Samsonite International S.A. (OTCPK:SMSOF) Q1 2019 Earnings Conference Call May 14, 2019 9:00 AM ET
William Yue - IR
Kyle Gendreau - CEO
Reza Taleghani - CFO
Conference Call Participants
Chen Luo - Bank of America
Erwan Rambourg - HSBC
Dustin Wei - Morgan Stanley
Good morning, good afternoon, and good evening, ladies and gentlemen. Welcome to Samsonite International 2019 First Quarter Results Earnings Call. Please note that this event is being recorded.
I would now like to hand the conference over to Mr. William Yue, Director of Investor Relations. Thank you. Please go ahead, sir.
Thank you, operator. Hello, everyone. Thank you very much for taking the time to join the -- our first quarter 2019 earnings call. With us presenting today are our CEO, Mr. Kyle Gendreau; and so our CFO Mr. Reza Taleghani. And without further ado I will begin, we have our CEO, Mr. Kyle Gendreau begin with the opening remarks. Thank you very much.
Okay, great. Thanks William and William you'll turn the pages and I'll just indicate what page I'm on just so we stay lined up. So, thanks everyone for joining. Thanks and good morning or good evening depending on where you are. So reporting our Q1 results, as we indicated at our year-end results that we were seeing some challenges in a select group of markets, and that has played out in Q1.
So on page four, our underlying business has remained stable but the macro headwinds in these few markets has definitely impacted our Q1 results. From a sales perspective, we had downward pressure on really four key markets, our U.S. business off the back of the tariff noise, which obviously elevated over the weekend.
Our China business, particularly China B2B where were adjusting kind of the size of that business along with those customers scaling back, Korea and Chile both feeling -- continuing to feel some pressure. If I adjust for these markets our underlying business which I would label as stable is up 3.4% constant currency. There is an FX impact in our numbers this year from a sales perspective, fairly meaningful around $34 million, $35 million negative impact on currency on the sales side.
The U.S., China trade tensions, as we all know are leading to impacts on our U.S. business with inbound traffic to the U.S. particularly in our gateway cities, which has impacted our North America business and to a lesser extent, but impacting our Tumi business. And our wholesale customers on the back of concerns on consumer sentiment have been cautious in ordering and managing their inventory.
On a positive note our Tumi business continues to perform very well. We were up 8.5%. We launched Alpha 3 beginning of the year with a very good advertising campaign. And if I adjust for kind of some of the adjustments in trend shippers our Tumi business was up just about 10% for the first quarter.
We continue to push our e-commerce business and our direct-to-consumer business overall, but especially e-commerce. And if I adjust for eBags where we are consciously reducing our sales of third party brands to improve profitability, e-commerce was up 27% for the quarter.
On page five, I thought this page would be helpful to give you just the scale of the Q1 sales numbers. So first thing I would point out is if you remember last year Q1 was a record quarter from a growth perspective for us we’re up 15.5% in Q1 2018 largely with the launch of the American Tourister campaign, which was highly successful in 2018 and with a very large kind of initial launch as we launched the advertising campaigns and several new products for Tumi. So we had a very strong Q1 last year.
And as we step into Q1 of this year, you’ll see impact on FX is our first bar here. And so, against the strengthening dollar we’ve seen kind of translation effects to our sales of around $35 million, we always break that out for you so you can get the constant currency.
And then going across the page you can see the markets where we’re seeing more significant strengths, so U.S. business that I’ve touched on our China B2B business this is -- this sales property is just China B2B down $10 million. We’ve gone from last year Q1 close to 29% to this year Q1 close to 18%. So pretty dramatic reduction in the B2B business if I adjust B2B out our China business is actually up around 6%.
South Korea which continues to be a strain for us offers inbound traffic in general sentiment in Korea down 7.6% or $4.7 million. In Chile which we’re seeing some strain last year continues with sales drop of around $3.5 million Chile as a business is down a little over 12%. If I take all our other markets we’re up $16 million for the quarter or 3.4%. So we can really see an isolation kind of the markets the challenge is a few of these markets are obviously our bigger markets that have an impact on the overall sales growth for the quarter.
The next page and Reza will cover this a little more detail in the back is we have also this year IFRS 16 taking into place, which is lease accounting. What we’re doing in this page is showing kind of the adjusted EBITDA as reported on the left.
And so you’ll see Q1 to Q1 2018 adjusted is a big step up and down the more important pieces of the chart is on the right, which is what you’ll see in the rest of our presentation here, which is adjusted EBITDA taking out the impacts of IFRS 16. So it’s more relevant to the way we’ve looked at the business. And so there’s a small dip in 2018 if I adjust for IFRS 16 and you can see the impacts on our EBITDA, which I’ll go into more details off the back of the sales drop that we’ve seen in the first quarter.
And on the next page I bridge EBITDA for you. So I'm on page seven, William. And so, if we started with Q1 2018 adjusted for IFRS around $117 million we saw around a $30 million dip in our EBITDA for the quarter. There’s a small portion of FX there so I’ve taken all of the FX on the EBITDA line put it into one spot, so around $4 million just with translation.
The next column is the gross margin impact of the sales drop in constant currency. So around the $12 million drop in gross margin just because of the sales drop. Our gross margin rate actually was up for the quarter so around 14 basis points, so that’s a net positive in our numbers.
We also have some advertising decrease, which is really just a function of the lower sales in the advertising carry across. And then we have other SG&A which as we talked about at the year-end we have a few markets where we’re seeing pressure on the SG&A side as we push initiatives around direct-to-consumer and this is particularly in Europe. And a little lesser extent in Asia with the Tumi push, which has had an impact on our EBITDA of around $19 million for the quarter.
And so on page eight, I just break that out on a little more colors so you can see how our non-advertising SG&A is moving within the quarter. And so you can see there’s a currency impact that’s positive and it’s really Europe $12 million this is where we’re consciously -- we’re investing at the end of 2017 and through the first half of 2018 on retail stores. We had opened 84 stores in the last year and 40 of them were in Europe and most of them happened in the first two months.
So you are getting the continued effect of those retail store openings within the SG&A side. We throttled that retail expansion back as I indicated on our last results announcement. And this is really just the effect of these stores continuing to ramp having a negative impact on the SG&A side. Latin America and North America were fairly light, Latin America tiny bit as we push Brazil strategy. North America's SG&A was very stable, as you'd expect in that business.
And Asia was up a bit on SG&A with more than half of that coming from the expansion of Tumi, now that Tumi is settled and we really start to push the retail strategy with end markets like China you see the SG&A side for that. And then our corporate costs were down $3 million for the quarter. So as we manage costs within the business overall you’ll see that our corporate expenses are down in Q1.
Next page really just bridges it to adjusted net income. And so the largest part there is just the EBITDA impact push through on adjusted net income, our adjusted net income is down from $45 million to $27 million, most of that is the sales drop. We have a net interest benefit of $3 million off of the restructuring last year, and our effective tax rate is slightly lower with just the mix of the business and the tax associated with stock compensation. So we've got a benefit on the tax rate carrying into the net income as well.
So that's kind of the overview. I'm going to turn it to Reza to go through a little bit more details on Q1 and then I'll come back at the end of the presentation.
So we're on slide 11. So as Kyle said, overall constant currency growth this quarter ended up being down 2.4%. So the reported number will be $832 million on sales. We did get a pickup in margin of 14 basis points. So that's flow through, as you will see the adjusted EBITDA is -- and I'm going to have a separate slide on IFRS 16 because at the year-end presentation, there were a lot of questions. So I want to be very transparent in terms of how this is all calculated.
What you see here in terms of adjusted EBITDA, is adjusted EBITDA including the lease and amortization interest expense. That means that we're factoring in the expense of amortization and interest. And the reason we're doing that is our purpose of reporting adjusted EBITDA to give you as much clarity around the performance of the underlying operations and by doing that it gets us as close to kind of the pre-IFRS world as possible for compatibility purposes.
So what you see here is, if we adjusted last year's numbers for IFRS 16, there was about a $6 million impact. And so it would have been around $117 million for the quarter. And this quarter we're reporting $84.6 million in terms of the adjusted EBITDA that we're focused on. That is a 300 basis points decline as it relates to the lower net sales. And then we also have some non-advertising operating expenses specifically the SG&A that just Kyle went through as we wait for the European stores to ramp further and some of those store investments to materialize.
The flow through to net income, if you're going from left to right it's basically the impact of the sales rolling into net income. And there is some benefit as we just went through in terms of interest expense and taxes that happened there.
On the next slide on page 12, what is driving some of these headwinds? I mean, the overall business does remain strong. So we have sales growth of 3.4% on a constant currency basis. The largest component, obviously, as we look at this are the U.S., China, and to a lesser extent South Korea and Chile. So in the U.S., it's been the impact of tariffs, as you are well aware a large component of our U.S. business is driven by sales to wholesalers. And even though the full tariff impact did not coming in, in the quarter, wholesalers were looking at what the consumer impact was going to be of that and anticipating and waiting. And so as a result of that some of those wholesale customers have not been purchasing.
And obviously, that noise continues as we go through the weekend and to this week. There's also the impact of the Chinese traffic and Asian traffic overall to U.S. gateway cities. So if we look at what's happening on a comp basis in those stores, there has been a decline due to that. And then there has been some actions that we've taken actively in terms of improving the profitability of the U.S. business.
So specifically as we look at the eBags, we have taken actions that we mentioned at the year-end. In terms of reducing the proportion of third party brands. So that had a $5.5 million impact in the quarter that we think is better for the business in the longer term. But obviously, it impact sales for the quarter as we adjust. And finally, Tumi, we mentioned the trans-shipper issues so that continued and there was a little bit of overhang into the first quarter of about $2 million due to the trans-shippers as well.
As we focus on China, I think it's very important to distinguish between the consumer and China B2B. So the largest component of what's affecting our China business is really this move out of reducing the percentage of China B2B. And we mentioned with many of you at the year-end that we -- as we think about strategically where the China business needs to be, we don't like it being kind of in that 25% zip code.
So I think strategically, we're aiming for something in that 15% area, which is where we are right now. So our B2B sales are down to 17.8%, which I think that's a healthy number, but that obviously impacts overall China, which is going to end up being down $10.7 million or on a constant currency basis, it was down $6.5 million for the quarter.
The Korea business there's a component of it driven by Chinese traffic into the country in terms of tourism, and then there's the overall economic environment in Korea that's impacting it. And Chile, it's a smaller decline. And there has been some recovery as we sit here looking at April and the May numbers, but Chile during the first quarter remained slow, largely due to the consumer sentiment in the country and some impact from Argentine tourists coming over the border.
So our favorite topic on page 13 from a CFO perspective is IFRS 16. I'm going to just lay out a lot of numbers just to make sure that everybody has them. And again, you'll see this in the earnings release, but I just want to draw your attention to them given the fact that this is the first quarter we're recording this.
So overall, the right of use asset that came on the books in the quarter was $705.9 million. What that is it's within the range of what we indicated at the end of the year. So that's what we expected it to be. And the breakdown of that is that there's a lease liability on the other side of the balance sheet of -- it's basically $578 million of lease liability and the current portion of that is about $128 million that roles in. What ends up happening here is we wanted to basically show you quarter-over-quarter if we had basically been in IFRS mode all along what the adjusted number would look like. And how does that compared to our as recorded number?
The reason we're going through all these machinations is because it’s the only thing you did was pull our financial statements under the old accounting rules last year, you would have seen adjusted EBITDA on the first column of $123 million. And right now, you would look at it and say we're at $142.3 million. So we would, we would be saying that there's a growth in that.
But for full transparency, a lot of that impact is basically due to IFRS changes that are happening. So what we're trying to do is again to normalize for that. And the reason we're showing you two specific lines of adjusted EBITDA is to basically be able to give you clarity around, if all you were trying to do was solve for what our adjusted EBITDA has been for the past few years that would be the first component of it.
However, we feel the right way to report the business is to readjust and basically back out with the lease amortization expense of roughly $49.9 million and the lease interest expense that comes as a result of IFRS 16 of $7.7 million. And so our adjusted EBITDA, including the impact of that expense is basically $84.6 million. Hopefully, you'll have a chance to digest this because I know there's a lot of information on here, but we've tried to lay it out as clearly as possible. And if there's questions we can follow up.
On page 14, we covered a lot of this already, but overall first quarter net sales by region obviously North America was down 6.2% on a constant currency. There is some Canada effect there, but the currency actually neutralizes in that dollar. Asia, although it is down 1.2% constant currency if you were to exclude that China B2B issue and South Korea overall the region is performing and it would have been up 4.4%. So it really is these isolated parts of the business that are impacting it.
Europe is up 2.3%. So despite some of the headwinds, they continue to perform and Latin America off of a smaller base down 2.8%. But again, that's largely been isolated to Chile and Mexico and there has been a recovery there and we forecasted that's going to rebound in the second quarter and by the end of the year.
Looking at it by brand on the next page on page 15. If you're looking at Samsonite, largely because of what's happening in the U.S., China and South Korea, the Samsonite brand, the constant currency growth is down 4.2%. Tumi, as Kyle said a little bit earlier continuing to perform, up 8.5% off the back of increased sales, specifically in Asia, which was up 17% and Europe 22.5%.
So we're really, really pleased in terms of the international expansion and adoption of Tumi. And American Tourister is really the comparable if you look at it. Q1, 2017 was 22.3%, the Q1 over Q1 growth with 22.7% growth between 2017 and 2018. And so although constant currency growth for American Tourister is down 5.2%, that's just largely because we don't have that large campaign going through. And the other brands there has been some headwinds around High Sierra and eBags we purposefully have been reducing some of the third party brand sales as I alluded to earlier.
On page 16, the DTC growth. Again, Kyle touched on this we're pleased with the e-commerce growth that’s continuing. So net sales growth of 7.4%, overall, 9.8% of the total company sales in Q1 came from DTC e-commerce. And the retail stores, if you're looking at the net sales, we did have an increase of 3.5% in terms of the new stores that have come in. We only opened up nine new stores in the first quarter. So I think you should note that we’re taking a very measured approach in terms of the continued implementation of brick and motor retail. Especially as we focus on the SG&A and given the sales environment and the consumer sentiment that we see.
On page 17 non-travel continues to be an area that we’re focused on and there was some growth in that. So despite the fact that travel was down 4.4% constant currency non-travel was up slightly as well, as we continue to focus.
And as it relates to advertising, this is all -- we’re basically in line year-over-year in terms of the advertising so we continue to invest in the brands you’ll see some of it on here hopefully you’ve had a chance to little bit some of our ads online as well there has been a big push into Samsonite. We have some new innovations that are coming up that we’re going to be focusing on and Tumi there has been a couple of campaigns the Lenny and Zoë Kravitz campaign as well as the Chris Brett [ph] campaign that recently launched in Asia as well.
As it relates to balance sheet net leverage for the quarter was 2.67, so well within our balance for our covenants we continue to focus in terms of where we stand on debt and as we continue to generate cash flow we’re focused on continuing to delever. We have $624 million of revolver availability so plenty of financial flexibility still available to us. And we’re continuing to manage inventories which we’ll talked about on the subsequent slide as well.
So we do have a focus as the sales environment has put some pressure working capital has not come down as much as we’d have hoped in the quarter, but that’s largely driven around the payable numbers as you’ll see there. So we’re slowing the pace of purchasing that’s happening and as you’ll see inventories we have managed to keep that down slightly year-over-year, but we continue to have a focus on that and we hope that as sales pickup that inventory level will continue to come down.
One area that also draw you attention to as we think about CapEx overall for the rest of the year. we are actively managing our CapEx numbers from a forecast perspective and trying to make sure that we maintain discipline. So focused on cash flows is going to continue for us as we continue for the remainder of the year.
So with that, I’ll turn it back to Kyle for views on the rest of the year.
Okay, thanks Reza. So just before we get the questions just I’ll give you some outlook based on where we’re sitting today and as you can imagine and as I indicated at the year-end the ability to get outlook as crisp as possible is a bit more challenge with the noises around tariffs. But from our view today my view is that our Q2 numbers will -- and we’re seeing in April and May a bit of an improvement from what we saw in Q1. My view on our Q2 numbers is we’ll probably be slightly up around somewhere between kind of 1% and 2% is my best guess on Q1. But again we’re watching carefully tariffs, which the world was kind of semi-expecting something to happen anyway. So was already well kind of built into the sentiment, but it seems like it’s obviously elevated quite dramatically over the weekend.
So we’re watching that, I think for the first half of this business this is probably in line to slightly different than what I was thinking at the year-end I think for the first half we will be probably flat to slightly down. And from where I'm sitting today I would probably say more slightly down than flat. The business in the same markets that we’re seeing noise particularly the U.S. market I think will continue to have some strain. We’re watching China, underlying China which has been performing well when you take B2B out my optimistic view is that will continue, but we’ll watch as sentiment kind of picks up on the tariff side.
From a full year perspective, I still think this business will deliver single-digit growth I think second half will be in the kind of lower to mid-range on single-digit and for the full year I think will be low single-digit growth. I would caution that with general kind of noises and macro pressures around tariffs this is harder to predict, but from what we can tell off of again a softer Q2 last year I feel pretty good that we’ll be in that range.
I just want to remind last year the first half was up close to 12% and our second half was up around 5% roughly. And so when you think about our first half numbers this year it’s against the very strong first half last year that settles out at the second half of the year. So that’s our view on outlook. I think from a gross margin perspective I think we’re slightly up for the quarter, I think we will continue to work on the margin side, particularly with tariffs -- with this second round of tariffs going in my sense is we’ll have some good discipline on margin, ideally flat to maybe slightly down, but I'm not seeing major margin pressure as our ability to manage gross margin has been one of our strength.
Reza quickly touch on working capital and cash flow, I do think by the end of the year we’ll be in line with our targets on working capital, we have the teams really focused on that, and I think we will get there. And last year, we had some investments in working capital that had our cash flows down a bit last year, I would -- you should expect that our cash flows in the back of all of this will be up year-over-year and the teams are very focused on that, as well. So that's my best on outlook. And William, we can go to questions now.
Great, thank you very much, Kyle. And operator, we can begin to take questions now.
Thank you. ladies and gentlemen we will move for questions. [Operator Instructions] Our first question comes from Chen Luo with BoA Merrill Lynch in China. Please go ahead.
Thank you, management. I've got two questions. First of all, just now Kyle mentioned there have been a lot of noises on the trade war. But on the other hand, we think that a lot of U.S. retailers I think they are delaying their purchase decisions and try to manage down the channel inventory. So based on our current observation, how low the current China inventory is? And are they going to actually do restocking anytime soon, or simply because of the renewed retention, since they may still continue to postpone the purchase decision to a later stage.
And also, if later the U.S. government hike the tariffs on travel goods from 10% to 25%, what are we going to do? Are we going to raise prices again, or there are other alternatives? So this is my first question.
Well, there's two questions there. Right. Those are your questions. Yes. So for the channel, I think you're exactly right, what we've seen in our U.S. wholesale customers is, given the potential kind of challenges of consumer sentiment, they've been much cautious and much more cautious on buying. So clearly, in Q1, a big piece of our drop is these U.S. retailers, wholesalers holding back on buying. We're seeing that pick up in the second quarter, as you'd expect there is a period of time where they'll need to start kind of rebuying, and they've been just
managing that very closely.
So you'll see a U.S. business, which was down 6% in the first half being much more improved as we move into the second half. For example, in the month of April, the U.S. business looks to be down around 2% or 3% versus 6%.
There's still some pressure, I think with this kind of renewed kind of noise it'll have some impact. But you have to remember the -- all of these guys had already assumed a second round was coming in. If you remember back in September, the second round was threatened to go in, in January 1st, and so many of these people were managing, assuming that if there's any sort of like in any of this it’s -- we have a little bit more clarity and what I think is going to play out.
So people can kind of get on with kind of the world and where we're at. But, my sense is people will continue to be cautious and I think the next two, three, four weeks will be really important. It sounds like it could kick into the end of June before we get some clarity on this.
So, that's why I think second quarter will be better than first quarter because of exactly your point. And they don't have lots of inventory in their pipes when you really think about our products, anywhere from one to two months of inventory, so they'll need to start buying in. And we're seeing that as we move into Q2.
As far as what we're going to do with pricing, we've already had discussions with our customers even back in December of last year, because we've been waiting for this kind of foot to drop here on this second round. And so we'll like we did in the past, when this the first round of tariffs goes in, we're working with customers to manage through how do we maintain margins, we're very clear on that, the whole industry is subject to this.
So generally we will be attempting to push the price increases into cover as much of the margin as we can we’ll be also working with our suppliers to make sure that they're able to cover some on their side. And as you know, we're generally under an initiative to kind of shift what we can from China, which we were doing even ahead of tariffs and we're just continuing to excel.
Now which we were doing even ahead of tariffs, and we're just continuing to accelerate on the mix of what's coming from China to kind of mitigate the impacts as well and all that stays in place. But you should assume that we'll be doing our best to maintain the margins, the gross margins on our U.S. business on the back of the second round of tariffs if it does make it all the way in.
Okay, thank you, Kyle. And one more question on margin. Just now you mentioned, the guidance of flat to slightly down margin. Are we talking about the EBITDA margin if that stays given the pretty sharp decline of normalize adjusted EBITDA margin in Q1. Whether we have the confidence to actually achieve largely flat to slightly down EBITDA margin for the full year? Thank you.
Yes, that was gross margin that I was covering, but I'll give you an overview of what I think is going to happen with EBITDA margin. We're -- as a team, we're very focused on kind of driving as much cost reductions in the business to navigate the headwinds we're seeing. And so we're clearly in Q1 down. Q1 is our smallest kind of quarter from both the size of the business and also the margin for the business. And so we pick up in the rest of the year.
I think our full year margins, EBITDA margins will be slightly down. When I say slightly down anywhere from 50 to 100 basis points year year-over-year on an adjusted EBITDA margin. That's my sense on where we are with the sales levels, I think we can achieve for the full year. That's what us very actively pursuing cut costs initiatives in the business.
So as you'd expect from management team, we are aggressively looking at our cost structures and cutting where we can cut to navigate the bit of turbulence we're seeing right now. And so you'll see the benefits of that as we move into -- you'll see a bit of it in Q2 improving what you saw from Q1 and for sure in the second half of the year, you'll see some of that benefit as well.
And keep in mind, there's a comparison that happens as the year goes on as well. So a lot of the store openings and other investments that happen were happening in the second half of last year that continued.
Okay, thank you. That's all my questions.
Our next question comes from Erwan Rambourg with HSBC in New York. Please go ahead. Thank you.
Hi, good evening, gentlemen or good morning, depending. Just I wanted to check on the guidance in terms of the actual top line. Are you talking constant currency in the sense that when you're saying slightly down in H1 and single-digit for the full year that’s constant currency, okay.
Thank you. So I just had two questions, one on the B2B business. So you're saying the right level in China eventually will be at around 15%. Do you have other markets where B2B is actually an important chunk of the business where you can have a bit of a reset like this as well.
And then secondly, I was wondering in terms of cash generation, you've had a few discussions with investors, talking about what you do with cash between paying down debt, looking at other acquisitions. And actually some investors thinking it could be interesting for you to signal to the market that you think that the shares are a bit low by potentially announcing a buyback program. I'm just wondering what you think about those three options?
Okay. As far as B2B, China is probably the biggest, in certain markets in Asia, we tend to run in this kind of 10% to 15% of our business, particularly in those markets. China was unusually high and I think that's probably the biggest reset that we have happening in the business. And the reality is what we want to get it to is some level of sustainability and predictability. And so the challenge with last year is it was very high in Q1. And Frank has been adjusting this.
We've talked about this in the past. I think a normal run rate for China is in this 10% to 15% range. And when we get there, we'll be able to kind of take out the volatility of B2B.
It's not bad business, we make really good money on it, but it has ups and downs as you know. And so we're just managing so that we have a consistency in that. And I think that's also helpful for the business to be in that consistent mode.
From a cash generation perspective, we're highly focused on obviously cash flow we always are. You'll see an improvement in our cash flow this year versus what you saw last year. We know that off of the working capital numbers last year. You'll see our CapEx a little tighter than the range we put out kind of our outlook for CapEx for the year will be a little tighter there as we manage that. And my view on cash flows for this business have continued to delever.
One of the challenges with share buyback for us is the way we would go into market is challenging, we'd be very limited to what we can buy based on the volumes. And I would rather see us continue to delever versus huge lever to buy back shares at the moment. I think that's a better balance for the business why I listen to kind of the blended feedback from investors. And, I think this business naturally has the ability to deliver. And I'd like to see us continue that.
And again, we'll have a strong cash flow from our view for this year, which will largely go to debt repayment as we get to the end of the year.
Thanks. Good luck.
Just one you add -- you through an M&A there. As I indicated last year, we do have capacity within the management team on M&A. We're not actively engaged to pursuing anything, but we are kind of keeping our feelers out there. And, I think, this business has the ability to continue that and -- but at the moment, we're very focused on kind of managing and navigating the business at the moment with what we have for turbulence in front of us.
Okay, the next question is one from online, from Ferdinand Groos of Cryder Capital Partners. His question is this and I think this is for Reza, what is the annualized impact of what looks like an increase of $20 million in SG&A expense? It's just basically the cost of running stores that has not been opened in the first quarter of 2018.
William, the short answer is, yes. So it's -- if you looked at the layering of the SG&A that happened, it was largely due to the push to D2C, a component of that was e-commerce investments. But obviously, we're happy with what we've seen on the e-commerce side in terms of the pickup in sales that we just reported.
In terms of the brick and mortar retail, you're seeing the full year effect of that in terms of what the stores that were built kind of Q1 of last year and now it's coming in as we look at the layering that happens in this quarter.
Thank you, Reza.
Any other questions?
I think so. We have three more -- at least three more callers waiting on line.
Sure. Yes. Our next question comes from Hugo Chen [ph] with Macquarie in Chine. Please go ahead. Thank you.
Hi, management. Thank you for taking my question. I have one small question regarding the competitive landscape. So are we see increasing competition from those brands, especially in the U.S. and China, such as private label brands from Xiaomi, Amazon and [indiscernible] like that? Thank you.
I would say there's not anything new. These were all the competitive pressures that we're seeing through last year. We have one of the things I look at when we're kind of in this turbulence is just where we are from a positioning and share perspective. And I would say we're not losing any footing on that front. So there's nothing new elevating from a competitive perspective. The same kind of noisy players at the bottom, I would say this is at the very entry level zone, where we see things, but that's not any different than what we're seeing through last year.
Got it, thank you.
Thank you. [Operator Instructions] Our next question comes from Richard Cooper [ph] with Deutsche Bank in UK. Please go ahead.
Hi, guys, thanks for the call. Just a quick one for me, in terms of your export out of China into the U.S. and the whole tariff question. It looks as if you were able to pass most of this on. And so the American consumer, I guess was putting the bill at the end of the day. Now with tariffs going up again, do you think that you can continue that I mean do you think you may need to adjust prices downwards to offset a drop in demand in the U.S. with obviously a much bigger increase going through at the other end?
It's the fine line of the discussion Richard, it's a very tricky zone. Our approach is to maintain the margins in the business. I think that's important for the business. And will we -- if you can imagine, in the U.S. we do that customer by customer. And we're very focused on kind of positioning and in managing the margins of the business. So our intentions are to cover as much of the margin impact as we can. We do that with pricing, we do that with pressure on our suppliers, and we do that with product reengineering, which has a little bit longer tail.
But as you can imagine, we've already been thinking about that. So you get some benefits of that. And lastly, we do it from shifting sources. And we've been very successful with our U.S. business of quickly moving sources and there's plenty to do, there is -- we were kind of north of 90% in the U.S. by the end of the year we will be closure to 75%, 76%. And so we’re dramatically or quickly moving some of the sourcing on locations and we are actively pursuing that as well.
So when you blend all of the initiatives we have together our intentions are to cover as much of that margin as we can. The bigger piece of this tariff if it plays all the way through is just what does it do to U.S. sentiment and probably causes pressure on the U.S. sales number and that'll have more of an impact on kind of just the flow through to profitability versus I think the margin side, which we’ve had a good history of being able to manage. You're right on the first round of tariffs we’ve managed that very well and we saw very little margin impact in the U.S. business.
Okay, thank you.
Thank you. Our next question comes from Dustin Wei with Morgan Stanley in Hong Kong. Please go ahead. Thank you.
Thanks a lot. So my first question is regarding to the sales growth. Could you please give some of color region by region, I think you mentioned about North America, what about the other region in the second quarter?
I think just in rough quarter, I think the second quarter is going to be up somewhere in this kind 1% to 1.5% range. I think you'll see a bigger recovery in Latin America. In our Q1 Latin American numbers were lower than usual. I think you'll see Latin America get back into a double digit kind of zone for Q2, and we’ve seen a pretty good bounce back just in the month of April.
Our Europe business will be in the zone that it's in now, I think it's in this kind of 2% to 3% range and I think Q2 probably feels about the same way for Q2 versus what we saw in Q1. Our two main business in Asia where we kind of see it will be up blended our Tumi business I think for Q2 will be in this kind of 6%, 7%, 8% range for Q2. There's a little bit of noise in North America just on some timing of some bigger orders last year, but blended Tumi will be in that same zone.
And Asia will shift -- in our view Asia will shift from slightly negative in Q1 to positive lower single digit Q2. And if you blend that all together you get fairly close to what we're thinking for the quarter in the half.
Okay, thanks. From your new product perspective you sort of mentioned that you are going to have a several rounds of the new product push for Samsonite brand is that in sort of your guidance or you're not going to do as big as what you did for American Tourister last year?
We're doing some evaluating on advertising spend at the moment. So my intentions are to keep advertising kind of in the zone that we’ve spend and we last year were focused on American Tourister and we had some shift to Samsonite and Tumi this year. I'm watching carefully just kind of the tariff noise and you might see us throttle a little bit of the advertising back.
But still push the initiatives that we’ve talked about with some really exciting products coming in, really, starting at the end of Q2 and really Q3 and Q4, some really innovative products, some new materials that we’re working in that will start to launch and we continue to be extremely excited about those. Those are baked into our numbers and we’ll be supporting those as they go out.
So I am quite excited to get out with these products so the markets can see them I think they are really wonderful. So all that stays intact and we’re just managing kind of the overall spend on advertising and we’re evaluating where we might be, you might see us shade advertising down a bit for the full year versus where we are at the first quarter really just managing the business, it’s one of the levers we can manage.
Thanks. On the GP margin side, do you have the breakdown for the Tumi and the Tumi for first quarter?
No, but William you can get back to with that. I don’t have it right in front of me, sorry about that.
No, not a problem. But is that fair to assume the Tumi is close to like 70% GP margin and should sort of stay the same roughly the same going forward?
I would generally say, our margins are consistent and they haven't dramatically changed. We have achieved most of the Tumi margin upside last year, so our run rate leaving the year was in that zone and it's still in that zone. That overall margin kind of maintenance for the first quarter is consistent across the business. So there is no real changes there.
And just to clarify on the GP margin side in terms of the guidance are you guiding the flattish to slight down GP margin or with GP margin you think you are going to...
Yes. Flat to slight down. I’m just -- the world becomes continues to be challenged, you can imagine margin and the efforts we’ve put into maintaining margins. It's a piece of the headwinds, we're seeing. I think, as a company, we do a very good job with that. I just want to -- we're slightly up in Q1, I just want people to be careful that they don't kind of assume that that can -- that will trend up from there my sense is it might stay in the flattish range for the year.
Okay. And on the OpEx side, if I look at your distribution costs for the past couple of quarters, that sort of stay at a similar number like $305 million or $307 million or so. So should we sort of look at that as like fixed costs in terms of dollar amount that that should be several dollar amount for distribution costs for each quarter this year?
Well, we were -- as Reza said earlier. We were -- we continue to open stores off of Q1 last year, so in Q2 and a bit into Q3, we had store opening. So SG&A in a period where you would have expected my SG&A to be down a bit, it's up a bit, because of these kind of retail investments that we've made. And so that's why we kind of bridged and showed it by region where the SG&A costs are. So you -- as a percent of sales, you should start to now see SG&A as a percent of sales coming down from where we were.
Dustin, just on the quarterly breakdown kind of just so you have it for last year. So we opened 46 stores Q2 of last year in the second half of the year, we did another 32. So it does normalize eventually, but those investments you have to look at the full year effect that’s hitting kind of this quarter. So just be aware of that.
Yes, thanks for that. But my question is more on, if I just look at the dollar term for the distribution costs, since the second quarter 2018 to the first quarter this year you have roughly like $302 million and $306 million and $307 million. This is sort of similar amount of dollar -- in dollar terms. And if you're not adding more stores to that is that sort of fair to assume like even your sales growth is going to accelerate to recover in terms of the dollar term is not going to getting bigger, because you are not opening more stores?
Yes, I would probably just without having all the maps in front of us I would generally agree. But percent of sales is coming down, because a lot of that is the footprint that was laid for these stores. And as you know, there's a component of store cost that is fixed, and in many ways, and that's what you're seeing.
But as a percent of sales, it should naturally come down these as stores continue to play out. And we've throttled the new store investments down. So I don't think, I would call it all fixed. But there's a component of it that you're seeing and there was cost laid in Q2 and Q3 of last year as we continue to push out on the distribution expense side.
We've throttled that back and so you'll see kind of as the sales growth picks up and kind of recovers a bit in the second half of the year that that as a percent of sales will dramatically come down.
Okay. So you sort of guiding the EBITDA margin to decline like 50 bps to 100 bps on the year-on-year on full year. So is just kind of the gradual recovery process starting from second quarter, or for second quarter we should still expect a little bit decline in terms of EBITDA margin?
I think you'll see a little bit of improvement, the piece I'm watching is just where gross margin plays out on the back of kind of tariffs in the U.S. So definitely on the distribution costs, you'll see improvement. I'm just watching the margin side, I think, hopefully you'll see some improvement, you'll see more of it in the second half of the year than the first half of the year for sure.
Sorry, my last piece on the question is regarding the tariffs. So I think the trade tension or trade talk that abrupt turn, like last week is kind of surprised everybody, I suppose. So could you sort of talk about your discussion or negotiation with your customer? Because I kind of feel previously the U.S. retail, they already, like you said they're starting to replenish their inventory. But would you think that this will change their mind and keep even lower inventory and that's going to only start kicking in the next few weeks, but not now. So could that be sort of another negative downside to you?
And also, it sounds like you are going to maintain your GP margin for the U.S. market. So if you're going to increase the prices again. What kind of the retail price increase eventually that we are going to see? For example, I am thinking you're going to increase like export price by maybe like 10% or so. Is that going to like 5% increase in the retail price? I am just want to get a sense about like how much impact from the retail demand, if there's going to be a price increase?
Yes. Well, you and I both, I read that part of the challenge right to be totally honest with you. That's when we think about the U.S. team and other managing that’s exactly what they are working through right. How do I kind of maintain margins and the hardest part of that equation is not even just this piece of tariff, but not only is the news this weekend about this, but the second round of tariff and everything that’s coming from China, which really feeds into what is the consumer sentiment really going to be and what’s the impact to the U.S. consumer, which to me hasn’t fully baked into the consumers mind in the U.S. But after this weekend and what I think will play out over the next few weeks there’ll be much more attune to it. That’s the hardest piece of the equation is what the sentiment.
We’ll do a good job managing margin, the one piece with our customers is we already had this discussion back in the end of last year as I said earlier, because the original assumption was the second round of tariffs was going in, in January. And then it’s been kind of kick down the road all along.
So this isn’t a new topic for any both our teams and our customers it just became a little more alive this weekend because I think most people were thinking there could be some positive outcomes and it quickly kind of turn the corner this weekend. And so that’s what the teams are kind of navigating through as you can imagine this is a customer by customer discussion.
I think generally we’ll be increasing prices in some range that allow us to maintain margin that’s not 15%, but obviously somewhere in kind of the higher single-digit price increase range to cover the margin component of this. Off of the 10% that went in last year our blended increase was around 5% to 6% if that’s helpful in your math.
Yes, that’s helpful.
That’s exactly what we’ve been doing to kind of shift things around.
Is that going to be the sort of the similar magnitude of the increase at the retail price or is more at the sort of wholesale pricing…
We’re figuring that out still to be totally honest that’s why I think directionally it will, but we’re figuring that out that’s part of the work that we have to do and we’ve been kind of doing all along this year because we’ve always had this kind of backdrop. But now that it’s kind of pen to paper that’s exactly what we’re doing so probably in that same direction we’ll be obviously trying to mitigate as much as we can.
And the wild card is consumer sentiment, which is not just kind of up in luggage it’s general consumer sentiment in the U.S. if all the next rounds of tariff go through that will be I think more impactful. So again not just us it’s the U.S. in general.
Understood, thank you very much. Thank you.
We have three questions from online. Two of them are relating to the tariff increase, the first one is, have you seen our competitors increasing prices in the U.S. and the price increases that they are taking similar in terms of our scale to our own?
I will just answer as they come, William. So on that one we have everybody is kind of stepped in at different time points, but we’ve definitely have seen because at the end of the day this is impacting most of our competitors. And I'm sure on this second round even if somebody is a little softer on the first round they can hide from the second round. So again what’s important here is we kind of assess our kind of footprint on the floor ensuring the floor we haven’t seen any deterioration in that.
Okay. Second question relating to tariffs. Now just to be clear this caller wanted to know if we are likely shifting, sourcing out of China faster than we originally anticipated? And can you provide more color around how we’re doing this and where that is coming from?
I would say that we’re at the same pace William we’ve been pushing this fairly quickly. So if you go back a year ago we were north of 90 in Q1, we’re around 75% and -- or 73% and I think the same initiatives we’ll probably get closer to 70% by the end of the year.
We are elevating our thinking is the way I would think about it. We’ve done a lot of very fast moves, as you know you have to be cautious in the shift because not only are we shifting, but we want to make sure that we’re shifting with the same quality levels and the same D&A that Samsonite is known for from a sourcing perspective. And so -- but the teams are the hyper focused one of our benefits in this business is we can shift volume from one of our benefits in this business is we can shift volume from one region to the other. So some of the wins that we get is we can kind of shift some Europe volume to a Chinese supplier and the U.S. business can take some of that volume.
We’ve shifted some production from China to India fairly easily and so these are things that we’re doing very actively. But we were -- I want to say that we have been actively aggressively pursuing this. It’s just we’ll continue that as the way I’d say it’s not that we’ve changed our views that we need to move faster. We’ve already been moving pretty quickly here.
Okay, great. Thank you. Another question about -- around guidance, regarding the 2019 sales guidance, does that already incorporate the assumption about a slowdown in the U.S. sales as from the price hike and the recent consumer sentiment or is that still subject to…
Yes, we’re starting to factor that in as you know it’s fairly fresh, but what I’ve kind of guided is kind of taking into account that this has become a little bit more complicated. I think at the end of the year I was feeling like there’d be some resolution to this and I probably would have been slightly more cautiously optimistic. But what we’re talking about today for kind of outlook for the year we’ve kind of -- where this is our initial assessment of how this factors in to the business.
Thank you very much, Kyle. Operator, can you just make one more call to see if there are any further questions before we close the call.
Certainly [Operator Instructions] Mr. Yue there seems to be no further questions at this point in time. Thank you.
Okay. And I think that’s all the questions we have tonight gentlemen.
So with that…
Thanks everyone for joining. I appreciate everybody dialing in and we’ll keep charging away here at Samsonite. So thank you very much.
Thank you for participation. This concludes the conference.