Full Year 2016 Burberry Group PLC Trading Update Call
Apr 14, 2016 AM BST
BRBY.L - Burberry Group PLC
Full Year 2016 Burberry Group PLC Trading Update Call
Apr 14, 2016 / 08:00AM GMT
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Corporate Participants
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* Carol Fairweather
Burberry Group plc - CFO
* Fay Dodds
Burberry Group plc - VP, IR
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Conference Call Participants
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* Helen Brand
UBS - Analyst
* Thomas Chauvet
Citigroup - Analyst
* Antoine Belge
HSBC Global Research - Analyst
* Luca Solca
Exane BNP Paribas - Analyst
* Charmaine Yap
Jefferies - Analyst
* Rogerio Fujimori
RBC Capital Markets - Analyst
* Julian Easthope
Barclays - Analyst
* Elena Mariani
Morgan Stanley - Analyst
* Melanie Flouquet
JPMorgan - Analyst
* Dan Gianera
Macquarie Research - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to the Burberry second-half trading update call. (Operator Instructions). I'm now handing you over to your host, Carol Fairweather, to begin today's conference. Thank you.
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Carol Fairweather, Burberry Group plc - CFO [2]
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Good morning and welcome to Burberry's second-half trading update conference call. With me this morning is Fay Dodds from our investor relations team. I will make few brief comments on this morning's announcement and then we will be very happy to take your questions.
As we said in the statement earlier today, the external environment remains challenging for luxury. Against this background total revenue in the second half was down 1% at both underlying and reported rates. And we expect adjusted PBT for the year to March 2016 to be broadly in line with analysts' expectations.
Retail, which accounted for 75% of our revenue, was unchanged year on year, with comps down 2%, slowing from unchanged in the third quarter to down 5% in the fourth, with the shift being largely volume led.
The most significant change in trend between quarters was in continental Europe, where sales by the traveling luxury customer declined sharply, particularly from the Chinese, although we did see growth from domestic customers. Overall, with the UK and the Middle East remaining difficult markets throughout the period, the EMEIA region delivered broadly unchanged comps for the second half.
The Americas also slowed in the fourth quarter to give a marginal decline in comps in the half. As we've been saying since the start of the last financial year, demand from the US domestic customer has been uneven, and this continued. And spend from the traveling luxury customer was also down -- was down double digit.
We were, however, pleased with the strong performance from our Burberry private clients team, leveraging our customer insight data to contact customers in a more personalized and effective way.
And, finally, in Asia Pacific performance was consistent across both quarters, with a mid single-digit decline in comps. Hong Kong declined by over 20% for the third consecutive quarter as footfall for the sector remained weak. Excluding Hong Kong and Macau comps for Asia Pacific were up mid-single digit for the half, led by growth in mainland China, Korea and Japan.
Our retail revenues in Japan have more than doubled for the full year as we build our direct luxury business and we now have six mainline stores and 30 concessions. As we said in the statement, other channels performed in line with guidance. Wholesale revenue in the half was down 1% underlying, with a 6% decline in apparel and accessories, and beauty up 11%.
And, finally, license declined to GBP16m in the half, largely reflecting the planned expiry of the Japanese Burberry licenses. Globally we continue to execute against our six key strategies. And let me just highlight progress on three of these today.
First, under realized product potential, accessories were more resilient than apparel in the second half, led by innovation in scarves, ponchos and runway rucksacks. Within beauty we continue to elevate our image through focusing on our key fragrance pillars with both product extensions, such as My Burberry Black, and the launch of our new male fragrance, Mr. Burberry.
We are also pleased with the performance of makeup in Sephora online and in store and are planning to expand the physical distribution beyond the 40 current doors or so during the coming year.
Second, under optimized channels digital again grew in all regions supported by investment in new initiatives, including the rollout of the single pool of inventory model, now covering all 44 online countries, personalization initiatives such as the scarf bar and the rucksack, and new payment methods including China UnionPay and PayPal. Digital also continues to see the benefit of our prior investment in mobile, which represented the majority of digital growth in the half.
Third, under unlocked markets we continue to reposition our store portfolio in China, where we finished the year with 63 stores. A particular focus for us now is Beijing where we have several projects planned to elevate our retail positioning in this key flagship market.
Looking ahead to FY17 we have said in the statement that we currently expect adjusted PBT to be around the bottom of the range of analysts' expectations, which, as of today, we see at around GBP405m. This includes around a GBP60m benefit to profit in FY17 based on current exchange rates compared with FY16 rates.
So let me explain some of the factors behind this guidance. Firstly, we expect the demand environment to remain challenging. Second, we expect H1 wholesale to be down around 10% underlying due to significantly tighter inventory control by our US wholesale customers, continued cautious ordering globally and the elevation of beauty distribution in key markets.
And thirdly, as you're already aware, there will be a further step down in full-year licensing revenue of about GBP20m primarily due to the planned expiry of the Japanese licenses. In response to this we are, as you would expect, taking actions.
Firstly, we are increasing our tight control on discretionary costs, having saved over GBP25m against our original plans this year. However, cost inflation pressures persist, such as year-on-year rent increases, which will contribute to an underlying mid single-digit percentage increase in our OpEx in 2017.
Secondly, and important to note, this guidance excludes the benefits to come from our productivity and efficiency agenda. As we announced in January, we have accelerated this work, especially looking at our ways of working. We are also addressing how to optimize future organic revenue growth opportunities, the resulting investment plans and our capital structure.
As Christopher said this morning, we are making good progress and will share our plans as well as the short- and medium-term benefits at the preliminary results in May. Meanwhile I'm pleased to say that brand momentum remains strong, digital continued to outperform and innovation in new products is resonating well with our customers.
So with that we'd now be happy to take your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Helen Brand, UBS.
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Helen Brand, UBS - Analyst [2]
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Hi. Good morning, three questions from me. So the first one just on the 5% negative like for like in Q4, obviously, the delta mainly volume led. But can you break out what you saw between ASPs, footfall and conversion in the quarter?
Secondly, on the H1 wholesale guidance, are you seeing any impact from the move to one brand on how the wholesalers are ordering? And also how do you expect to manage with the wholesale partners as we go through the year the impact of this see now, buy now from the fashion shows?
And could you also break out beauty versus the underlying in the H1 guidance?
And then finally just around the PBT guidance at the bottom end of the range in 2017, can you just clarify your assumptions for performance-related pay within that? And also within the GBP60m of FX guidance how much of that comes from hedging? Thank you.
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Carol Fairweather, Burberry Group plc - CFO [3]
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Okay, so --
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Fay Dodds, Burberry Group plc - VP, IR [4]
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(Multiple speakers) four.
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Carol Fairweather, Burberry Group plc - CFO [5]
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Anyway, so first of all in terms of the 5% negative like for like, we're saying that footfall did continue to decrease as we went through the fourth quarter predominantly in EMEIA, and, as we said, that was largely tourist driven. Conversion was up in Q4, but the rate of growth slowed slightly. And as we said this morning I think that we saw some growth -- small growth from ASP, but it was largely volume-led decline.
In terms of your question on wholesale guidance, the negative 10% for H1, absolutely nothing to do with the one-label strategy, because that really only impacts the second half of this year as people come into market in May to buy for the second half. And as we've said before, so far that has been positively received by our wholesale customers in concept and we'll see what happens as we close the order book for H2.
And in terms of the change to runway, remember, it's only a tiny percentage of our business, largely in our own retail anyway and will be with selected wholesale partners, but no significant impact anticipated certainly on wholesale from that change, although very exciting, obviously, from a brand point of view.
In terms of beauty we're saying that beauty will be broadly flat across this year, split evenly across H1 and H2. And that reflects underlying growth in beauty partly offset by the clean up or the elevation of the distribution in one of our key markets effectively here in the UK, where we've taken the decision for brand reasons to actually reduce distribution and elevate going forward.
And then your question on PBT and what's included for PRP, as we've said, as we've gone through this year we've achieved around GBP65m worth of saving versus a GBP60m to GBP70m worth of saving versus last year, split broadly between bonus and long-term incentive plan.
Within that there is an underlying cost of share schemes in every year, around GBP20m, and that cost in this year has been masked by credits relating to prior-year share scheme charges as we have trued up to reflect the latest vesting assumption. And therefore next year's number, the guidance we've given today, includes that GBP20m charge next year.
And then your last question on currency. It does reflect -- as you know, we hedge forward our euro procurement. And as we look forward to next year we won't have the same degree of benefit on procurement that we had this year, because obviously rates have moved against us from a procurement point of view, but do benefit us from an overall translation point of view.
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Helen Brand, UBS - Analyst [6]
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So within the GBP60m that's purely the pound benefit then, or is there any hedging benefit within that?
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Carol Fairweather, Burberry Group plc - CFO [7]
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Well, we always guide inclusive of everything. I think others sometimes split out hedging. We guide including all the hedges that we have in place, which is why we could. So at the moment the anticipated rate based on spot rate and any hedging we have in place on euro and US dollar procurement is incorporated within that GBP60m guidance.
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Helen Brand, UBS - Analyst [8]
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Okay, thank you very much.
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Carol Fairweather, Burberry Group plc - CFO [9]
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Thank you.
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Operator [10]
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Thomas Chauvet, Citigroup.
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Thomas Chauvet, Citigroup - Analyst [11]
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Good morning, three questions, please. Coming back to the GBP4m, GBP5m PBT guidance for March 2017, I'm not sure I understood the GBP20m PRP. So can you just confirm what bonus costs and also cost savings you factored in that guidance compared to the GBP60m cuts in bonuses and GBP25m discretionary OpEx savings?
Secondly, on the FY17 revenue and profit guidance can you perhaps detail what assumptions you've made in Japan and whether there's been any change versus the last time we spoke on the delays in retail expansion?
And could you give us just a couple of numbers, sales and EBIT margin, perhaps, for March 2017 in Japan. Are you seeing in Japan, like some of your peers, softer tourist demand in recent weeks on stronger yen?
And finally, on Europe, if we look at the deterioration in like for like it seems largely due to tourist flows from Chinese into continental Europe. Have you seen the loss of that business recouped elsewhere, be it mainland China, Japan, Korea?
I would have expected perhaps these three markets to accelerate sequentially if you've lost some Chinese tourism business. Or do you think it's effectively what is lost is lost and not recouped elsewhere? Thank you.
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Carol Fairweather, Burberry Group plc - CFO [12]
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Okay, so your first question in terms of PRP, so I'm saying we saved around GBP60m versus the prior year. Within this year's GBP60m -- within this year's numbers there's an ongoing charge for existing LTIP schemes of around GBP20m, but that has been offset by credits in this year relating to accounting true ups.
You always true up your LTIP schemes, which vest over several years, and so this year the underlying charge of GBP20m has been offset broadly by credits relating to prior-year charges which -- where schemes will now not vest.
So I'm saying that as we look forward into FY17 that underlying charge of GBP20m, which was in this year's number but was masked by the credits, is incorporated within our guidance for FY17. But there is nothing in for new schemes that the remuneration committee may or may not decide to grant in May for either EMEIA bonus or LTIP depending on what they deem to be an acceptable level of performance for PRP to kick in.
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Thomas Chauvet, Citigroup - Analyst [13]
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Okay.
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Carol Fairweather, Burberry Group plc - CFO [14]
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And then in terms of the GBP25m, we took out actually GBP25m and a little bit more, as we obviously saw difficult conditions through Q4. That robust cost control absolutely continues. The GBP25m plus that came out in this year stays out.
As we put our budgets together we took further robust measures in terms of discretionary cost savings, and that's baked in, but not withstanding that we do see this underlying increase in OpEx driven by non-discretionary spend which is largely the rent increases and the annualization of stores that we put down in this year.
And all of this is before the benefit that you will see from the productivity agenda work that's going on at the moment, where we'll update you on both the short-term benefit and the medium-term benefit in May.
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Thomas Chauvet, Citigroup - Analyst [15]
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Okay. So how does the GBP25m in March 2016 compare to the savings you've identified in March 2017? And can you tell us what these savings are?
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Carol Fairweather, Burberry Group plc - CFO [16]
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So the -- in March 2016 we didn't spend GBP25m of costs that we had planned to spend when we saw the difficult trading conditions. That cost, which was cost avoidance effectively, stays out of next year, so it's on a like-for-like basis no -- there's been no increase in discretionary cost in the budget for next year.
There may, and we'll talk about it in May, be further cost savings to come in FY17 as a result of the productivity agenda work, and, as we said, we'll update you on all of that in May. So the robust ongoing cost control persists and we have taken that forward into FY17, but there is this inflationary pressure around annualization and rent increases, and all of that's incorporated in our guidances.
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Thomas Chauvet, Citigroup - Analyst [17]
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Okay.
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Carol Fairweather, Burberry Group plc - CFO [18]
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Okay. I'll just do the question on Europe and then maybe, Faye, you can just touch on Japan. So, as we said, the biggest change in trend we saw during the quarter was in continental Europe, where we saw tourism go from double-digit growth to negative, and that was principally the Chinese across all of our continental European markets.
Your question about where did we see that business going, we still saw continued growth in mainland China, mid-single digit, which we were very pleased with, and we also continued to see positive growth in Japan and Korea. But remember, for us, Japan -- and we'll come onto Fay's question -- Fay's answer in a minute.
Japan is a much smaller business for us than for many of our peers. And therefore if the Chinese were traveling more localized within Asia we wouldn't necessarily see all of that pick up to the same extent that others may have done. But we were pleased that in mainland China we continued to see growth in the quarter.
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Thomas Chauvet, Citigroup - Analyst [19]
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Okay. So the trend is not accelerating in these Asian markets where the Chinese are potentially repatriating some of their tourist demand in Europe back into Asia? So --
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Carol Fairweather, Burberry Group plc - CFO [20]
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It was broadly -- we're saying that the trends in Asia were broadly unchanged quarter on quarter.
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Thomas Chauvet, Citigroup - Analyst [21]
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Okay.
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Fay Dodds, Burberry Group plc - VP, IR [22]
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And if you look at the spend by the Chinese consumer globally for us, it was down in the third quarter and it softened a little bit in the fourth quarter, but really importantly, as Carol said, we've had that continued cost growth in mainland China.
And then turning to your question on Japan we've been very pleased with the performance this year. It was slightly softer in Q4 than Q3, but there's still over 30% growth in the second half. And in terms of our plans going forward, no real change to what we've said before, and we currently have six stores and --
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Carol Fairweather, Burberry Group plc - CFO [23]
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30.
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Fay Dodds, Burberry Group plc - VP, IR [24]
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-- 30 concessions, including 10 small children's wear concessions. Over time we're probably looking for six to eight mainline stores, 30 to 40 concessions excluding children's wear and as we look forward really still expecting to get to about GBP100m of profit and GBP25m of -- sorry, GBP100m of revenue and GBP25m of profit in financial-year 2018.
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Thomas Chauvet, Citigroup - Analyst [25]
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Thank you.
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Operator [26]
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Antoine Belge, HSBC.
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Antoine Belge, HSBC Global Research - Analyst [27]
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Yes, hi. It's Antoine Belge at HSBC. Three questions, please. First of all, following up on the previous question about Chinese consumption globally, could you be a bit more specific in terms of how much it was down in Q3 and how much further down it was in Q4, as it's quite clear that what was lost in -- for instance, in Europe, wasn't compensated elsewhere?
And also on this are you having any -- are you doing any surveys of trying to understand is this just a question about threat to travel etc., or is it something a bit more profound than this?
Second, on wholesale especially in the US, you highlighted that you're cautiously delivering to retailers there. Can you comment especially on what type of -- there are different types of retailers in the US and shouldn't you also be streamlining the number of doors there? Is it -- I think it seems that many players have issues with US retailers at the moment.
And finally on beauty, the elevation strategy, is it a bit of a legacy from in the past, i.e., from when [Atapatha] was running the business, or are you actually closing some doors that you had opened since you took over? Thank you.
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Carol Fairweather, Burberry Group plc - CFO [28]
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Okay, so on Chinese consumption we're saying that we did see -- in Q3 we saw Chinese consumption negative and we saw that just accelerate a tad further negative in Q4. And again the major shift as we look at it market by market was in EMEIA, where we went, as I said, from double-digit positive across continental Europe to negative as we went through Q4, all significant countries in continental Europe impacted.
Hong Kong and Macau we said no change in trend and, likewise, in China we saw continued mid single-digit growth. So in terms of surveys and travel patterns or whatever clearly we've got our customer insight data that we use to understand where the Chinese consumer is shopping, which is how we can give you these stats here. But I think it's a little early to say in terms of specifically what impact, longer term, the events in Europe may have on tourism.
In terms of the US, in terms of the cautious outlook on wholesale, so we're saying overall we're guiding to H1 wholesale down around 10%. The biggest section of that is in the US, so there is cautious ordering globally both in EMEIA and in Asia around travel retail, but the US is the most significant portion.
And there you reflect I think what the difficult market conditions that the US wholesalers are seeing. For us that's principally four or five big accounts. And we have been on this journey of elevating our presence in US wholesale for some time.
And, to your point, we certainly wouldn't want to encourage or look for the US wholesale account to take any more inventory than we think they can appropriately sell and therefore that is what they believe they can sell. It wouldn't be appropriate for us to push that any harder, given that we want to continue to elevate our position in US wholesale.
And then on beauty, the elevation there, it is absolutely a legacy issue related to the business that we took over. And I think I said on the answer to the previous question it is principally in the UK, our home market, where with the very successful launch of My Burberry and now Mr. Burberry it feels entirely appropriate to only be in those real luxury doors.
And we're delighted with the position we now have in Harrods, in the black room there or whatever, and so that needs to continue. So it's the UK that we've taken the decision on this year.
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Antoine Belge, HSBC Global Research - Analyst [29]
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Thank you. Actually, I've got two follow-ups. First of all, so if we analyze the 5% delta going from overall comps flat to minus 5%, is it fair to say that the decline in Chinese consumption that would be a bit more than half of that, and then maybe your local consumer, especially in the US, explaining the other half or --?
And the second follow-up would be on US wholesale. So I understand that you don't want to push more inventories, but I -- in your offering you always have a lot of new products, so what happens to the older inventory? Do they have to sell it before they sell the new products? I don't really get that.
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Carol Fairweather, Burberry Group plc - CFO [30]
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So your comment on what was the impact of Chinese versus locals, I haven't got the data cut that way. But if you think about what we're saying, we're saying we saw a significant decline in continental Europe, which explains most of the movement in the comp in continental Europe is principally Chinese driven.
And then the other change in trend we referred to within the US domestic market, where that was just probably broadly about half and half, I would guess, but I haven't done -- I haven't cut the data that way.
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Fay Dodds, Burberry Group plc - VP, IR [31]
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We'll have a look at it, Antoine, just -- and we'll get back to you.
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Carol Fairweather, Burberry Group plc - CFO [32]
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And then your comment on US wholesale, I'm not quite clear. Every season they come in and they will buy an element of replenishment product and an element of newness, and that continues. And it's just their absolute pound millions or dollars of buy that has been reduced and I don't think there's anything to call out between replenishment of fashion.
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Fay Dodds, Burberry Group plc - VP, IR [33]
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I think historically what we've done is if we haven't -- if we haven't liked the number that's come out of the order book we've gone back to the department stores and perhaps encouraged them to buy more than they wanted to. This year we've been very, very clean, because as part of the elevation strategy we would just much rather they bought what they think they can sell through at full price rather than then having to put it into markdown either in their mainline stores or increasingly in their off-price stores.
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Antoine Belge, HSBC Global Research - Analyst [34]
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All right, thank you very much.
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Carol Fairweather, Burberry Group plc - CFO [35]
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Thank you.
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Operator [36]
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Luca Solca, Exane.
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Luca Solca, Exane BNP Paribas - Analyst [37]
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Thank you. Good morning.
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Carol Fairweather, Burberry Group plc - CFO [38]
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Good morning, Luca.
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Luca Solca, Exane BNP Paribas - Analyst [39]
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Morning. First question to understand the nationality mix so that we can make heads or tails of the trends by geography. At one point you mentioned that the Chinese consumers represented about 40% of your sales. I wonder whether for the just-finished fiscal year this is still the case, or whether they went down by 1 or 2 percentage points.
The second question relates to the productivity agenda and your current PBT guidance. I wonder whether it's just by a measure of prudence that you're not including it at the moment, or because you're still working on the agenda, and whether you anticipate that this could potentially be material for fiscal-year 2017 in supporting the PBT results that you will achieve.
And, thirdly, I was wondering whether you could give us a ballpark assessment to where you stand in the fragrances and beauty business and, ideally, how much this is contributing to your results, if you may. Thank you.
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Carol Fairweather, Burberry Group plc - CFO [40]
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Okay. So in terms of Chinese I think we've always said around 40% from the Chinese across our retail business -- not of retail, wholesale. And I think that may have been a tad over 40% and it now may be closer to 40%.
I don't think there's been a really material shift. It's still around that amount. Clearly, we always quote to the nearest round number. I don't think there's anything else significant to call out on that.
In terms of the productivity agenda, when we spoke to you in January, Luca, we said that we had accelerated that work and we would come back in May and share all of our plans around that both for future growth drivers, top line and operating efficiency, both of which would drive bottom-line growth.
And we committed then to coming back in May. That work is ongoing and making good progress, as Christopher said this morning, and so we look forward to sharing both the short-term benefits and the medium-term benefits when we come back in May.
But the impact on this year will -- obviously, will be part way through the year. It won't be a full-term -- full-year benefit, but we'll be updating you on the number in terms of the extent to which it will impact this year and, as importantly, future years when we come back in May.
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Fay Dodds, Burberry Group plc - VP, IR [41]
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And in terms of the beauty profitability you know we don't split that out, but we've traditionally said it's around about the same level as the Group retail wholesale margin. And one of the reasons that we don't split it out is, for example, well illustrated by the recent launch of Mr. Burberry, where the advertising campaign is not only about the fragrance but is also really supporting our menswear business.
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Luca Solca, Exane BNP Paribas - Analyst [42]
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Understood. Thank you very much indeed.
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Carol Fairweather, Burberry Group plc - CFO [43]
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Thank you, Luca.
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Operator [44]
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Charmaine Yap, Jefferies.
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Charmaine Yap, Jefferies - Analyst [45]
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Hi, good morning. Charmaine Yap calling from Jefferies. I have three questions, please. In terms -- the first one, in terms of your full-year 2017 guidance on PBT, that's very helpful, thank you, but are you able to share what assumptions you have included for comp store sales growth?
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Carol Fairweather, Burberry Group plc - CFO [46]
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No. We've given you the normal guidance that we would give at this point, but what we are saying is that clearly the demand -- the environment for luxury remains very challenging. And that's all we're commenting on today.
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Charmaine Yap, Jefferies - Analyst [47]
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So a similar run rate to where you are currently?
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Fay Dodds, Burberry Group plc - VP, IR [48]
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No, we're not guiding, Charmaine.
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Charmaine Yap, Jefferies - Analyst [49]
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Okay, sorry, then perhaps a second question on price adjustments. Are you seeing any narrowing in the market in general between regions? Are there more activities in Europe or US to narrow the gap versus Asia, for example?
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Carol Fairweather, Burberry Group plc - CFO [50]
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No. We talked this time last year when pricing was obviously very topical and we did talk about the fact that we did adjust prices, some down, in China and Hong Kong, and, likewise, took prices up in Europe. As we tracked through last year we got our strategic pricing policy. There has been no change to that fundamentally and, therefore, I don't think we have anything new to say in terms of any price adjustments [today].
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Fay Dodds, Burberry Group plc - VP, IR [51]
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No, no, we're clearly listening to what our peers are saying, but we've yet to see any material adjustments from them.
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Charmaine Yap, Jefferies - Analyst [52]
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Okay, thank you. And the third question was just if you have any views on the recent new tax regime in China in terms of tightening the customs borders of people buying products abroad and bringing back to China. Have you seen any impact, or do you expect just a gradual shift more towards [spend in] mainland China?
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Carol Fairweather, Burberry Group plc - CFO [53]
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No, I don't think we're seeing any material impact at all, because it is really just on cross-border e-commerce, so, to date, no material impact. And don't forget we have a very strong digital and retail presence within mainland China and we saw comp growth in the second half.
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Charmaine Yap, Jefferies - Analyst [54]
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Okay, thank you.
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Operator [55]
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Rogerio Fujimori, RBC.
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Rogerio Fujimori, RBC Capital Markets - Analyst [56]
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Hi, everyone. Thanks for taking my questions too. Just a clarification on your plans for beauty. How should we think about your distribution in terms of total number of doors in fiscal 2017? You refer to further elevation of beauty in the UK, but you also announced recently a partnership with Shiseido and Sephora, so I just wondered about the net global footprint.
And your retail guidance could you give us extra color on your 15 store openings in addition to your plans for Beijing? Just wondering how many are planned for Japan -- in Japan. And [does it] include any selective closures in Hong Kong, Macau, among your planned closures in the next 12 months? Thank you.
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Carol Fairweather, Burberry Group plc - CFO [57]
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No, so in terms of beauty what we're guiding on today, Rogerio, is the fact that we expect beauty revenues to be broadly flat year on year, H1, H2 weighted. As I said, that's due to ongoing growth in the business offset by the rationalization of our distribution in the UK.
We don't guide specifically by doors. What we are pleased with, as we've said in -- on the call just now, is that somewhere like in Sephora in the US we've seen -- launched there with digitally and we've launched beauty (inaudible) Sephora and we expect that to continue to grow and roll out further. We've talked about early progress we've made with Shiseido in Japan in terms of beauty counters there.
And so we will continue to carefully monitor the rollout to make sure that we protect the distribution whilst delivering growth. It's really about quality as much as it is about quantity. So it's a balancing act as we go through this year and future years, but we are seeing growth in the underlying business.
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Fay Dodds, Burberry Group plc - VP, IR [58]
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Yes, and in terms of the store portfolio I think we said in the statement we're going to open about 15 mainline stores and close roughly the same number. And that's the trend that's really been going on over the last couple of years.
If you look at the openings in 2017 it's predominantly as we evolve the portfolio in China, particularly in Beijing, and there's a couple of small openings in the Middle East which we see as a long-term growth opportunity and really some relocations as well, and nothing really much to call out in terms of closures.
And specifically in Hong Kong I think Carol has said consistently that all of our stores in Hong Kong remain profitable. We are clearly seeking to reduce rents there. We are clearly seeking to work more closely with the local customer, but that is still a very profitable market for us.
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Rogerio Fujimori, RBC Capital Markets - Analyst [59]
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And just one quick follow-up in your wholesale guidance. Any comments about the -- what is implied in terms of Asian travel retail in that minus 10%? Thank you.
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Carol Fairweather, Burberry Group plc - CFO [60]
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So Asia travel retail is probably down mid-single digit within that, as I said, but the lion's share of that wholesale guidance really does relate to the US.
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Rogerio Fujimori, RBC Capital Markets - Analyst [61]
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That's great. Thank you very much.
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Carol Fairweather, Burberry Group plc - CFO [62]
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Okay, thank you.
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Operator [63]
------------------------------
Julian Easthope, Barclays.
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Julian Easthope, Barclays - Analyst [64]
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Yes, many thanks. Yes, just -- I've got three questions as well if that's okay. In terms of your one brand I had one of your US department stores who happened to be on [my list emailed] me the other day saying 20% to 25% off Burberry on the Brit and London ranges.
And it suddenly occurred to me as you move to the one brand is it likely there's going to be some disruption from as though you have to get rid of the old branding? And is that an issue for the first half?
The second [area of value] is from OpEx. Your mid single-digit growth I think you said it was a mixture of rents and salaries. Just how big a concern is salary growth particularly in the emerging markets, because I think there's still 20% plus in some areas? Is that the main area, actually, of your OpEx growth? There's not really a lot you can do about that, I guess.
And, lastly, in terms of the delta between Q3 and Q4 of the nought to minus 5%, I think you specifically said the seasonal product was extremely good running into Christmas. Can we assume, therefore, that your core product ranges have therefore -- have been consistently down 4% to 5% from Q2? Is that the right way of looking at it? Thanks.
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Carol Fairweather, Burberry Group plc - CFO [65]
------------------------------
So in terms of the one-brand comment, Julian, absolutely not. We're not expecting any change in promotional discount policy due to the label strategy at all. So we've been very clear with US department stores that this was coming. They will have planned that in their buys.
Both in our own retail and in US wholesale we expect to be able to manage through that in terms of the inventory labels as we move away from the current labels and go to the one-label strategy. So there's nothing I'm aware of from the one-label strategy that should affect discounting.
Clearly, the US is a promotional market, and we have seen that impacting, and that's why we are trying to be very pure in what we're doing. But I don't think one label has anything to do with that at all.
In terms of the OpEx guidance I would say that the rent inflation is probably more of a pressure than the salary inflation. We do broadly just look to give inflationary increases. We don't look to do anything over and above that across our regions. And that will vary market by market and it's the net of all of that. But I would say, if anything, it's the impact of the annualization.
Remember, this -- the year we've just finished we've opened some pretty large flagship stores in Japan, in Korea. We've relocated SoHo, in New York. So we've got the annualization impact coming through, contractual rent increases, and then this -- probably what is on average low to mid single-digit and no salary inflation. And, as I said, all discretionary -- any discretionary headcount increases or pay rises have not happened in the budget year.
And then Q3 into Q4 in terms of product what we're calling out is that accessories did -- was more resilient than apparel in this quarter or across the half. Certainly, we saw growth in scarves, in certain aspects of large leather, ponchos. We are saying that outerwear for us was more difficult. We hate talking about the weather, but we do know that around the key festive period that may have been the case.
And then offset by, I think, what is encouraging is that the newness, be it emerging categories like dresses, [the] lightweight cashmere trench coats, off of a small base we are seeing nice growth there, so it's been a mixed bag. But I would say that unusually for us that in this half accessories was more resilient than apparel.
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Julian Easthope, Barclays - Analyst [66]
------------------------------
Okay, thanks. If I could have one follow-up, mainly because I was too embarrassed to ask four questions outright.
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Carol Fairweather, Burberry Group plc - CFO [67]
------------------------------
Go on.
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Julian Easthope, Barclays - Analyst [68]
------------------------------
But in terms of your license fee on Fossil, is it around GBP5m, most of which will be in 2018?
------------------------------
Carol Fairweather, Burberry Group plc - CFO [69]
------------------------------
Yes, it is -- we don't split it out specifically year on year, but what we are saying is that within the GBP20m [down] the way in which the termination arrangements with Fossil have materialized that's contributing to part of the GBP20m in this year versus last year. But the lion's share of that again is the Japanese license income, but there is a small impact within that GBP20m from the termination of Fossil.
------------------------------
Julian Easthope, Barclays - Analyst [70]
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Right, but it is around GBP5m, is that right? Or is it (multiple speakers)?
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Carol Fairweather, Burberry Group plc - CFO [71]
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It's something broadly like that, yes.
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Julian Easthope, Barclays - Analyst [72]
------------------------------
Brilliant. Perfect, many thanks. Speak to you later, bye.
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [73]
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Okay, bye bye.
------------------------------
Operator [74]
------------------------------
Elena Mariani, Morgan Stanley.
------------------------------
Elena Mariani, Morgan Stanley - Analyst [75]
------------------------------
Hi, good morning. Thanks very much for taking my questions. Actually, I have just two follow-ups. The first one is on your productivity and efficiency agenda. It's just a clarification.
What should we expect in May? Is this going to be a detailed plan around productivity initiatives, efficiency initiatives with a clear concrete quantification of what these would imply? Is this going to be a three-year plan, two-year plan? If you could clarify that it would be great.
And then with regards to the short-term benefits, so if I understood correctly you're going to share a new number for the PBT for fiscal-year 2017 which is going to include these benefits. So I was wondering why didn't you wait until May to give a full guidance for the year which includes these initiatives as well.
And the second follow-up is about the GBP60m FX benefit. Can you share with us how much of this is actually locked up maybe because of previous wholesale sales so it's not going to actually change over the year? And how much is the part that is going to continue to vary according to how much FX moves? Thanks very much.
------------------------------
Carol Fairweather, Burberry Group plc - CFO [76]
------------------------------
Okay. So your first question on the productivity and efficiency agenda, we have said consistently since January that we'll come back and share our plans with you in May. Those plans will give a degree of detail around where we see the growth opportunities and the efficiencies coming from. But you'll have to wait until May.
And clearly we will give you an indication then as well about how those benefits will materialize over both the short and the medium term. And that will be laid out to a certain level of detail in May that will enable you to be able to understand how much will come in 2016 and 2017.
You said why didn't we wait until May. As part of our normal H2 trading update we would always talk about our normal guidance on licensing, wholesale, FX, and that is what we have done today.
The only piece we haven't been able to do in this year where we are -- we have got this agenda on productivity running is to guide as to what the benefits may be -- the short-term benefits that we may see in 2016 and 2017, because it feels more appropriate to do that as a joined-up package when we've finished the work and can give you the total picture in May.
And then in terms of the GBP60m FX benefit, most of that in the coming year is -- so the first thing to say it's based on spot rates at March 31 and a lot of that benefit in this year is coming from translation rather than from procurement. And therefore the only piece that we've locked in is part of the procurement benefit, which is reasonably small in this coming year.
The bigger piece is mostly coming from translation. And there it will depend on what the rate -- exchange rates are at the months in which we book the revenues and profits as we track through the year. So broadly I wouldn't bank on any of it being locked in. What we can say is that at those spot rates at March 31 it would come out at around GBP60m.
------------------------------
Elena Mariani, Morgan Stanley - Analyst [77]
------------------------------
Thank you, very clear. Thanks very much.
------------------------------
Carol Fairweather, Burberry Group plc - CFO [78]
------------------------------
Thank you.
------------------------------
Operator [79]
------------------------------
Melanie Flouquet, JPMorgan.
------------------------------
Melanie Flouquet, JPMorgan - Analyst [80]
------------------------------
Yes, good morning. It's Melanie at JPMorgan. I have three questions, actually. Sorry, the -- on US wholesale can you confirm to me that I understood this right?
Are you saying that the wholesale partners are ordering prudently, or that you are delivering cautiously, i.e., are you actually delivering them less than what they are asking for? This is my first question, because I suspect it's an important one in reality.
Number two is, in Japan, could you give us an idea of the size of this business today in sales and profit terms compared to the GBP100m, GBP25m profit by full-year March 2018?
And the last one just so I get that clear, but I think Elena's question was already answering this. In full-year March 2017 when you guided for GBP405m you have in there GBP60m FX gain, you have underlying cost pressure of mid single digit, you have sustained discretionary spend cuts of roughly GBP25m still in, and you have basically a long-term incentive plan reinstated at GBP20m.
Can I just confirm there is no accrual on bonuses in there for full-year March 2017 and, on the more positive side, there is no incremental productivity gains which you would announce in May? Thank you.
------------------------------
Carol Fairweather, Burberry Group plc - CFO [81]
------------------------------
In reverse order, absolutely, so you've -- yes, that's exactly -- your summary is exactly right, Melanie. So we've put in everything that we would normally guide on, other than we have not yet -- we've got the fixed charge for PRP in there.
And then if there's any new award under either bonus or LTIP from the RemCo in May then that would have to be factored in. Likewise, we have not incorporated any benefits -- short-term benefits that will come from the productivity agenda. Again, we will guide on that in May.
In terms of US wholesale we are saying that that is based on the orders that they have come into market and given us, which reflects their tight inventory management, given that we know that the wholesale market in the US is pretty challenged right now. Our comments were more around that is the level at which they've ordered.
We haven't reduced their order, but in other seasons we may look to see whether we can increase their order. We certainly wouldn't be doing that, because we do not want any inventory in the US wholesale chain that we don't believe they can sell through in a brand-appropriate way. So it's really about continuing to protect the brand.
And then in terms of Japan (multiple speakers)?
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [82]
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Yes, basically, if you look at the retail revenue it's doubled this year to about GBP60m.
------------------------------
Melanie Flouquet, JPMorgan - Analyst [83]
------------------------------
Sorry, to about --?
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [84]
------------------------------
About GBP60m.
------------------------------
Melanie Flouquet, JPMorgan - Analyst [85]
------------------------------
Okay. And could you share with us -- I know it's not a profit call -- but the profit impact of that roughly?
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [86]
------------------------------
Yes. Given the level of investment that we're making in some of the flagship stores that Carol referenced it's broadly breakeven.
------------------------------
Melanie Flouquet, JPMorgan - Analyst [87]
------------------------------
Okay, perfect. And just can -- there seems to be a pretty big issue in US wholesale of US department stores being involved in pretty big off-price activity --
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [88]
------------------------------
Yes.
------------------------------
Melanie Flouquet, JPMorgan - Analyst [89]
------------------------------
-- and also some shipping back into Asia actually. I was wondering -- I'm surprised that they would actually -- it sounds like they're actually asking for more because they resort to all of these activities. So what do you -- how do you explain their soft ordering? And do you not want to even get it further down than what they're actually ordering, given the environment?
------------------------------
Carol Fairweather, Burberry Group plc - CFO [90]
------------------------------
Okay, so we've worked -- we have a very close relationship with US wholesale. As I said, we've been on a journey to elevate the brand in the US department stores. It's part of our long-term strategy. We work closely with them and based on the orders they believe they can sell through in the first half of this year, that is the number that we have guided to today.
So we work closely with them. We're not looking to force that number one way or the other. We are keen to make sure that we believe that they can sell through and that is why we've accepted this double-digit decline in ordering from them for H1. And I'm not aware of any -- we do know that the US wholesale market is very promotional and certainly we wouldn't want to do anything to jeopardize our brand in any way by trying to encourage them to take any more.
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [91]
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Especially to put in their off-price channel.
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Carol Fairweather, Burberry Group plc - CFO [92]
------------------------------
Yes.
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Melanie Flouquet, JPMorgan - Analyst [93]
------------------------------
Thank you very much.
------------------------------
Carol Fairweather, Burberry Group plc - CFO [94]
------------------------------
Okay, thank you, Melanie.
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Operator [95]
------------------------------
(Operator Instructions). Dan Gianera, Macquarie.
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Dan Gianera, Macquarie Research - Analyst [96]
------------------------------
Good morning. Thank you for taking my three questions. My first question is [specifically] the UK trend and how the Q4 performed versus the third quarter. In addition, do you expect an improvement on the back of the new visa scheme for Chinese and the weaker pound?
The second question, if you can please give us an update on the rollover of the single inventory pool versus plan. And what is your learning from it so far? It's a few months already.
And moreover on this where do you see the highest benefit from it? Is it more an efficient inventory level, is it gross margin, or we should expect lower OpEx from that side too and then obviously [would be] additional to the discretionary costs that you are making?
And the last one is just a clarification. Can you please give us more detail on the eight stores that have been closed on the -- over the quarters in terms of location, please? Thank you.
------------------------------
Carol Fairweather, Burberry Group plc - CFO [97]
------------------------------
Okay. So in terms of the UK trend we said that the UK trend continued, so it was negative in Q3 and that continued into Q4. Again, we believe that was tourist driven.
Clearly, the restriction on the visa requirement is potentially good news for us, likewise, with sterling where it is at the moment. That said, we need to understand what the impact of recent events in Europe will have on tourist patterns, so I think we can't guide specifically in terms of what we think is going to happen into the UK.
In terms of the single pool of inventory, as I said earlier, we're delighted with the progress we've made there. So we're saying that it did have a meaningful uplift in terms of our digital sales, because what we've effectively done is opened up, when you look on our digital website, all of our stores that are involved.
And I think we're up to something like 75 stores now globally. And you see not only the inventory in the distribution center, but also in those 75 stores, so it did have a nice benefit. And the benefit principally for doing this was to make sure that we optimized sales.
Clearly, it will also have a benefit on inventory management, but it was done in response to the customer to make sure that they could access that inventory wherever it was in the world. And we didn't disappoint them. And we did see that that contributed to our digital out-performance in the quarter.
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [98]
------------------------------
And if you look at the eight store closures in the second half, a couple of them are in China, a couple of them are in the US, and there's the odd relocation, but very much a normal part of business.
------------------------------
Dan Gianera, Macquarie Research - Analyst [99]
------------------------------
Thank you.
------------------------------
Operator [100]
------------------------------
Melanie Flouquet, JPMorgan.
------------------------------
Melanie Flouquet, JPMorgan - Analyst [101]
------------------------------
Yes, sorry if I missed it, but just a small clarification. You updated us on what you expect for the ForEx gain for full-year March 2017. But for full year March 2016 I don't think I saw -- I saw the update and I suspect it's slightly higher than the [last] GBP10m (inaudible).
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Carol Fairweather, Burberry Group plc - CFO [102]
------------------------------
Melanie, we're closing in. Obviously, the number that we report in May will be based on the final profit number. We're clearly going through our year-end closed process at the moment. The way rates have moved I would expect that there would be a GBP1m or GBP2m benefit perhaps.
But don't forget also the last time we guided it was on volumes that we were expecting for Q4 and so, therefore, any reduction in sales the benefit from translation won't come through. So I think I'd expect a small benefit from rate, maybe offset a little bit by business performance, so I wouldn't roll much above the GBP10m.
------------------------------
Melanie Flouquet, JPMorgan - Analyst [103]
------------------------------
Thank you very much.
------------------------------
Fay Dodds, Burberry Group plc - VP, IR [104]
------------------------------
Thank you.
------------------------------
Carol Fairweather, Burberry Group plc - CFO [105]
------------------------------
Okay, so thank you all very much for your attention and we look forward to speaking with you again on May 18.
------------------------------
Helen Brand, UBS - Analyst [106]
------------------------------
Thank you.
------------------------------
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