U.S. Markets open in 4 hrs 12 mins

Edited Transcript of BOSS.DE earnings conference call or presentation 7-Mar-19 1:00pm GMT

Full Year 2018 Hugo Boss AG Earnings Call

Metzingen Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Hugo Boss AG earnings conference call or presentation Thursday, March 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christian Stoehr

Hugo Boss AG - Head of IR

* Mark Alexander Langer

Hugo Boss AG - Chairman of Managing Board & CEO

* Yves Müller

Hugo Boss AG - CFO & Member of Managing Board

================================================================================

Conference Call Participants

================================================================================

* Andreas Inderst

Macquarie Research - Senior Equity Analyst

* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Elena Mariani

Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands

* John Frederick Speirs

UBS Investment Bank, Research Division - Director & Research Analyst

* John William George Guy

MainFirst Bank AG, Research Division - MD

* Jurgen Kolb

Kepler Cheuvreux, Research Division - Analyst

* Melanie Anne Flouquet

JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's HUGO BOSS Full Year Results 2018 Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 7th of March, 2019.

I would now like to hand the conference over to your first speaker today, Mr. Christian Stoehr, Head of Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

Christian Stoehr, Hugo Boss AG - Head of IR [2]

--------------------------------------------------------------------------------

Thanks very much, and good afternoon, ladies and gentlemen. My name is Christian Stoehr, as you know, and I'm heading up the investor relations activities here at HUGO BOSS. I would like to welcome you to our full year 2018 financial results presentation. Today's conference call will be hosted by Mark Langer, CEO of HUGO BOSS; and Yves Müller, CFO. We have a lot of topics to cover today, so let's get started. And over to you, Mark.

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [3]

--------------------------------------------------------------------------------

Well, thanks, Christian, and good afternoon, ladies and gentlemen. Also from my side, I would like to welcome you following our meeting either via the web or over the phone to the presentation of our 2018 financial results. In the next 30 minutes, Yves and I will discuss our 2018 fiscal year operational and financial performance, before taking a closer look at our expectations for 2019, the first full year of our mid-term strategic business plan.

But let me start with a quick review of the 2018 fiscal year.

I'm pleased to report that we achieved our targets for 2018, thus delivering on what we had promised almost exactly 1 year ago. Back then, in March 2018, we highlighted the importance of successfully implementing our strategic priorities as they will be the key enabler to accelerate brand momentum and to deliver sustainable profitable growth.

With the currency-adjusted sales growth of 4% to EUR 2.8 billion, we've increased our pace of growth as planned. Even more encouraging is that this growth was broad-based, no matter whether we look at the performance by region or by sales channel.

Above all, our own retail business and here, in particular, our online business, enjoyed dynamic growth in 2018. While sales growth accelerated in all regions, it was particularly in the important Asia/Pacific region, where the positive trend from previous years continued. Despite some uncertainties with regard to the strength of the underlying Chinese economy, our Chinese business continued to record overproportionate growth in 2018.

This positive sales development does not only show that both BOSS and HUGO resonate well with our customers, it also means that the consistent execution of our strategic priorities has started to pay off.

Besides sales, operating income also turned out as forecasted at the beginning of 2018. At EUR 489 million, EBITDA before special items remained on the prior year's level. A series of investments to ensure sustainable profitable growth was the reason why we have not yet converted sales growth into higher profits. This includes especially investments in the quality of our products and in the digital transformation of our business model.

I'm particularly pleased that we also made significant progress in implementing our strategic priorities in 2018. In this context, we are very proud of the successful realignment of our BOSS and HUGO brands, aiming at addressing our customers clearly and more consistently through our 2-brand strategy in the future.

With the launch of the Spring/Summer 2018 collections, our customers were able to experience the new brand positioning for the first time last year. And also, the 2 brands are clearly distinguishable from each other in terms of their individual attributes, targeting different customers that embody the same high values such as quality and fit, innovation and sustainability. It is these attributes making both BOSS and HUGO the preferred brand of choice for our customers.

While the feedback we get from our customers following the brand realignment is encouraging to all of us, it is important that we continue to listen carefully to what our customers have to say, be it through our physical stores, own website or the various digital channels. In doing so, we will create the best product in our industry, maximize customer satisfaction and drive brand desirability.

From a brand perspective, clearly the BOSS and HUGO fashion shows were particularly highlighted in 2018. In September, we presented BOSS menswear and BOSS womenswear together again for the first time as part of the New York Fashion Week. With the theme California Breeze, the new Spring/Summer 2019 collection created excitement and received a very positive feedback. The event also left a strong mark in the digital world, where we reached more than 50 million fans and followers throughout our various social media and brand channels.

HUGO has already presented its Spring/Summer 2019 collection in July as part of the Berlin Fashion Week. In spite of those who mix and match styles of different decades and to create their own esthetics with striking neon colors, light fabrics and contrast details, HUGO reflects the modern street style of Berlin's mixmasters and club scene.

We also made significant progress in further developing our distribution strategy. This was true especially for our online business, which, as you know, is of strategic importance for us. In 2018, we recorded strong double-digit growth in our own online business and for the first time, achieved sales of more than EUR 100 million. This has proof positive that we successfully implemented improvements to the hugoboss.com website and that customers are responding very well to our online presence with this consistent alignment towards BOSS and HUGO.

To further strengthen our digital footprint, in fall 2018, we intensified our partnership with the online retailer Zalando. But for the first time we added BOSS businesswear to the product range available through Zalando. Importantly, from now on, we will be offering this collection by the partner program platform by ourselves, from product presentation to pricing, to fulfillment. I'm convinced that we will be able to serve the needs of our customers even better in the future with this sort of cooperation.

Consequently, we have set ourselves a goal of entering into further cooperations in the online segment in the coming years starting in 2019, with a strong focus on Asia/Pacific and Europe.

In 2018, we also successfully advanced our most important distribution channel, brick-and-mortar retail, by rolling out our new BOSS store concept we further optimized and modernized our store portfolio. Already today, our customers can experience our menswear and womenswear collection in a new exciting environment in 26 BOSS stores worldwide. With modern architectural features and a large number of digital services, this store concept guarantees customers a unique shopping experience.

Importantly, the new store concept has also started to yield financial benefits, as reflected by improvement in sales, units per transaction and store productivity, which we're able to witness for a number of renovated stores.

HUGO has also been presented itself with a innovative new look in many major cities since 2018. The first HUGO stores with a unique store concept opened last year in London, Paris, and Dubai, among other key metropolitan areas. In total, we have opened 12 HUGO freestanding stores in 2018 and see the potential for adding additional openings in 2019 and beyond.

Our fashion-conscious progressive HUGO customers from all over the world are impressed by our unconventional store design and the tight integration of social media features. While we truly believe in HUGO's ability to excite our customers in a mono-branded environment, we will carefully assess future store openings by their potential to drive profitable growth for our company.

To conclude our strategic initiatives, we have also made very good progress in driving the digitization of our business model. We increasingly develop and distribute our collections using digital tools. This enables us to respond faster to changing market trends. This is particularly true for HUGO, our digital speedboat, where product development for certain parts of the collection is fully digitized already today.

For distribution for wholesalers, we rely more and more on the use of digital showrooms, which have been in operation for the HUGO brand since the end of 2017. Digital showrooms allow our wholesale customers to browse the entire HUGO collection and enable orders to be placed directly. And in our physical stores, we provide customers with a high-quality and seamless shopping experience, thanks to a large number of digital services across all our distribution channels.

There is no doubt, the digitization of our business model from beginning to end is in full swing and we are excited about the many opportunities that will come with it in the future.

Ladies and gentlemen, this concludes my review of the operational highlights of 2018. Before I talk you through our operational expectations for the 2019 fiscal year, let me hand over to Yves, who will give you some more details on the financials for 2018 and the financial outlook for 2019. Yves, it's over to you.

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [4]

--------------------------------------------------------------------------------

Thanks very much, Mark, and good afternoon, ladies and gentlemen. As Mark already mentioned, in my comments today, I will focus on the financial highlights for 2018 and 2019.

As you know, this was the first full year for me as the CFO of HUGO BOSS. I'm encouraged that we delivered on our top and bottom line targets for 2018 despite some external headwinds that the industry had faced during the course of the year.

As promised, and as Mark already alluded to, our strategic initiatives have yielded an acceleration in sales growth in 2018. Group sales increased by 4% on a currency-adjusted basis. In euro terms, sales were up 2% to EUR 2.8 billion, reflecting the appreciation of the euro against most other currencies in 2018.

All 3 regions recorded currency-adjusted sales increases in 2018. Europe was up 4% in currency-adjusted terms, benefiting in particular from double-digit growth in Great Britain and solid growth in most of the regions' other markets, including France and Benelux.

The Americas were also up 4% on a currency-adjusted basis, thus exceeding our initial expectations of a low single-digit increase for the full year. The important U.S. market returned to growth in 2018, up mid-single digits.

Lastly, looking at Asia/Pacific, the region recorded a strong 7% increase on a currency-adjusted basis. Momentum in China remained strong throughout 2018, resulting in high single-digit sales growth. Japan was an especially bright spot in the region, recording low double-digit growth in 2018.

By distribution channels, own retail sales grew 4% currency adjusted, supported by an increase in all formats. On a comparable store basis, own retail sales were up good 5% on top of the 3% increase in the prior year period. Main driver behind this performance was a strong improvement in conversion rate, partially offset by a slight decline in the average selling price, reflecting the higher sale of casualwear in our product mix.

From a regional perspective Asia/Pacific recorded the strongest performance with a high single-digit comp store sales increase. Comp store sales in the Americas and in Europe grew at a mid-single-digit rate each. I'm particularly encouraged by the strong performance of our online business, up 41% on a currency-adjusted basis in 2018 and with strong double-digit improvement across all 3 regions.

Sales in the wholesale channel recorded a robust 5% increase on a currency-adjusted basis, supported by mid-single-digit improvements in both Europe and the Americas.

There were, in particular, 2 effects that contributed to the sales development in 2018, which ultimately turned out somewhat higher than initially expected. Firstly, our replenishment business, which allows HUGO BOSS to respond to short-term demand from wholesale partners, developed particularly strongly, up high-single digits on a currency-adjusted basis. And secondly, we also recorded a positive effect from delivery shifts, which led to sales increase in the fourth quarter of 2018.

To conclude on our distribution channels, the licensing business declined 4% on a currency-adjusted basis in 2018. Increases in the license income for watches and eyewear were more than offset by declining licenses income from fragrances. The latter mainly reflects the anniversary effect of the change in license partners towards the end of 2016, which yielded double-digit increases in 2017. This said, we are clearly not satisfied with the current performance of our fragrance business, and have raised this topic vis-à-vis Coty, our licensing partner.

Completing my discussion around the top line development, let's have a look at our brands. And particularly, I'm pleased about the strong performance of our BOSS brand, where sales increased 6% currency adjusted. This development was driven by high single-digit growth in both business and casualwear.

HUGO, in turn, was negatively impacted by strategic distribution changes, aimed at sharpening the brand's positioning. In this context, in 2018, we continued to transfer selling space from HUGO to BOSS at those wholesale accounts where the brand environment speaks more to the BOSS customer rather than the HUGO customer.

At the same time, we made further progress in our approach to no longer distribute the brand in some of our BOSS stores and to reduce the presence of HUGO in the outlet channel. All measures combined resulted in an anticipated sales decline down 4% currency adjusted versus the prior-year level. Strong double-digit growth in casualwear could only partially offset the sales decline in businesswear.

By gender, our menswear business recorded 5% currency-adjusted sales growth, driven by double-digit increases in casual and mid-single-digit growth in businesswear. Sales for our womenswear business declined 3% currency adjusted, reflecting the reduction of selling space with BOSS freestanding stores. This could not be offset by growth for the womenswear of the HUGO brand.

Moving to below the top line, let's have a look at the development of major P&L items. At 65.2%, the gross margin -- gross profit margin declined 90 basis points in 2018, in line with our adjusted outlook for the full year. This development was mainly due to the planned investments in product quality in order to upgrade our BOSS casualwear offering. In addition, currency effect had a slightly negative impact on the gross margin development.

On the cost side, selling and distribution expenses declined 2%. The slowdown in retail expansion and positive effects from the ongoing renegotiations of rental contracts in the own retail business were the main drivers for this decline.

Administration expenses grew by 4%, reflecting investments in the digital transformation of our business model. There is no doubt that these investments will help us to fully exploit the tremendous opportunities we have identified in digital. The strong double-digit increase of our own online business in 2018 is clearly a reflection of our first successes in this regard.

At EUR 489 million, EBITDA before special items remained on prior year level as guided. Positive impacts from the increase in sales and the tight operating cost management were offset by the aforementioned investments in product quality and in the digital transformation of the business model.

Depreciation and amortization amounted to EUR 129 million, down 18% on the prior year. This development is mainly due to a slowdown in retail expansion as well as lower impairments for our own retail stores, reflecting the improvement in underlying performance. As a result, EBIT rose by 2% to EUR 347 million.

The group tax rate came in at 30% in 2018, as income taxes were higher than initially anticipated. Expenses related to the recognition of a provision for risk arising from an external tax audit were the main contributors. On the other hand, this 2017 noncash tax expense in connection with a revaluation of deferred tax assets in the U.S. did not recur. In line with EBIT, net income rose 2% to EUR 236 million.

If you look at the earnings development by region, Asia/Pacific, once again, stood out, generating a significant margin improvement for the second year in a row. The region's segment profit rose 9% in 2018. In addition to the increase in sales, a decline in operating expenses contributed to this development. At 24.2%, the adjusted EBITDA margin was up 120 basis points on the prior year.

In Europe, segment profit was up 4%, as the increase in sales more than offset slightly higher operating expenses. As a result, the adjusted EBITDA margin increased slightly by 10 basis points to a level of 31.1%.

In the Americas, operating profit was down 17% due to negative currency effects following the appreciation of the euro versus the U.S. dollar. These negative currency effects more than offset the positive effects from lower operating expenses. Accordingly, the adjusted EBITDA margin for the Americas was down 340 basis points to 17.2%.

Now let's move over to the key balance sheet and cash flow items. Starting with inventories, which were 14%, currency adjusted, above prior year level. Let me be very clear that one of our key priorities for 2019 is to bring inventories down to a normalized level. Compared to the first 9 months of the year, the inventory increase has already started to decline, a trend we expect to continue over the course of 2019.

Speaking about inventories, let me also reiterate what I had already explained back in November 2018. The vast majority of the inventory position is related to never-out-of-stock products. In other words, product groups that are not related to a specific season. This in turn means that we should be able to normalize inventories sequentially during the course of 2019 without a need to sacrifice gross margin development, just the way we achieved this during the fourth quarter of 2018.

As a result of the inventory increase, trade net working capital grew by 16% on a currency-adjusted basis. At 19.7%, the moving average of trade net working capital as a percentage of sales based on the last 4 quarters was 110 basis points above the prior-year level.

Investments in our business were once again a key priority in the last year, as Mark explained before. At EUR 155 million, capital expenditure rose by EUR 27 million compared to the prior year. The anticipated step-up in store renovation as well as continued investments in the IT infrastructure were the main drivers for the increase.

With investments of EUR 89 million, the group's own retail business was once again the focus of investment activity. Of this, EUR 45 million were spent on store renovations, an increase of 36% compared to last year and reflecting the almost 30 BOSS store renovations in 2018. Investments in store openings remained on the prior-year level at EUR 44 million, partly due to the planned opening of our new outlet in Metzingen.

IT investments rose to EUR 36 million, an increase of EUR 5 million versus the prior year. These investments mainly focus on the further digitization of our own retail business and the development of our ERP systems.

The increase in working capital and the step-up in capital expenditure resulted in the anticipated decline in cash flow. While free cash flow at EUR 170 million was noticeably below the level of 2017, this development was in line with our initial guidance. Finally, net debt only increased marginally to EUR 22 million at the end of 2018.

Let me conclude my review of the 2018 financial year by reconfirming our commitment to our dividend policy aimed towards continuity, which we had talked about in detail during our Investor Day back in November. Accordingly, we will propose a dividend per share of EUR 2.70 for the 2018 financial year. This represents a 2% increase compared to the prior year, in line with the increase in net income. At 79%, the payout ratio will remain on the prior-year level and thus, at the very upper end of our dividend payout corridor of between 60% to 80% of consolidated net income.

Now let's change perspectives and look ahead into 2019, the first full year within our strategic business plan until 2022. The year 2019 will therefore be all about the execution of our strategic priorities and mark the first major milestone towards achieving our midterm financial ambition. We expect group sales to grow at a mid-single-digit percentage rate on a currency-adjusted basis, thus outgrowing the global economy as well as the relevant market segment in 2019.

All regions are forecasted to contribute towards sales growth, with the strongest increase expected to come from Asia/Pacific. The region is projected to grow at a mid- to high single-digit percentage rate on a currency-adjusted basis, led by significant growth in the Chinese market. Europe and the Americas are both forecasted to grow at a low to mid-single-digit percentage rate.

From a channel perspective, growth will, once again, be driven by our own retail business, where sales are expected to increase at a mid- to high single-digit percentage rate on a currency-adjusted basis. This forecast is based on the assumption that comp store sales will grow at a mid-single-digit percentage rates on a currency-adjusted basis. In addition, our online business will continue to contribute overproportionate to retail growth.

Turning below the top line. The gross margin is expected to increase up to 50 basis points in 2019. This development will be supported by a positive channel mix, as the retail business is expected to grow stronger than wholesale. In addition, improvements in markdown management should contribute to the gross margin development.

Operating expenses are forecasted to increase moderately. First positive effect from the efficiency program will be largely offset by further digital investments, including the expansion of the concession model as well as the rollout of hugoboss.com website to additional geographies. These investments are not only important to drive further digitization of the business model, but also to further stipulate the positive sales momentum in our online business.

EBIT, our new key performance indicator to judge our bottom line performance, is forecasted to increase at a high single-digit percentage rate, and thus stronger than the top line. This development will be driven by the anticipated sales increase, the improvement in gross profit as well as tight operating cost management. In line with EBIT, net income should also increase at a high single-digit percentage rate.

Moving over to the balance sheet, we expect capital expenditure to increase to a level between EUR 170 million and EUR 190 million. Our clear priority for investment activity will continue to be our own retail business and IT infrastructure. Alongside the accelerated upgrade of existing BOSS stores to the new store concept, we are also investing in our new state-of-the-art outlet in Metzingen, which is expected to open in September 2019. Investments in IT infrastructure will mainly focus on further strengthening the online business and expanding our digital brand communication and CRM capabilities.

As promised back in November, we will continue to put particular emphasis on inventory management, as we are committed to bringing down inventories. In this context, 2019 should see a gradual improvement quarter after quarter. This will result in a decline of average trade net working capital by 50 to 100 basis points compared to year-end 2018. Consequently, free cash flow is expected to improve significantly to a range between EUR 210 million and EUR 260 million.

Now before handing back to Mark to look at our operational topics for 2019, let me spend a minute on IFRS 16.

From our press release earlier this morning, I'm sure you have noticed that our outlook for 2019 does not include any implications that are expected to occur following the first time adoption of IFRS 16. To make it very clear, the implementation of IFRS 16 will not have an economic impact on HUGO BOSS. It has no effect on the way we run our business, nor on total cash flows. It does however have a significant impact on our balance sheet.

There's also an impact on the P&L as lease expenses are no longer booked as operating expenses, but split into 2 components: firstly, depreciation of the right-of-use asset; and secondly, interest from discounting future lease obligations. IFRS 16 also has an impact on free cash flow as operating lease expenses are no longer treated as operating expenses and this will, as a result, boost operating cash flow.

To be more precise, we expect the following implications to occur during the course of 2019: the increase in total assets on the balance sheet will be between EUR 1 billion and EUR 1.2 billion; EBIT is expected to increase by a low double-digit million euro amount as depreciation of the right-of-use asset will be lower than the previous operating lease expenses; net income instead is forecasted to decline by a single-digit million euro amount as the sum of depreciation and interest charges is expected to be slightly higher than the previous operating lease expenses; and last but not least, free cash flow is expected to increase by a low triple-digit million euro amount.

To ensure comparability between our 2018 actuals and our 2019 outlook, we will report 2019 actuals both including and excluding the effects from IFRS 16, starting with our reporting for Q1 2019 in May.

With this, ladies and gentlemen, let me hand over to Mark to share with you our initiatives for 2019.

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [5]

--------------------------------------------------------------------------------

Thank you, Yves. There's no doubt, ladies and gentlemen, that with the financial outlook presented today, we'll achieve the major milestone towards our midterm financial ambition of growing our business with a 5% to 7% top line CAGR and towards achieving a 15% EBIT margin by 2022.

But 2019 will be much more than that. Most importantly, 2019 will be a year where we will make further progress towards our vision of being the most desirable premium fashion and lifestyle brand globally. This is what actively drives us and this is what our strategic initiatives in 2019 will be centered on.

In 2019, our initiatives will once again focus on driving personalization and speed to actively enhance the desirability of both BOSS and HUGO. This will be our guiding principle, no matter whether we define our action plan from a brand distribution or operations perspective.

Let me therefore show you some of our operational initiatives for 2019 to further drive brand momentum and excite our customers.

Starting with the BOSS fashion show that took place in New York City 3 weeks ago, where both our menswear and womenswear collection for Fall/Winter 2019 were presented. This time, the Gallery District in Chelsea has inspired the design and the creation of the new mens and womenswear looks in the collection. Highlighting the event, as BOSS Curated, the art of sophisticated style was celebrated with fine attention to detail, modern silhouettes and unique material with artistic highlights.

To leverage the content from the fashion show, we put a particular focus on social media, using the most relevant social media channels. On Instagram, for example, followers had the opportunity to look behind the scenes and to see the runway presentation from multiple perspectives.

To drive excitement with our customers, we'll put an even stronger focus on collaborations in the years to come. Here, I'm particularly proud that we are able to enter into a close collaboration with Porsche in the innovative global motorsport series, Formula E.

As part of this collaboration, we will be launching a joint collection, incorporating design elements of the first fully electronically powered Porsche Taycan. The high-quality collection consists mainly of sporty casualwear styles and modern tailoring. The collection will be available in selected stores and online later this month.

Moving over to HUGO. The brand will continue to play a key role in driving the digital transformation of HUGO BOSS. After successfully introducing the digital collection in 2018, this year will see a further extension of the digitally developed assortment. By year-end, we are targeting up to 10% of HUGO's total collection to be developed fully digitally. This compares to 1% in 2018 and is consequently a major milestone towards commercial reality.

To drive engagement with the HUGO customers and to create more buzz around the brand, HUGO will return to Berlin this summer to celebrate the brand and the city in a new innovative way. There is more big news around HUGO to come and particularly on the marketing side of the things, and we'll talk about it over the course of 2019. So please stay tuned for some exciting announcements later this year.

2019 will, of course, also be a year where we will make further progress in exploiting online opportunities, starting with our digital flagship hugoboss.com, which will be rolled out to additional geographies, as already mentioned during the Investor Day. In the second half of 2019, Scandinavia and Ireland, markets with a strong digitally minded customer base, will be onboarded to our digital flagship.

In addition to our own website, in 2019, we will continue to expand the online concession business by adding new leading online platforms to it. Some of them will be conversions from former wholesale models, some of them will be new partnerships we are about to enter. And of course, not to forget our partnership with Zalando, where we will be intensifying our collaboration by adding further countries to our partner program.

On the brick-and-mortar side, we will continue to optimize our BOSS store network. We have seen great improvements in retail KPIs for many stores that were either renovated, rightsized or in some cases, even relocated. Unsurprisingly, the further optimization of our store network aimed at driving retail productivity will become one of our key priorities in 2019. This will include some of our large flagship stores, such as the one on Champs-Elysées to give you just one prominent example.

As you know, we're also committed to growing our physical footprint for the HUGO brand. In this context, 2019 will see further store openings across a number of metropolitan centers, among others, Moscow, Hong Kong, Singapore and Los Angeles. The expansion in 2019 and beyond will clearly be of a gradual nature and not to be anything close to an aggressive push to ensure we run the right number of our stores in the right areas. We're looking forward to introducing HUGO's smaller branded appeal to a larger customer base all over the world.

Now, ladies and gentlemen, this concludes my operational outlook for 2019. Yves and I are now very happy to take your questions. Just like in previous quarters, we kindly ask you to limit the number of questions to 2 so that all the participants will hopefully have a chance to ask their questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question is coming from the line of Antoine Belge from HSBC.

--------------------------------------------------------------------------------

Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [2]

--------------------------------------------------------------------------------

It's Antoine Belge with HSBC. Two questions. First of all, at the Capital Market Day, you had introduced a medium-term target of growing between 5% and 7% per annum, so mid-single digit I think in English means between 4% and 6%. So any reason why the average growth should be a bit more back-end loaded? Or any reason to be a bit cautious this year for some macro reason?

And my second question relates to the OpEx developments. I understand that most of the operating margin gain should come from the gross margin, so implicitly there shouldn't be any OpEx leverage. So maybe could you give a bit of flavor of the different buckets, as I understand that there is a cost-cutting program in place, and so on some digital investments. So maybe, what would be the impact positive from the cost savings and then each of the investment that you're targeting?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [3]

--------------------------------------------------------------------------------

Thanks, Antoine. And let me say that at the beginning of our story with PSG -- I mean, [first of all, it's] super unfortunate loss in the game. And you know that we are big sponsor of PSG, so we are with you on this one.

Let me give you some color on the top line guidance. I mean for us, the 5% to 7% that we had given as average growth rate for the full year of business plan, is covered in our mid-single digit perspective for this year. You are right that there are elements from a macro perspective that we take a cautious view and necessary preparation steps in the year 2019, which is just beginning. But we would see our top line guidance for the year 2019, for the full year in the order of magnitude that we guided also the mid-term base.

In particular, the first quarter, and I think we touched on that one, we see a tough comparison base with a strong like-for-like we recorded in the first quarter of 2018, and also the delivery shifts that we've seen in wholesale will be a burden, at least the first half year of '19. So I think we are well advised with a mid-single digit top line guidance for 2019.

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [4]

--------------------------------------------------------------------------------

The second question was -- Antoine, this is Yves speaking. The second question was related to OpEx. So first of all, I actually want to highlight 2018 that we achieved the bottom line targets by operating leverage, because the gross margin decreased by 90 basis points and finally, we achieved our bottom line guidance.

So for 2019, we clearly are well ahead of our efficiency program. And on the other hand, we are committed to invest into the digital environment. And I think with our guidance to have a top line improvement mid-single and to have EBIT improvement high single digit, we are clearly delivering this, what we promised to our Capital Market Day that we will have an increase in EBIT margin at the end.

And what we see with our strategic priorities that we have really found the very prominent recipe to move on, and that we as a board have to balance it always between future growth -- future sustainable growth and delivering short-term profit.

Just to give you the right perspective on the investments that we are doing. Clearly, today, we have a high number of millions of online sales in the wholesale part. EUR 130 million in the wholesale part is related to online. So whenever there come a concession partner, we will convert these partners into the concession model, because we are convinced that this is strategically right.

Secondly, we are only present today in 12 countries with hugoboss.com. So a lot of bunch of white spots regarding our digital flagship hugoboss.com. And of course, all the store renovations, we know that the store renovations that they have a tremendous impact on net sales and sales productivity. So whenever the rental contracts will be terminated or will be renewed, then we start our remodeling because it pays off.

So these are the investments that we are clearly doing. And by the way, if we are saying that the gross margin will be improved up to 50%, this does not include -- this does not exclude that we might show operating leverage at the end.

--------------------------------------------------------------------------------

Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [5]

--------------------------------------------------------------------------------

Maybe just on what you said about the first quarter. As I understand, the impact on wholesale from the advance deliveries, so does it mean that you expect retail like-for-like in Q1 to be a bit below the mid-single digit? And maybe quantify what could be the -- what has been the running rate in the first 2 months of the year.

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [6]

--------------------------------------------------------------------------------

Antoine, just as I was saying, we can't comment any further on Q1 trading, but we all are aware that we experienced a very strong double-digit like-for-like in the U.S. operation, first quarter 2018, which, as we know, will not reoccur, due to the onetime effect from the tax cut that was effective, which drove short-term customer demand.

So it is the toughest quarter to beat from a like-for-like. It was, I believe, 7% like-for-like improvement was the strongest quarter in '18, which is just a matter of fact, a tough comparison base. We quantified at around EUR 10 million, the wholesale shift effect from the first quarter '19 into fourth quarter '18, both are burdening the momentum. But as we said, we are strongly convinced on our full year guidance for 2019, and this is what we want to reconfirm also today.

--------------------------------------------------------------------------------

Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [7]

--------------------------------------------------------------------------------

Thank you also for your sympathy for PSG.

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [8]

--------------------------------------------------------------------------------

Yes. Next year you're going to be in the final, I'm sure.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Your next question is coming from Andreas Inderst, Macquarie.

--------------------------------------------------------------------------------

Andreas Inderst, Macquarie Research - Senior Equity Analyst [10]

--------------------------------------------------------------------------------

Maybe 2 questions from my side. The first one, you guide on reported EBIT. What kind of one-offs can we lock in for 2019, is best guess a similar EUR 13 million negative impact, given all the measures you have assumed?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [11]

--------------------------------------------------------------------------------

Well the nature of one-offs is a bet that's, even for the smartest management team, hard to predict, especially as we discussed this item at the beginning in the process of first quarter. So that's why you will get no further quantification on embedded or implicit onetime items in our 2019 forecast.

Given the global structure of our business and complexity of supply chain, there will be, clearly, onetime restructuring or onetime expenses also embedded. But we think it's the right thing to do with the IFRS 16 changes that Yves explained to you that the business of our scale has to guide on an EBIT number, including also this onetime effect.

So we just follow best practice in our industry in this regard. And you can be sure it's a management obligation now to manage the business that we deliver on our results, including some less predictable items, which is the case like onetime items.

--------------------------------------------------------------------------------

Andreas Inderst, Macquarie Research - Senior Equity Analyst [12]

--------------------------------------------------------------------------------

Okay, good. And my second question, maybe you can give us a bit more hint on developments in the U.S. and China and Europe for 2019. What's your market expectations here? So maybe you can, particularly on China, you can outline your growth prospects beyond your general comment?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [13]

--------------------------------------------------------------------------------

Well first, I think that we -- something we already highlighted at the beginning of the year with our preliminary result that we have seen others through some industry voices have speculated on a slowdown of Greater China. That was not the case for us in the fourth quarter 2018.

So we have seen a very robust above-group average performance in this part of the world. By the way, also some smaller Asian markets for example, Japan also showed a very strong results.

We are happy, without going into much further detail, with the Chinese New Year development, which is a clear revenue driver in the first quarter 2019. And this is embedded in what Yves was giving you, that we expect an above-group average, so high single-digit growth on the Asia/Pacific region.

So it comes from a strong underlying market, which is clearly more favorable than what we see in trading for instance, European or North American market. And we expect also this market to benefit from our investment into the digital distribution, as we see with upgrading of our collaboration with important partners like Tmall that this will allow us to tap more aggressively into these growth opportunities.

Our outlook on Europe and North America is a bit more muted. It will also be, on a full year, clearly a growth part to it, but rather on a low to mid-single-digit basis. As I already mentioned in the question to Antoine, we are -- especially, the U.S. market is burdened by a very strong like-for-like comparison base from Q1 2018, but it's a single quarter effect. But we do see that the underlying market is clearly more muted compared to the Asia/Pacific overall in our industry, and this is reflected in our forecast.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question is coming from the line of John Guy from MainFirst.

--------------------------------------------------------------------------------

John William George Guy, MainFirst Bank AG, Research Division - MD [15]

--------------------------------------------------------------------------------

I've just got one clarification and 2 questions, if that's okay. Just clarification-wise on the retail sales densities, I noticed that there was a restatement on your sales densities within the retail business that seemed to only move up by EUR 100 to EUR 10,700 and still EUR 800 below where you were back in 2015. So I'm just trying to get a sense, number one, if that's correct. And also, how you're thinking about your improvement in productivity going forward into 2019.

My question with regards to, I guess, gross margin at the outlook, that you said, up to 50 basis points and the comments that you've made about progressively reducing your stock levels over the course of the year. And I appreciate that you said that the bulk of what you have in stock is effectively never out of stock product.

Could you sort of comment on how you see, at the moment, the moving parts within gross margin? Because you said that the markdown will be a better or better managed going forward. The FX should be slightly positive. You talked about a positive channel mix. There wasn't much of a positive channel mix in 2018. And I guess there will probably be some implied markdown, maybe not that much, given where you're going to take your stocks. I'm just trying to get a sense of how you look at those moving parts within that up to 50 basis point gross margin.

And finally, just on the costs. The selling expenses was obviously very well managed in 2018, just down just under 200 basis points. Marketing was also down by 6% or 60 basis points. So clearly, you're going to be looking to, I would imagine, invest in both of those areas with new store concepts and also pushing your 2-brand strategy going forward. So when you say that some of them may be some operating leverage coming from the expense line, where is that going to come from?

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [16]

--------------------------------------------------------------------------------

Thank you very much, John, for your questions. I will take those questions. First of all, the first question regarding sales productivity, so like we said to you in the Capital Markets Day, we will be clearly focusing on having an CAGR increase of 4% in sales productivities. This is what we are aiming for.

Secondly, what we did is, and this is what we said to you on Capital Markets Day for the future and this is embedded in those figures that we were showing, that you were referring to, we exclude online because we were arguing there is no square meters in online.

And thirdly, the improvement of EUR 100. This is true on euro basis. If you take this currency adjusted, it was between 3% and 4%. So currency adjusted was actually close to this, what we were originally expecting.

Coming back to the gross margin guidance, up to 50 basis points for 2019. Clearly, we will see a positive channel mix effect, because we will -- we envisage that retail will outgrow wholesale. And we will see a slight positive effect from this markdown management. And especially, if I refer to the fourth quarter, this is what we really achieved in Q4, that we had a very good like-for-like performance, 4% in retail in Q4, and we even lowered our markdowns, our discounts in Q4, in comparison to the prior year.

So having this in mind, this will continue, actually, in 2019 going further, and so we see improvements in gross margins up to 50% and markdown management. This means less rebates in comparison to 2018 will contribute to this effect.

And actually, if you have the guidance in mind, we want to improve actually our free cash flow from EUR 170 million to a range between EUR 210 million and EUR 260 million. So this includes actually CapEx -- more CapEx that we need in 2019. So we see that the dominant part is coming from profit improvement and less inventories.

And regarding the marketing expenses, yes, they decreased in 2018 versus 2017, but there was an IFRS 15 change. I'm sorry about all those IFRS changes. But actually, there was a mid-single-digit million amount that had to be booked as net sales deduction. This refers to the contributions that we are paying for wholesale partners for shop constructions.

So in 2017, they were booked as marketing expenses and in 2018, they were booked as net sales deductions. So I'm sorry about this technical effect, but that led predominantly to the effect that marketing spendings went down.

--------------------------------------------------------------------------------

John William George Guy, MainFirst Bank AG, Research Division - MD [17]

--------------------------------------------------------------------------------

I'm sorry, just one additional, just on this fast track that you've got, where you are looking to obviously bring product quicker to market and drive a higher full-price sell-through. Is there any idea, have you given any metrics around what the percentage of fast track is in terms of sales for '18 and where you're going to take that to '19?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [18]

--------------------------------------------------------------------------------

Well, on the fast track, which is basically something where we reproduce best seller that we identified early in the season, it's something that we have been doing already for many years.

It's by the way, something both our wholesale and our retail channels are benefiting from that we have in certain categories, be it jersey or sometimes even in clothing, where we have our own production facility, as you know in Izmir, that we are able to reproduce items where we see a stronger-than-anticipated sell-through. That's not, surely, something completely new. But there's clearly a limitation into this part of what we call fast track.

The far more exciting part that we highlighted in our call today, is where we are able now to have a full collection. So a full messaging that we can also use from a marketing perspective, a total look, that is fully digital developed.

And so all items from sneakers over trousers, jersey, outerwear, are developed now with lead times, which are less than 7 to 8 months, which is a clear reduction of more than 5 months versus previous practice, which allows us to be much closer to the latest fashion trends that we see, especially in casualwear.

Now we see a fourth generation of digital developed collection with HUGO, we have seen now the first time, and I think it's an important milestone where the digital developed collection have seen a slight outperformance in productivity, sell-through rates and lower markdowns than the traditional one.

And I think that's still early. As I indicated, we are just starting to grow the overall digital developed part of our collection. But if this proves to be a structural advantage, I think it's a very strong sign that this is not only far more cost efficient, but a superior way to operate in our industry.

That's why we would like you to focus more on the overall reduction in lead times via digital development process than the fast reaction processes, which are more commonplace I think, also with other players in our industry.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Your next question is coming from the line of Jurgen Kolb from Kepler Cheuvreux.

--------------------------------------------------------------------------------

Jurgen Kolb, Kepler Cheuvreux, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Two questions. First of all, Mark you just talked about the digitalization and your speedboat at HUGO. When do you think these experiences, these digital advancements that you've developed as HUGO can be shifted over to BOSS, where you have some -- when will we see some impact here from those advancements?

And secondly, on marketing again, sorry, your guidance was always 6% to 7%, given the new IFRS impact, is that still the run rate or should we more assume that going forward the marketing expense ratio will rather be at the low end of that corridor?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [21]

--------------------------------------------------------------------------------

Thanks for the question and you're absolutely right. Clearly, we are testing or we have developed first some of the digital capabilities, be it the showroom, be it a fully digital development process with HUGO, but this is spreading quickly throughout the operation.

So sometimes, people working on these efforts that are working across multiple brand lines, so they're also serving for example, BOSS menswear and womenswear in certain product categories. And we started to see already in 2018, that the number of physical prototypes also for BOSS is going down.

In some areas, where we traditionally, in outerwear, we have 2 or 3 physical prototypes, the teams, the designers, the technical developers have been also moved to new digital tools, which triggered, by the way, also some of the investments that we discussed earlier. But this is now already a technique that is being spread out through the organization.

So I'm very confident that even though we haven't quantified it yet, it's probably something that we will deep dive as a part of our Investor Day 2019, how quickly and how we will transfer the learnings from HUGO in the development process to BOSS. What we can already confirm today is that we have initiated the process in 2019, also triggering some investments in 2019, to bring the digital showroom distribution model also to BOSS.

So and during this -- the course of this year, we will start with our European showrooms to reduce our salesman samples also for BOSS. And predominantly based on the very positive feedback from wholesale buyers, say, using these screens, and I think you have seen it on site also, when we -- last time we invited you to our headquarter.

They say it's a much better tool to curate your buy, your collection, you would like to buy from HUGO BOSS with these new tools, and we will bring this in this fiscal year already to BOSS. On the development side for BOSS, we will probably give you more details on our expansion plan the later course of this year. On the marketing question, I will pass on this question to Yves.

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [22]

--------------------------------------------------------------------------------

Yes, Jurgen, regarding the marketing expenses, yes, we stick to our range between 6% to 7% every year. And like we said to you on the Capital Markets Day, actually we will grow in line with our net sales development. And in addition to this, like we said, we have a project running regarding marketing effectiveness.

We see sometimes having more effective marketing spendings coming from, due to the digitalization. But we are saying we will not reduce the number of percentage, but we want to keep this stable in line with the net sales overall. So we won't change our policy here. And if you have no further questions, good luck for tonight against Inter.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Your next question is coming from the line of Elena Mariani, Morgan Stanley.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [24]

--------------------------------------------------------------------------------

Two questions from me as well. The first one is on your online concession business. I just wanted to understand whether you could quantify the contribution from conversion of your online platform into concession businesses in your 2019 guidance. Because there's part of the growth that can be explained by the mechanical transformation of some revenues from wholesale to retail. And in this context, could you help us understand, excluding these effects, would ease the effective underlying growth that you are expecting both in wholesale and in retail, because I was getting to something like flattish wholesale growth for the full year, and perhaps a low single-digit growth in physical retail. Could you confirm if my calculation is correct? And my second question is on wholesale, I was a bit surprised by your guidance, excluding also these effects from the conversion of into concessions, wholesale seems to be quite soft in terms of guidance for the full year '19. Can you maybe share some feedback from the retailers on your product loan shares on the excitement around HUGO and BOSS, and why not a stronger growth in 2019 coming from these channel on an underlying basis?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [25]

--------------------------------------------------------------------------------

On the feedback, let me start with the second part of the question and then I will come back to the conversion impact. So we do have some visibility into the wholesale order intake for 2019. And what we do see is a continued strong demand like we've seen in our own e-com business, either it's hybrid models or online pure plays are still clearly outgrowing the overall market. So pure plays, like ASOS or Zalando, but also others that are wholesale partners of us are clearly growing at a rate above the underlying market. And also our traditional department store partners that are operating, both in physical retail brick-and-mortar and online, I wouldn't say all of them, but everybody said the e-com part of their business is growing significantly stronger than the e-com part of it . And this is, since the vast majority of about EUR 1 billion business on wholesale is still driven by a brick-and-mortar in Western Europe and North America, 2 regions which are not benefiting from the stronger underlying momentum that I mentioned earlier, in Asia/Pacific, gives us a reason to be cautious based on the order intake that we have seen that the wholesale business will be rather on the flattish side. And there are clearly 2 effect, and one I will discuss in a moment, but also the order delivery effect -- pre-delivery effect, which has had a dampening effect in 2019, all other things equal, due to the shipment already in the fourth quarter. The first part of your question has also a negative or dampening effect on the course of development, and clearly helps to our grow our retail business. However, it's too early to quantify this effect at this point of time. I mean, a lot of these negotiations are still ongoing, they will say what is the switchover date, and we still need to see what is then the full impact of that. I think it makes more sense to highlight that we are making clearly progress to grow this e-com concession business already in 2019. As you know, it is a major growth driver in our 2022 targets to grow e-com to EUR 400 million. So vast majority or the biggest part of that comes from digital concession. So we are very happy that we have good negotiations and making good progress to that, but it's too early to quantify the impact of that, so the implicit CAGR of 40% on our e-com business growing from EUR 100 million to EUR 400 million by 2022 is in terms of absolute and relative growth, especially driven by concession. But I would prefer to give you more details on successful completed conversions for every quarterly results, so we will have our next session in May. And then I think we have a better quantitative base to give you an indication on these retail, positive effect and the dampening effect on wholesale, which we try to find out.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [26]

--------------------------------------------------------------------------------

But given that you have a full year '19 guidance, perhaps can share with us what's your assumption's underlying. I guess, you probably made some calculations?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [27]

--------------------------------------------------------------------------------

Well we did. But as for your understanding that we say without these concessions takeover the wholesale numbers would be slightly higher, and clearly, and do we see the corresponding effect on retail. But please, I ask for your understanding because the moment when I give you the quantitative details to that I basically lock ourselves in an unnecessary wave in to complete this year may be on unfavorable terms, because we are committed to a certain sales impact to that. And honestly, I'm not interested in the strongest top line effect of that, but I want the most attractive deal for HUGO BOSS. And this includes for us as a management to have some flexibility to do the right deal and not one, which is implicitly guided in our top line guidance. So please, we run this business for profit and not for some general retail sales target number, and we need the flexibility to take the right decision for the business.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [28]

--------------------------------------------------------------------------------

Understood. And perhaps, just one small follow-up about your guidance based on the reported EBIT rather than adjusted EBIT. I might have missed part of your earlier answer. But effectively starting from reported EBIT, you start with approximately EUR 13 million of extraordinary items -- negative extraordinary items in 2018. So are you expecting to have a similar amount of negative extraordinary items into 2019? Because otherwise, it's quite difficult to understand your underlying guidance growth at the EBIT margin level.

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [29]

--------------------------------------------------------------------------------

Yes, this question, I think, I'm not sure what -- Andreas asked us a question to that. I mean, we have years we have seen significantly higher nonrecurring expenses. Remember that 2016 was an outstanding year, and we are clearly not envisioning something like this to happen in 2019 with the major retail restructuring. We think it's the right way to do, especially not only from the IFRS 16 changes that we explained to you that we give you an EBIT as a best proxy guidance for the year. We've comped and I will not break out our assumption for the nonrecurring. It could be in the order of magnitude of the previous year, but this is not a budgeted value in its way. But be clear, like we will be very explicit on the impact on the IFRS 16, is that anything like we had in the fourth quarter with certain liability that we have to disclose as part of our nonrecurrings from the fourth quarter, we would be very explicit. And I think we have a valid track record to be very open to explain to our investors if there are nonrecurring items, be it positive or negative, we will disclose these items and this is what we will do, but we can't give you a more explicit guidance details on the EBIT margin 2019.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Your next question is coming from Fred Speirs, UBS.

--------------------------------------------------------------------------------

John Frederick Speirs, UBS Investment Bank, Research Division - Director & Research Analyst [31]

--------------------------------------------------------------------------------

Two questions please. The first would be on online. You mentioned hugoboss.com was now in 12 markets, could you give us a sense of what proportion of your total group sales are coming from those 12 markets? And then second question would just be, could you tell us please, how you factored FX into your guidance in terms of top line and EBIT, in particular?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [32]

--------------------------------------------------------------------------------

Just to make sure that I got your questions right. So the EUR 100 million revenue that we generate in e-com are coming from these 12 markets. And we would probably add 2 more regions or market. Scandinavia, as you know, hope nobody from Stockholm is on the phone, so there's clearly more than one market. But the region and the expansion on island will be added to that. So that comes from these e-com markets. Was this your question or did I get you wrong?

--------------------------------------------------------------------------------

John Frederick Speirs, UBS Investment Bank, Research Division - Director & Research Analyst [33]

--------------------------------------------------------------------------------

More just in a broader sense to the total whitespace opportunity we're talking about, so the other 12 markets that you serve online at the moment, can you tell us the proportion of your total group sales they represent? Or maybe to come at it another way, could you tell us what the online proportion of sales in those 12 markets looks like?

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [34]

--------------------------------------------------------------------------------

Well, I mean, the one, it's just to calculate the EUR 100 million off the EUR 2.8 billion is the total group share, we would always say you have to look at it from the retail perspective. So then it's rather EUR 100 million out of EUR 1.6 billion retail business. If you would just look at these market, it varies. So the share one of the highest penetration we have in the U.K. and the German market, where we are in the double-digit share on all our retail sales. The Italian market is still a market where it's a lower penetration. Overall, in the markets where we operate physical brick-and-mortar and e-com, it's roughly around high single-digit to a low double-digit rate -- percentage rate of our retail business.

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [35]

--------------------------------------------------------------------------------

And Fred, regarding ForEx, overall, we see a very small impact actually, regarding from ForEx, which is overall actually negligible and which is included in our guidance. So we see a very low-million euro amount on the EBIT as a kind of headwind coming from ForEx. But we are in the beginning of the year and it's so difficult to predict, so but this includes our guidance.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Your next question is coming from Melanie Flouquet, JPMorgan.

--------------------------------------------------------------------------------

Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [37]

--------------------------------------------------------------------------------

I actually have more than 2, but I'll stick to 2 and 2 boring ones around the big drivers of the financials in quarter 4. I was wondering whether you could help us understand how the tax rate will evolve in 2020. If I understand well your targets, we are still around 30% in 2019. So where does that normalize, starting 2020 please. And the second question is regarding DNA issue. I'm sorry, they are a bit boring questions. But here you had a lot less impairment test in quarter 4 than you usually have. Is that your new norm. ex-IFRS 16, we're talking because clearly DNA line will change with IFRS 16. But excluding this, should we expect this line to remain around that level for full year '19? Or was this an exceptional year in the lower impairment test?

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [38]

--------------------------------------------------------------------------------

Thank you very much, Melanie, for your questions. This is Yves. We expect that the tax rate for 2020 will go down again. So this will be in the range between 26% and 28%, this is what we expect for 2020. And regarding the DNA, this is heavily related actually to our impairments. And there are actually, I think it's worthwhile explaining to you why the impairments were going down because impairments on our stores are actually normally extraordinary depreciations that we are doing on our assets of the stores. And there are actually 3 good reasons why the impairments are going down. First of all, we have experienced a very good like-for-like performance from 3% in '17 to 5% in '18, so a better performance of the stores. So the logic is, the better the store performs the less impairments you will have. Secondly, and this is another inherent effect, since there is not such a kind of store expansion to new opening stores, rather remodeling or relocation, this means that the risk is lower for new stores or the investments that we are undertaking, say it being a relocation or being it remodeling. So the better in your language is lower, so less risky, and this comes with the effect that impairments will structurally be lower once we go into this remodeling mode. And thirdly, my board colleagues, Bernd and me being still new, we are much more restrictive regarding store approvals and this has an effect on the impairment as well. So these are the 3 major drivers why impairments have come down in 2018 significantly.

--------------------------------------------------------------------------------

Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [39]

--------------------------------------------------------------------------------

Very, very clear. Just a clarification. The like-for-likes that you will report moving -- starting quarter 1, will exclude e-commerce?

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [40]

--------------------------------------------------------------------------------

Include. The like-for-like will include.

--------------------------------------------------------------------------------

Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [41]

--------------------------------------------------------------------------------

Will include this number.

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [42]

--------------------------------------------------------------------------------

Yes. No change to prior years. No.

--------------------------------------------------------------------------------

Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [43]

--------------------------------------------------------------------------------

Because I thought they were not included in your target?

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [44]

--------------------------------------------------------------------------------

No, they have been always being included in the like-for-like.

--------------------------------------------------------------------------------

Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [45]

--------------------------------------------------------------------------------

No, I know. I thought that 2019 was a change, because as you said your...

--------------------------------------------------------------------------------

Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [46]

--------------------------------------------------------------------------------

No, that chance was to the sales productivity, I'm sorry. So therefore the sales productivity, and this is related to -- I'm sorry, I don't want to confuse you, but this relates to sales productivity, clearly relates to the brick-and-mortar business, like-for-like includes online because they are like-for-like countries that we are doing like-for-like online business. And we have the same logic for online and brick-and-mortar, but sales productivity only includes the euros per square meters and not online.

--------------------------------------------------------------------------------

Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [47]

--------------------------------------------------------------------------------

Thanks for everybody joining us in the call, and especially for the time spent with us. So this completes our call for today. We will be reporting back to you on May 2 on our first quarter. If you have any questions, which you would like to discuss in more detail with us, our well-known members of the Investor Relations team are ready to help you on this one.

With this being said, I want to thank you for your participation, and wish you a very good day. Thank you very much.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

That does conclude our conference for today. Thank you for participating. You may all disconnect.