Q3 2018 Burberry Group PLC Trading Statement Call
Jan 17, 2018 AM CET
BRBY.L - Burberry Group PLC
Q3 2018 Burberry Group PLC Trading Statement Call
Jan 17, 2018 / 09:00AM GMT
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Corporate Participants
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* Charlotte Cowley
Burberry Group plc - VP of IR
* Julie Brown
Burberry Group plc - CFO, COO & Director
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Conference Call Participants
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* Antoine Belge
HSBC, Research Division - Global of Consumer and Retail Research
* Ashley Wallace
BofA Merrill Lynch, Research Division - Equity Analyst
* Elena Mariani
Morgan Stanley, Research Division - VP
* Helen Michelle Brand
UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst
* John William George Guy
MainFirst Bank AG, Research Division - MD
* Mario Ortelli
Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst
* Rogerio Fujimori
RBC Capital Markets, LLC, Research Division - Analyst
* Thomas Vincent Chauvet
Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director
* Zuzanna Pusz
Berenberg, Research Division - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen, welcome to the Burberry Third Quarter Trading Update Call. My name is Todd, and I'll be coordinating your call today. (Operator Instructions)
I will now hand over to your host, Julie Brown, to begin. Julie, please go ahead.
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Julie Brown, Burberry Group plc - CFO, COO & Director [2]
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Thanks very much. Good morning, and welcome to Burberry's Third Quarter Trading Conference Call. The accompanying slides are available on the IR section of our website.
I'll start this morning with some brief remarks on 4 areas: first, a recap of our strategic vision we shared in November; second a quick review of our retail sales growth in Q3; third, our operational progress to date; and finally, the outlook.
With me this morning is Charlotte Cowley, our Head of IR. And we'll be happy to take your questions at the end. In November, we set out our plan to establish our position firmly in luxury by reenergizing our product, communication and customer experience. This plan is underpinned by our operational excellence and people strategies.
This comes in the context of a changing customer who wants a combination of luxury and fashion, and this means frequently refreshed but high-quality product with creativity across all categories. We have a clear strategy to address these changing dynamics, and we're excited by what the future hold for our business. We've begun to make operational changes. However, this is a multiyear program, and it will take time to implement Burberry's transformation.
As we said, in the first 2 years of the plan, we expect revenue and adjusted operating profit to be broadly stable at constant exchange rates, with growth from full year 2021. And we'll remain strongly cash generative throughout.
Now before I update you on operational progress, let me take you briefly through our retail performance in the third quarter. Underlying revenue was up 1% at constant exchange rate and down 2% at reported to GBP 719 million. Comparable sales were up 2%, with Asia Pac delivering a mid-single-digit growth percentage, broadly consistent with the first half. Mainland China delivered slower growth as they annualize the start of the rebound in Chinese spending and with reduced promotion activity in the quarter.
EMEIA saw a low single-digit decline percentage. And as expected, the U.K. declined, given the exceptional 40% growth in spending in the same period last year. This was boosted by high tourist inflows which continued through the year. Excluding the U.K., EMEIA's performance was consistent with the prior quarter.
In America, we have a low single-digit percentage growth, which is also in line with the performance in the second quarter. And in addition to these geographic trends, we experienced a headwind from AUR due to product mix.
Turning to our operational progress. Over the last couple of months since we announced our strategy, we've begun to make operational changes within Burberry, and we're pleased with the early progress.
Firstly, on product. We continue to see the fashion content within our offer outperform. We are preparing for the start of the transformation of our leather goods offer with new styles launching from spring 2018. And we're pleased with our expanded outfit offer. It's showing positive early results, with more customers buying complementary trousers and skirts in addition to tops.
Secondly, on communication. We've creatively collaborated with key influencers, such as Kris Wu on social media platforms and with Blondey McCoy who created 3 large-scale outdoor murals in downtown Manhattan for the Christmas season.
And thirdly, the customer experience. In retail, we are piloting a new in-store digital sales associate tool with enhanced functionality, such as allowing product searches by image or look, barcode and the ability to track inventory across our global distribution network.
In wholesale, we have started to have conversations with our U.S. and European wholesale accounts to explain our brand ambitions and our wholesale aspirations and to begin the discussion around the location and presentation in our points of sale. And as an example of deepening relationships with digital third parties, we collaborated with NET-A-PORTER, creating a 14-piece exclusive capsule.
Finally, underpinning all of this work is our focus on operational excellence and people. Burberry Business Services in Leeds opened in October, as scheduled, a key new way of working for Burberry. We've already filled close to 200 roles ahead of our plan, enabling the center to deliver elements of work across 5 major functions and some of our core end-to-end processes, including purchase to pay, sales order to cash and hire to retire. We also launched a global engagement program to equip our employees with the knowledge and the tools required to deliver our strategic priority.
Finally, turning to guidance. There is no change to our outlook for operating profit at constant exchange rates, and we are on track to deliver the GBP 60 million of cumulative cost savings in full year '18. We continue to expect currency to be a GBP 20 million headwind to operating profit in full year '18 with a benefit of around GBP 15 million expected on the top line. In full year '19, our initial indication of our currency will be a GBP 25 million headwind to operating profit versus full year '18.
You will have also seen that we've made a preliminary comment on the recently announced U.S. tax changes. We will provide more detailed information at the prelims in May, but currently estimate that we will see a one-off noncash tax charge of GBP 10 million to GBP 15 million in our full year 2018 income statement relating to the revaluation of net deferred tax asset, and this will not impact adjusted EPS. There is no change to our guidance for the effective tax rate on adjusted profit for this, or the outer years.
And finally, just to update you on the share repurchase program. We have repurchased GBP 242 million of the GBP 350 million total share buyback that we've committed to complete by the end of March 2018.
To conclude, there are 2 phases to Burberry's transformation. Build the foundations before accelerating and growing and we're right at the beginning of this multiyear journey. There is a lot of work to do, but we are pleased with the early progress we've made. And we remain focused on our goal of positioning Burberry firmly in luxury and delivering long-term, sustainable shareholder value.
And with that, Charlotte and I, we're happy to take any questions.
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Questions and Answers
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Operator [1]
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Our first question is from Helen Brand calling from UBS.
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Helen Michelle Brand, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [2]
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First question, please, is on the Chinese consumer. Would it be fair to assume that, that nationality globally was flat in the quarter after around mid-single-digit in H1? Obviously, you flagged some tougher comps, but peers still seem to be reporting pretty strong Chinese consumer trends. So what do you think is the reason for the slowdown? Secondly, I just wondered if there were any actions in terms of the turnaround plan since we all last spoke, particularly with respect to timing and scale of the whole [dove door] or retail closures. And also, any reestablishment? And any update you can give us on pricing architecture of the offer and how that's changing? Finally, no update in the release today on the search for creative director. How soon before you think you can make an announcement on that?
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Julie Brown, Burberry Group plc - CFO, COO & Director [3]
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Okay, thanks, Helen. So in terms of China, taking your 3 questions, in terms of China, we did see a deceleration in Q3. We saw a very, very strong growth in the first 2 quarters, but we saw a flatter picture in Q3. I mean, obviously, we were up against some very tough comps. So the tougher -- the second half of the year got a much tougher base. We were actually, in terms of Chinese consumers, we were actually negative in half 1 2017, positive in the second half. The Chinese consumer overall, obviously, the population is both the spend at home but also the spend abroad. And in terms of spend at home, it was impacted by the fact that we reduced promotional activity ourselves in China. In China, the Burberry brand is extremely strong. The brand [usually] is very strong, so we decided to reduce promotional activity, and that impacted our sort of spend-at-home local Chinese results. And in terms of the traveling consumer, we saw a reduced -- a reduction in traveling consumer trade across the world and, in particular, the U.K. was impacted by that. So that's China. In terms of the turnaround plan, I mean, no major change at all. Obviously, the strategy was only announced about 9 trading weeks ago. No change for the plans we've got in wholesale/retail. So we've had very good early dialogue with the wholesalers, both in the U.S. and in Europe, in terms of how we position our brand in the store and the points of sales. And those initial discussions have gone very well, but no change to any of the guidance really that we've given in that regard. We're still anticipating a sort of mid-single-digit reduction in wholesale. And the retail footprint, we're broadly happy with it. We don't anticipate any change in space. The refresh -- the store refresh plan that we talked about in November is progressing. The concept has been approved, and we expect that to roll out from towards the end of this financial period. In terms of price architecture, no change to the plans really at all. We expect to see a change -- there'll be no change to existing prices as such. But what we expect to do is, in particular, in emphasizing more leather goods and handbags, which we expect to start from the spring of next year. There will be a degree of impact on price as we go through the 5 years of the strategy. But I would emphasize that these things do take time. This is a multiyear program, and it takes a while to build a full leather goods offering that we've got in mind. In terms of the third element, the creative. Obviously, we're pleased with the progress. Marco is leading the search, and that's progressing well. But nothing to announce on in terms of timeline at this point. And obviously, the time at which the person would join would depend on non-compete period. Important to say that Christopher is still leading the February runway show. He leaves the board at the end of March, and we'll continue to support him as needed throughout 2018.
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Helen Michelle Brand, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst [4]
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Great. Just a follow-up, on refurbishments. Any ideas on which stores you plan to go forth first, and any impact on fiscal '19 numbers at this stage?
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Julie Brown, Burberry Group plc - CFO, COO & Director [5]
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So in terms of the refurb program, we focused on the major cities. We'd certainly expect to see Bond Street being one of the first ones. So yes, the major cities are the area of focus. We've got 8 in line with our first wave, and we're progressing that according to -- but it's the major cities where the big influences are, in terms of Bond, New York, et cetera, L.A. And the second part of your question, in terms of physical space. I think in terms of physical space, we expect no change in net space. We've had a minus 1 this quarter, but it's largely just due to 2 mainlines closing, 2 opening. So it's just the titration of the space as we move, in some cases, to more elevated positions, which is our intention as part of this strategy.
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Operator [6]
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Our next question is from John Guy calling from MainFirst.
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John William George Guy, MainFirst Bank AG, Research Division - MD [7]
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A couple of questions, please. Maybe just starting with the 2% LFL, if you could break that out, volume and value contribution. It seems like the value contribution was obviously negative. If you could comment on outerwear. It does seem that besides, I think, some specific collections, like the doodle sketch example, which I think has done well, and outside of that within the heritage G&A outerwear, it seems like there has been a further deceleration. So could you comment on how you see that particular landscape vis-à-vis the competitors and your price points? And then on China, maybe just thinking about Mainland Chinese growth. You annualized the impact of Beijing mid-single digits. It does seem a little bit disappointing, to be honest. Could you maybe just talk about how much you've reduced your promotional activity in China? I think you've made earlier steps to effectively cut out some of the promotional side of things and raise -- cut prices in some markets, raise prices in others, namely in Hong Kong and other areas. What exactly are you doing in Mainland China today?
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Julie Brown, Burberry Group plc - CFO, COO & Director [8]
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Okay, thank you. So just in terms of the 2% comp, as you say, we won't break out the sort of specifics of volume and value. But the AUR impact in the quarter did have a meaningful impact in the context of the 2%. Volume growth was actually underpinning it was strong, and we've seen very good growth from our customers, our elevated customers. We're seeing good growth from existing customers. In terms of other elements of the equation, we saw continued pressure on footfall overall. But our conversion was good and, in particular, it was very good in Asia Pac and in the U.S. EMEIA was somewhat challenged by the tourist impact in the previous year, but conversion in the other 2 regions was very strong. So yes, the AUR impact is there on the basis of the 2% comp, but we won't give out the individual numbers. In terms of the outerwear performance, we were expecting this slight movement in the quarter and probably will also happen in Q4 as well. We are pleased actually with some of the innovative areas of the outerwear range and how well it has performed. So you mentioned the doodle sketch, and we will be continuing to refresh the outerwear range coming in for March. And as you know, we've had very good success with the tropical gabardine range that we launched about 9 months ago now. We are finding generally that newness innovation is what is driving the consumer and the market. And certainly, the range, in terms of puffers and quilts, did very well in this quarter also. And just moving on to China in terms of what's happened there with the mid-single-digit. I mean, the first thing to emphasize with China, this is the country as opposed to the population across the world, in terms of the country, we're actually really pleased with how we performed overall in China. We have got just into double-digit growth rate if you look at the year-to-date numbers. So I don't think we should take a single quarter as indicative of what's happening. We've overall got a very good result year-to-date in China. In terms of specifics that have affected this quarter, we had price reductions made in September and November last year, so that obviously has an impact on AUR. And we were up against a very tough comparator base, both in China and with the Chinese population, because the population as a whole were influenced by sterling weakening and coming to the U.K. to shop. So this is why one of the reasons we saw a deceleration in the Chinese as a nationality through the 3 quarters. Overall, Chinese nationality year-to-date, we've seen mid-single-digit growth globally. So positive overall in that sense. I would stress that China is still -- the Chinese is still a very important part of our business, still 40% of our business and therefore a much valued customer group.
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John William George Guy, MainFirst Bank AG, Research Division - MD [9]
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Maybe just on the -- I think your comps were high single-digit in Mainland China, double-digit excluding Beijing last year. So I appreciate that there's a bit of a comp effect there. Just going back to the outerwear. I mean, your doodle sketch and tropical gabardines aren't really going to drive your full trench coat offering. So I'm just trying to get a little bit more granularity, please, around the fact that -- I mean, it seems as if outerwear was down mid- to high-single digits. Could you just confirm that, please?
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Julie Brown, Burberry Group plc - CFO, COO & Director [10]
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Yes, no, it wasn't high-single digit. I mean, we can come back to you with the number, but no.
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Charlotte Cowley, Burberry Group plc - VP of IR [11]
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Yes. And John, I think what we're saying is that we are very pleased with the -- very pleased to see the positive results from the outfitting. So clearly, the fact that tops, bottoms, trousers, skirts are performing well, but clearly, they are intended to be a lower price-point product than something like a trench coat or a bag, both of which are categories where you're seeing more innovation coming in the future rather than in this quarter.
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Julie Brown, Burberry Group plc - CFO, COO & Director [12]
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Yes. I think, John, the final -- sorry. No, I just -- I think I may have mentioned it with Helen's question, but we know we did have this promotional -- reduction in promotional activity. We haven't given the exact -- potentially, it's impacted the results in China, but we wanted to protect the strength of the brand in China and, therefore, did have a reduced promotional activity, which affected the growth, but the mainline remains strong. Obviously, we don't split mainline and other data, but the mainline was very strong also in the third quarter in China.
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Operator [13]
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Our next question is from Thomas Chauvet calling from Citi.
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Thomas Vincent Chauvet, Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director [14]
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Three questions, please. The first one, coming back to China and the reduced promotional activity. Are there any other markets that you've identified where you'd like to follow a similar strategy maybe as part of your 5-year planning and your brand elevation strategy? Related to that question, on promotions impact on LFL. Could you perhaps give us an indication whether at group level outlets have generally performed better in the Christmas quarter than full price stores or maybe slightly differently, whether your full price store LFL globally were positive in the period? And finally, on your unchanged FX headwind of GBP 20 million that was struck at the end of the December. Obviously, the pound was 5% lower than current spot for the USD and I think nearly 10% lower for the euro. Could you give us your maybe best estimate for FX in FY '18 based on those much higher spot rates, and perhaps comment a little bit on FY '19, at least directionally, given we're not going to hear from you until May in your full year results?
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Julie Brown, Burberry Group plc - CFO, COO & Director [15]
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Okay. So if I take the China promotion and other market, if Charlotte could take the promotional impact on LFL. We normally wouldn't give much [indiscernible] on that. And then thirdly, I can come back on exchange. So in terms of -- yes, I mean, a key part of our strategy is clearly, as we explained, to remove or reposition some of the non-luxury elements within our distribution. And clearly, that goes hand-in-hand with our own retail network and what we do with promotions in our own retail network. So what we want to do is keep all the channels in complete synchronization through retail through to wholesale. So we would expect, over the course of the plan, to reduce our own promotional activity. In this quarter in particular, we were only really calling out China because in the U.S., we decided to move really with the peers in this period because the peers went early with their sale period this time. So yes, I think over time, you're going to see us reduce promotional activity in line with the changes we're making from non-luxury elements to the distribution channel. The second question, Charlotte, for you.
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Charlotte Cowley, Burberry Group plc - VP of IR [16]
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Yes. [I mean], we're not going to start digging into those different performances of the different channels in retail in terms of the comp. Clearly, all the strategies are looking and are focusing on driving our mainline performance and hopefully firmly positioning ourselves in luxury. So that's where we're really spending our time.
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Julie Brown, Burberry Group plc - CFO, COO & Director [17]
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Yes. Moving on to foreign exchange in terms of the overall impact. What we -- obviously, what we've got in the results is the effective rates which we've included in the appendix. And then we run the final quarter through at the end of the period spot rate to see the impact. This is where we've seen no change to the previous guidance, which was the minus GBP 20 million on profit. A GBP 15 million positive on revenue because we noticed our models were a little bit out on that, so we decided to try and provide a bit more guidance on the revenue foreign exchange impact, which is GBP 15 million positive. Next year, we're giving this heads-up that we're expecting minus GBP 25 million on the profit. This is coming from a combination of an adverse revenue movement together with hedges rolling off and further adverse cost of goods movement from exchange, partly offset by a benefit from expenses. We haven't run the model -- the exchange model again. I think we operate with about 28 currencies. We haven't run the exchange model again for the latest spot. We've only run it at the end of December. But we could update you further should exchange rates move again more seriously, but we wouldn't anticipate doing that at this stage. Obviously, we'll provide further guidance in May.
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Operator [18]
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Our next question comes from Mario Ortelli calling from Bernstein.
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Mario Ortelli, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [19]
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Three questions from me. The first one is on the appointment of a creative director. You mentioned that the process is ongoing, and the potential candidate can also have a non-compete agreement with the company. In the industry, it's not uncommon to see a [gardening grace] period for creative designer of 1 year. So can we expect that your company will not have a creative director even for whole year '18 and the appointment will be at the beginning of '19, or we should expect, by far, faster timing? The second is on wholesale. You mentioned that you've got very positive talks with a wholesaler regarding the repositioning of Burberry. Can you give us an idea on when you think that wholesale will increase? So after the appointment of the creative director, when you will have these new hand bags because it seems that now the trend is for a progressive decline of wholesale sale? The third question is about the AUR that was a drag on this quarter result. And from what I understood from your words, maybe I'm mistaken, especially from outerwear and leather goods, can you tell us if I'm right on the product categories and these AUR decline in rich countries or geographies was especially strong?
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Julie Brown, Burberry Group plc - CFO, COO & Director [20]
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Okay. Okay, no problem. So if I take the first 2 in terms of creative and wholesale, and then Charlotte can come back on the regional distribution, the AUR point. In terms of the creative, we have no further comments really on that. The process is under way. We're making good progress. It really does depend on the non-compete. In terms of what we've got in place, in the meantime, clearly, we have got a strong design team that currently works under Christopher. Christopher will be responsible for the February runway, and that's making great progress, and continue to support the organization. But I would refer to the strength of the design team that Christopher has built over the years. And clearly, we'll announce the creative as soon as we possibly can on that. I think it's really important to say that Marco's emphasis on this is to find the right candidate, to not feel the pressure of time, but to find the right candidate for the business because it's such an important decision for the brand. In terms of the wholesale and the time frame, yes, we will run this over a period of time because the wholesalers are a really important part of our sales, the sales of our business. The wholesale business is a great way of introducing new consumers to Burberry who go into department stores, as you know, and therefore, we want to retain the partnerships with the wholesalers. What we're doing is having the dialogue about how we want to position the brand, where we want the point of sale to be in the department store, which floor, what are the adjacencies. And those discussions are going well, but obviously, it takes time to do this. So we're anticipating the second half a mid-single-digit decline. Next year, we're anticipating a mid-single-digit decline, obviously, with that result being probably a little bit more pronounced in the U.S. than it is in Europe. It's early days at this stage, but the dialogues have been going very well. The U.S. wholesalers do appreciate where we're coming from, and they appreciate the brand strategy that we have. In EMEIA accounts, we have closed some accounts already in the dialogues with some of the EMEIA wholesalers. Of course, there are many, many more wholesalers there across Europe than there are in America. So we've managed to do that already because some of them were clearly non-luxury. So I think good progress but early days. This is -- we see this happening over a 2 year period. So AUR?
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Charlotte Cowley, Burberry Group plc - VP of IR [21]
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Yes, and then AUR by region, I mean, there's a little bit less of an impact in Americas, but nothing really significant to call out in 2 to 3 different regions in terms of the AUR trends.
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Mario Ortelli, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [22]
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Julie, you referred, just on wholesale, a bit of rationalization of doors. Can you give us an idea of how many wholesale doors globally do you currently have?
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Julie Brown, Burberry Group plc - CFO, COO & Director [23]
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We haven't given that data before. So no, we will confront...
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Charlotte Cowley, Burberry Group plc - VP of IR [24]
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I mean, the number of doors, I mean, very significant. They cover a large number are very small accounts. And one market and actually, one partner in another region that can be a significant portion of revenue. So I think I'd probably use that commentary on the revenue guidance rather than focus on number of doors.
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Operator [25]
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Our next question comes from Elena Mariani calling from Morgan Stanley.
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Elena Mariani, Morgan Stanley, Research Division - VP [26]
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A couple of follow-up questions from me, please. The first one is about your exit rate from this quarter. Thinking about sector trends, it feels like comp is becoming even tougher going into the new calendar year. Is there anything that you can share with us in terms of how things have been developing in the early part of 2018, and whether you expect the softness that we've seen sequentially Q3 versus Q2 to continue? Secondly, could you remind us what's the U.K. in terms of percentage of total sales as of today? And finally, one question again on promotional activities. Given what you're expecting to do in the next few months and quarters, how should we think about the impact on gross margin? I know you have guided towards pretty much flat EBIT margin for the next couple of years. But do you think we could see some pressure there, given what you have observed in terms of early results from this new strategy?
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Julie Brown, Burberry Group plc - CFO, COO & Director [27]
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Okay, thanks very much, Elena. Just running through those. In terms of the exit rate, as you say, we do anticipate -- the second half of last year was a lot stronger for Burberry. We did have this impact in the U.K., which will extend obviously into the next few quarters. So we would expect the comp to be tougher. And therefore, that will affect our Q4 -- we expect it to affect the Q4 results. And certainly, the Chinese performance continued to improve between Q3 and Q4. There was a considerable strengthening in China. So yes, those 2 factors will certainly affect our comp in the first quarter. The AUR, the product mix is also likely to run through because it runs by season, so we're also expecting an AUR impact in the fourth quarter as well. In terms of the U.K. percentage of total sales, it's 11% at the moment. It was around a 10-ish mark, 11%. And in terms of promotional activity impacting margin, we will see a positive impact. We've seen a positive impact in Asia from the reduced promotional activity. But net-net, we'd expect, on an underlying basis, to see some improvement in the gross margin. This is on an underlying basis before exchange. But exchange, because of the hedges rolling off, has a negative impact on our growth margin this year compared with last. So net-net, constant exchange rates, underlying improvement in gross margin, but net-net, I think post exchange, it's likely to be neutral with AUR guidance overall on gross margin.
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Operator [28]
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Our next question is from Ashley Wallace calling from Bank of America Merrill Lynch.
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Ashley Wallace, BofA Merrill Lynch, Research Division - Equity Analyst [29]
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Actually, all my questions have been asked. So maybe just one follow-up quickly if I can. Just in terms of the FX headwinds that you're talking about for 2019, the GBP 25 million, could you give us any more color around the mark-to-market at current rates and the quantum of that?
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Julie Brown, Burberry Group plc - CFO, COO & Director [30]
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No, we can't.
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Charlotte Cowley, Burberry Group plc - VP of IR [31]
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No, I think we're just trying to give you an early indication because it just looked like not many people have really sort of thought to look to us from our read of the numbers about the FX, so we thought we'd guide on scope clearly at the end of December. And we still got to finish this year before we can [give] that kind of numbers. We'll give you clearly a better guidance in May.
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Operator [32]
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Our next question is from Antoine Belge calling from HSBC.
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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [33]
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Three questions, please. First of all, just following up on your comments about this outperformance of certain categories. I noticed you [inclined] that trenches had underperformed. So is that something that you've been driving? That's at least my understanding. And is it something that should basically be visible in the next 3 quarters? My second question, on the U.S., I think it was the part of the world where we've been quite happy with relative improvements. And maybe a word on the U.S. and sort of some qualitative comment about what's happening in your retail store network and outlets, et cetera. And finally, maybe looking at consensus PBT, I understand you don't want to comment or quantify the additional headwind pressure coming from the move from 1.31 to 1.38 dollar-pound since the closing. But was this 2% like-for-like in line with your own expectation? Or was it a bit disappointing and then we would need to maybe take that into account in our estimates? Obviously, you can have mitigating factors against that.
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Julie Brown, Burberry Group plc - CFO, COO & Director [34]
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Okay, thank you very much for the questions, Antoine. In terms of categories, it's all about the relative performance of the categories, obviously, in the quarter reflected in the comp. We did see a good performance in areas overall, like rainwear was strong. It's just that the relative proportion of the performance of the tops and the bottoms following on from the work we've been doing on outfitting and looks, it made a bigger difference in this particular quarter, which has really driven the point on AUR. But obviously, the strategy is multiyear. The leather goods component of what we intend to do strategically will start to take effect from this spring. But it obviously takes a while to get the results going through the comp on that. In terms of the second question you raised about U.S., we have seen an improvement in the U.S. since we've been -- from Q1 to Q2, we saw an improvement. We've got low single-digit growth in the U.S. in Q2, and we repeated that in Q3. Overall, the highlights that we get in the U.S., our U.S. performance is really down to the work that the team has been doing on conversion. And the retail excellence program driving the [storytelling], driving the returning of top customers and also just the conversion is very strong in the U.S., one of the strongest performances we've got across the world, and that's been very, very good. In terms of the third question relating to exchange we've covered. So in terms of 2% like-for-like, was it in line with our own expectations? It was in the bounds. We obviously do forecast at different levels of scenarios, and it was within the boundary of what we were looking at in terms of that. And just on the foreign exchange, just to clarify, the 1.31 is the effective exchange rate for the 9-month period in 2018. And then we've used the rate in the third -- at the end of December and replicated that for the fourth quarter to give us the full year effective rate to explain how we've done that. And then when we do the full year '19 calculation, we take the full year at the spot rates at the end of December. So that's what we've done.
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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [35]
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Okay. And so all in all, I mean, that consensus PBT number, in your view, I mean, there is no significant change to be expected.
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Julie Brown, Burberry Group plc - CFO, COO & Director [36]
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Yes. I think, broadly, we're comfortable. The only thing is we've still got some of our analysts at the higher end of that range, probably didn't have the opportunity to fully reflect some of the guidance we've given. And therefore, we would expect some of the people at the top end of that range to move down.
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Operator [37]
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We currently have no further questions. (Operator Instructions) Our next question is from Zuzanna Pusz calling in from Berenberg.
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Zuzanna Pusz, Berenberg, Research Division - Analyst [38]
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So I have just 2 remaining questions. First of all, on the new products. So if I understood correctly, the new handbags offering under the creative direction of [Selena Gomez] will come into stores in Q1 FY '19. Is that right? And in terms of -- I appreciate that you can't give it, too early to share any specific detail, but can you give us any idea in terms of, I mean, how significant this could be? I mean, can we expect a completely, let's say, a completely new model or just generally a refresh of your existing range? And also, maybe a [justification] of major marketing push behind that. And just secondly, a small follow-up on the U.K. I understand that the big part of the retail store is obviously driven by the tougher comparable basis because of tourism. But also, can you make any comments on the domestic consumer? Have you seen any notable weakness? I mean, I suppose [to be frankly specific there has been] some comments made to the press earlier today that there's been some trading down observed in the region.
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Julie Brown, Burberry Group plc - CFO, COO & Director [39]
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Okay. Okay, sure. So taking each of those. Yes, we do -- I mean, the key thing with the handbags is we want to build out a full sort of architecture of handbags so that we're looking at different functions, different usage, so day, evening, different sizes, different functionalities. We want to bring that out fully. We will initiate the beginnings of that from March 2018. You'll start to see the first launches from that. But I think it's important to say that it's all about building and also having stability in the range in terms of handbags over time. So that's basically the strategy. In terms of the new models that we may expect to see, we will see a new model being launched in March, which we're very excited about. But the main emphasis that we've got is really around that's the start of the new product range, and it's building out the offering over time. We see this is a long-term way of building a sustainable leather goods business, not a short-term sort of one-product-type approach. So that's the really important thing to say. In terms of the U.K. in particular, in domestic U.K., the domestic data does indicate also a slowdown in the third quarter. However, a very big caveat around our U.K. domestic data, what we record when a consumer purchases from Burberry into their home address, and that dictates whether we're attributing the person to U.K. domestic or overseas. And quite often, people have second homes. And therefore, we could pick them up in our database as a U.K. national, but they may not be. They may have a second home albeit still a tourist. And what we -- in our database, what we've got is about 90% of our U.K. population is based out of London and Heathrow, so there's probably a large tourist component to that or a traveling consumer to that. So although we've seen a weakening in the third quarter in domestic, it's highly likely to have been influenced by tourist trade, I should imagine. In terms of some of the press commentary, it's really all around the mix, the product mix in the quarter. I mean, what we were doing is obviously giving analysts and investors more of an insight into the 2% comp by referring to the product mix, which had impacted the AUR. And I think that's what you're finding the press will pick up on.
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Operator [40]
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Our next question is from Rogerio Fujimori calling from RBC Capital Markets.
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Rogerio Fujimori, RBC Capital Markets, LLC, Research Division - Analyst [41]
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I think in the press release, you referred to good digital sales growth. And I appreciate you don't disclose specific numbers, but it's certainly an important driver for Burberry. So I was wondering if you could qualitatively talk about how growth contribution from e-commerce in Q3 compared to the first half. Could you give us an idea of how much e-commerce contributed to growth in Asia? And could you confirm that your e-commerce penetration in America is still double the global average?
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Julie Brown, Burberry Group plc - CFO, COO & Director [42]
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Okay. I think Charlotte will take this.
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Charlotte Cowley, Burberry Group plc - VP of IR [43]
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Yes. So yes, we did see and nice to still see digital performing strongly for us. The growth was led by Asia, so that was the strongest growing part of our digital business. And as you know, we've had a focus on localization efforts particularly in Asia. This might be that working for us. And I would say, yes, the U.S. is still the most penetrated market for us for digital.
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Rogerio Fujimori, RBC Capital Markets, LLC, Research Division - Analyst [44]
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And was the growth contribution from e-commerce in Q3 comparable to the first half?
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Charlotte Cowley, Burberry Group plc - VP of IR [45]
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It was very similar.
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Operator [46]
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We currently have no further questions registered. I'll hand back to you, Julie.
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Julie Brown, Burberry Group plc - CFO, COO & Director [47]
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Okay, thank you very much. So thank you for your questions and for joining our call.
So just to close, we're right at the beginning of a multiyear journey. There's a lot of work to do. We're pleased with our early progress. And we remain focused on positioning Burberry firmly in luxury and delivering long-term and sustainable shareholder value. And we look forward to updating you at our prelim results, which is going to be held on the [15th] of May. Thank you very much.
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Operator [48]
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Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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