of for the geographic shifts.

Melanie Flouquet

So it's the same regions, but just reallocating your stores?

Charlotte Cowley

Yes.

Operator

The next question comes from the line of Roger Fujimori from RBC Capital Markets. Please go ahead.

Roger Fujimori

Carol, I think you've mentioned that outwear in women's didn't perform as well. Could you talk a little bit about the performance in heritage trench coats in the half? That's my first question. And then my second question, I can see that between the end of June and the end of September, you closed eight concessions and nine franchise stores. Could you confirm this was all in the Americas region? Thank you.

Carol Fairweather

Yes, in terms of the performance of heritage trench coat, and as I said, we didn't see growth in that category this quarter. That said, we continue -- we've got festive ahead of us. We continue to innovate around the trench coat. You will have seen what Christopher did on the runway in September. So, it's an important one of our icons and we would expect to see, growth into the coming quarters. It’s just the way the numbers have materialized this quarter particularly with the strength that we seen in bags. And in terms of the store numbers?

Charlotte Cowley

In terms of stores, yes, on franchise stores, there were some in Europe, some in the America, so nothing it wasn't all in one location. So generally, just a few closures there. And elsewhere on the stores and other side, it's just sort of work going on in China is probably quite big part of the concession number because remember, quite a few of the in China are concessions.

Operator

[Operator Instructions] And the next question comes from the line of Carole Madjo from Haitong. Please go ahead.

Carole Madjo

Hello good morning this is Carole Madjo from Haitong Securities. Few questions from me. First of all, can you give some insights on productivity? Have you seen some improvement there for your recent initiatives? Second thing, South Korea, can you maybe comment on the trend that we are seeing there after quite some easy comps in the quarter. So can you tell us why there was no real changes there? And later just a clarification on your adjusted PBT, so did you say that you are currently expecting PBT at 50 million for this year? Thank you.

Carol Fairweather

So, I’ll talk about productivity. I mean we’re delighted as said notwithstanding footfall being down conversion was up, there is online and in our stores this quarter. So very much all those measures we’ve got around retail initiative beginning to kick in as we saw conversion increase again. So yes, I mean productivity we know that a single big opportunity and great that we’re making progress in that. In terms of South Korea, for us it was broadly flat quarter-on-quarter, remember for us it's largely a domestic market, and it’s something like 80 to 90% domestic. I think others may have seen, or maybe I think they would like to say, I think others may have seen an improvement because of travel retail. For us, Korea, travel retail is a wholesale market and within our wholesale guidance to H2, we are seeing growth in Korea travel retail. So that explains the pattern that we have seen in the first half of South Korea. And in terms of adjusted PBT.

Charlotte Cowley

Yes, absolutely so it was 415 including the 90 million of FX that is new today is the incremental 35 plus exchange rate. So to say that would take about 450.

Operator

The next question comes from the line of Charmaine Yap from Jefferies. Please go ahead.

Charmaine Yap

Hi, thank you. I was just wondering in terms of FX, are you able to guide or help us think how we should model for full year '18. There should be a negative impact or have you changed any of your hedging policies given the volatility of currency release. So any help there will be appreciated? Thank you.

Carol Fairweather

No, absolutely no change to the hedging policy, but what we also I mean clearly it's very early days in terms of next year, clearly the way we move. There probably would be some benefit from translation in H1 and next year obviously H2 that we would translate to the same footprint that we’re currently at. That said, I think there will be some pressure on procurement that is clearly we have hedge, we will hedge part of that procurement, we have yet to hedge the seasons and we don’t hedge yet to come through. So early days and we run some models here, I would expect the translational benefit in H1 but I’ve expect that probably be offset to some degree if not all by procurement. But we need to wait until we’ve got further clarity around the full of mix about budgeted revenues in cost for next year and until we have fully hedged the second season of next year.

Operator

We now have a follow up question from the line of Julian Easthope from Barclays. Please go ahead.

Julian Easthope

Just a follow up on pricing actually, I know you’ve already talked about China going down and the UK staying flat. So just wondering what’s your average pricing has actually done this year or at least in the latest round of changes. Have there been offsetting numbers elsewhere? Thank you.

Charlotte Cowley

So I'd say AUR was still a little bit positive for the quarter, so net-net, AUR up.

Operator

We have no further questions coming through, so I will hand the call back to Carol for any concluding remarks. Thank you.

Carol Fairweather

Okay so thank you very much. And we look forward to speaking to you again with our interim results. Thank you.

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