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Edited Transcript of BOSS.DE earnings conference call or presentation 5-May-20 12:00pm GMT

Q1 2020 Hugo Boss AG Earnings Call

Metzingen May 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Hugo Boss AG earnings conference call or presentation Tuesday, May 5, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Elena Mariani

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

* Jaina Mistry

Deutsche Bank AG, Research Division - Research Analyst

* Jurgen Kolb

Kepler Cheuvreux, Research Division - Analyst

* Kathryn Parker

Jefferies LLC, Research Division - Equity Analyst

* Melanie Anne Flouquet

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

* Thierry Cota

Societe Generale Cross Asset Research - Equity Analyst

* Thomas Vincent Chauvet

Citigroup Inc, Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the HUGO BOSS First Quarter Results 2020. (Operator Instructions) I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Christian Stoehr, Head of Investor Relations. Please go ahead.

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

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Thank you, Maria, and good afternoon, ladies and gentlemen. Welcome to our first quarter 2020 financial results presentation. Today's conference call will be hosted by Mark Langer, CEO of HUGO BOSS; and Yves Müller, CFO. (Operator Instructions) Now let's get started. And over to you, Mark.

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

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Thank you, Christian, and good afternoon, ladies and gentlemen. Also from my side, a very warm welcome to all of you. In the next 20 minutes, Yves and I will guide you through our first quarter 2020 operational and financial performance. We will use a considerable part of this call to address the current situation in the context of the COVID-19 and elaborate in detail regarding our comprehensive measures to safely navigate HUGO BOSS through these exceptional times.

Allow me to start, however, by also saying a few words about myself. As you are all aware, after 18 years with the company, I will leave the Managing Board of HUGO BOSS at the end of September. I'm grateful for almost 2 decades that I've been able to serve HUGO BOSS in various roles and for having had so many talented and passionate people around me who supported me during this journey. Yet, today is not about saying goodbye. Our company, just like the apparel industry as a whole, is currently facing an unprecedented situation, a situation that none of us had witnessed before and a situation that requires the full attention and dedication of each and every person working for HUGO BOSS. I care deeply for this company, and I will continue to serve HUGO BOSS as best as I can in the months ahead.

Together with my Board colleagues, I will ensure we take all steps necessary to steer HUGO BOSS through this crisis. Despite major challenges associated with the COVID-19 pandemic, we are fully aware of the social responsibility HUGO BOSS assumes in particular during the current situation. Prioritizing the health and well-being of our employees, customers and partners is and will remain our guiding principle for any decision we currently take. In this context, and already at an early stage, we set up a cross-functional crisis team that closely monitors the development of the pandemic, thereby coordinating all measures to moderate the impact on our people. That includes enabling our corporate employees to work from home and implementing a variety of precautionary measures relating to distancing and hygiene rules for our global production, logistics and retail staff.

In order to make a vital contribution to the well-being of the public, we've temporarily dedicated our manufacturing facility in Germany to the production of reusable face masks. In the meantime, almost 200,000 of these masks have been donated to public services and facilities. Likewise, we donated protective suits as well as face shields to medical facilities, both of which were produced in our facility in Izmir.

In addition, over the course of the past several months, we have temporarily closed most of our retail stores, including shop-in-shops and outlets, in order to protect our customers and our retail staff while at the same time complying with regulatory requirements.

So let us take a closer look at the impact of these measures on our global store network. As of March 31, approximately 75% of our global retail store network was closed with the remainder largely operating at reduced operating hours. While the vast majority of our store base in Asia Pacific has reopened towards the end of the quarter, Europe and Americas, by far the biggest regions, were almost entirely shut down following the implemented lockdown in mid-March. Since then, the situation has barely changed. And while Europe has seen the first store openings in Germany and Austria towards the end of April, the situation that we are haunted with globally continues to put severe pressure on our brick-and-mortar business in most of our core markets. As we speak, more than 3/4 of our global store base remains closed.

For HUGO BOSS, the current circumstances led to a significant decline in sales, profitability and cash flow. After a very promising and successful start to the new year, the global spread of the virus significantly impacted our business, first, in Asia Pacific and with some delay also in Europe and the Americas. Consequently, group sales decreased 16% to EUR 555 million in the first quarter. This corresponds to a currency-adjusted decline of 17% compared to the prior year level.

In Asia Pacific, sales for the quarter were down 31% currency adjusted. Following 3 weeks of strong double-digit growth in the run up to Chinese New Year with a rapid spread of COVID-19 and the corresponding store closures put a strain on our business. This was particularly noticeable in the Chinese market, where comprehensive actions were taken at an early stage. As a consequence, Q1 sales in China were considerably weaker as compared to other markets in the region, such as Japan and Southeast Asia. However, since the reopening of our stores in Mainland China towards the end of March, we have been witnessing an encouraging and steady improvement in this important market.

In April, sales in Mainland China were down only 15% to 20% as compared to the prior year level after being down 80% and more in February. We are confident that the positive trend we are currently seeing, whether that's customer demand, traffic or conversion, will continue in the coming weeks, enable us to return to growth in the foreseeable future. The gradual recovery in China is accompanied by consistently strong performance of our online business in that market, in particular, during the month of April. This includes significant double-digit sales growth recorded on important e-comm platforms such as Tmall and JD. We are also in the midst of strengthening our social commerce capabilities on WeChat and the likes in order to further accelerate online sales growth, while at the same time, driving brand momentum among the Chinese client tier.

Moving over to Europe, where the strong momentum from the final quarter 2019 continued at the very beginning of the year. Many key markets such as the U.K., Spain and Italy recorded robust sales growth in January and February, while others such as France already began suffering from a lower share of tourism in particular from Asian countries. As the spread of COVID-19 intensified also in Europe, we acted quickly by temporary closing virtually all of our stores and point of sales at wholesale partners in mid-March. This led to an overall decline in currency adjusted sales of 14% in the first quarter. While retail sales saw a decrease of 10%, wholesale sales were down even 19%, the latter mainly reflects lower deliveries to wholesale partners in light of the ongoing uncertainties of COVID-19 but was also driven by 2 conversion effects. Firstly, also on a technical note, the successful expansion of our online concession model over the course of 2019 keeps burning our wholesale performance in the short term. This is particularly relevant for our European business following the successful conversion of our BOSS business on Zalando from wholesale to retail, which largely took place during the third quarter of 2019. Secondly, starting on January 1, 2020, we have fully consolidated our group entity in the United Arab Emirates. Together with a strong local partner, we are now successfully running 5 BOSS stores and 1 HUGO store in the market. The generated sales have previously been accounted for as wholesale revenue and are now fully included in retail.

Looking ahead, we are mindful that the economic environment in Europe will most likely remain challenging in the short term. While we have taken the first steps to get back some of our free standing stores in Germany and Austria on track, we have to acknowledge that we'll be a long way back to normal operations. With only a few days trending again, it's also too early to provide you with the first indication on current trends in these 2 markets.

In the Americas, the situation the first quarter was quite similar to that in Europe. Both January and February played out very well particularly in our important U.S. market, where comp store sales reaccelerated and posted very solid growth after having stabilized in the previous 2 quarters. Against the backdrop of the pandemic, however, momentum in the U.S. and Canada deteriorated sharply in March. This resulted in a 17% currency adjusted revenue decline for the Americas in the first quarter, with retail and wholesale performing broadly in line. In contrast, our business in Latin America was affected by the pandemic only later. We were, hence, able to record sales growth for these markets in Q1, reflecting robust momentum in both Brazil and Mexico. At the end of March, however, retail stores and shop-in-shops in these 2 markets have been closed in order to protect our customers and employees.

While the vast majority of our stores, shop-in-shops and outlets have been affected by temporary closures in the first quarter, our own online business continued its double-digit growth trajectory. With an encouraging currency adjusted sales increase of 39%, the first quarter of 2020 marked the tenth consecutive quarter of strong double-digit growth for our e-comm business. This not only reflects the growing importance of our own website, hugoboss.com, but it's also proved positive for the success of our online concession business implemented with many of our core partners. As a result of its strong outperformance versus physical retail, the share of our own online business increased from 7% in the prior year period to 11% of own retail revenues in the first quarter of 2020. We are absolutely confident that the strong momentum of our e-comm business will also continue in the second quarter. In this context, we are encouraged by the further acceleration in online sales growth in the month of April, with revenues more than doubling as compared to the prior year period.

In total, retail sales were down 17% currency adjusted in the first quarter. On a like-for-like basis, currency adjusted revenues decreased 20%. The nonlike-for-like part of our retail network was somewhat more resilient, benefiting from the aforementioned expansion of our online concession business in 2019 as well as around 50 store refurbishments completed in the prior year. Wholesale revenues declined 18% in the first quarter reflecting lower deliveries to wholesale partners due to order cancellation as well as softer replenishment business towards the end of the quarter. Besides this, the conversion effects that I mentioned earlier also weighed on our wholesale performance in the first 3 months.

Ladies and gentlemen, that concludes my operational review of the first quarter of 2020. Before I hand over to Yves to guide you through the most important P&L and balance sheet items, allow me to conclude very briefly. The situation we are confronted with is by far the biggest challenge our industry has faced in recent history, in particular, as it did not allow us nor anybody else to fully prepare for it. We at HUGO BOSS, we're going into the year with high confidence. We are committed to further executing our strategic initiatives and driving the strong momentum from the final quarter 2019. Now the priorities have changed, and our focus will be on protecting the long-term well-being of our company and ensuring that we rebound even stronger once the crisis is over. I'm fully convinced that HUGO BOSS will successfully overcome these challenging times. Thanks to the great passion and dedication of our more than 14,000 employees worldwide, the strength of our brands as well as our group's solid balance sheet, we are well equipped to safely navigate HUGO BOSS through this pandemic. And we are in the middle of implementing numerous measures that would help us safeguard the financial flexibility and stability of HUGO BOSS. Regarding the latter, Yves will provide you more color. Yves, over to you.

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

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Yes. Thank you, Mark, and good afternoon, ladies and gentlemen. As Mark has already alluded to, the challenges associated with the pandemic inevitably weighed on our financial performance in the first quarter. At 62.9%, the gross margin was down 90 basis points versus the prior year level. Against the backdrop of the pandemic, increased markdown activity weighed on the gross margin development in Q1. All other effects, including channel mix, currencies and inventory valuation, only had a minor impact in the first quarter.

Speaking of inventory valuation, let me be very explicit when I say that we expect a meaningful impact of the ongoing store closures on our inventory position in the coming quarter. Consequently, the gross margin development in the second quarter will most likely be burdened by a significant negative inventory valuation effect.

Moving over to operating expenses, which saw 1% decline in the first quarter. Within operating expenses, selling and distribution expenses developed broadly stable in the first 3 months of the year. While we recorded some first cost savings from the various measures we implemented to protect our cash flow, something I will talk about in detail in just a few minutes, we also had to post valuation allowances for specific wholesale accounts in the magnitude of a high single-digit million euro amount. Besides this, also the full consolidation of our subsidiary in the Middle East that Mark mentioned earlier led to the inclusion of costs in the mid-single-digit million euro range. These costs are associated with our 6 stores in Dubai and Abu Dhabi. Last but not certain but least, negative currency effects impacted selling and distribution expenses by a low single-digit million euro amount.

On the other hand, we were able to bring our administration expenses down 6% in the first quarter, mainly reflecting our continued strict cost management approach. In addition, lower personnel expenses also contributed to the decline in admin expenses. To complete the picture on the P&L, both EBIT and net income came in below the prior year level, mainly reflecting the double-digit sales decline, which unsurprisingly weighed on the bottom line development.

Now let's move over to the key balance sheet and cash flow items. Trade net working capital increased 1% year-on-year, currency adjusted. Lower trade net receivables contributed positively as a result of the wholesale performance in the first 3 months. Our inventory position, however, was up 6% currency adjusted, reflecting the aforementioned store closures. During the course of the first quarter, we adjusted our CapEx budget for the full year to the current environment. This, in turn, meant suspending the majority of store renovations and new openings until further notice. As a consequence, capital expenditure in the first quarter was 41% below the prior year level at EUR 18 million. A major project that we finalized just before the store closures in EMEA and in America took place was the relocation of our BOSS flagship store in New York SoHo district, which is now shining in a new splendor at an even better closer location close by.

Finally, free cash flow in the first quarter came in at minus EUR 86 million as the earnings decline was only partly compensated for by the first successes of the various measurements initiated to protect our free cash flow.

Ladies and gentlemen, the current global health crisis and its financial implications represent an unprecedented situation for the industry as a whole as well as for HUGO BOSS. However, thanks to our healthy balance sheet and the comprehensive measures we have initiated to protect our cash flow, I'm fully convinced that we were able -- that we are well equipped to navigate this exceptional situation. So let's take a closer look at the various initiatives aimed at securing our liquidity and hence, preserving the viability of our company. I will focus on the 4 most important ones as they together will lead to an additional protection of free cash flow in a magnitude of around EUR 600 million.

Starting with operating expenses. On top of our already consistent approach to strictly manage overhead costs, we have meanwhile mobilized fast and determined all levers that will enable us to realize additional savings, in particular, in the areas of selling and distribution. In total, we are targeting incremental cost savings of at least EUR 150 million in fiscal year 2020 compared to our initial budget. This includes payroll savings via implementing short-time work in Germany as well as other countries, reducing working hours in retail, postponing all planned salary increases for 2020 as well as putting a global hiring freeze into immediate effect. Our goal is to maintain our workforce during this challenging time, while at the same time, staying as flexible as possible. We, as the Managing Board, will also participate in the measures to secure cash flow. And consequently, we will waive 40% of our basic remuneration for the month of April and May 2020.

Besides personnel expenses, our initiatives also include savings resulting from successful negotiations with our landlords as well as individual agreements to temporary reduce rental expenses for several stores over the next month. We have also reviewed our marketing budget and canceled or postponed various marketing events and campaigns. Saving in this regard relate to cutting back on media and print advertising, visual merchandising as well as physical events. At the same time, we will continue to invest in digital marketing with a strong focus on our e-comm platforms and social media in order to keep driving brand momentum for BOSS and HUGO.

Last but not least, we are also eliminating all further nonbusiness critical operating expenses, including reducing external third-party services, reducing travel expenses and halting nonessential system implementations. On top of the aforementioned OpEx savings, we are cutting our CapEx budget for the current year by around 1/3 as compared to our initial plan of around EUR 150 million. This mainly includes postponing planned store openings and renovations when not perceived to be business critical. In addition, we have decided to hold all nonessential IT investments.

To limit the increase of our trade net working capital position in the quarters to come, we will reduce the inventory inflow by at least EUR 200 million in fiscal year 2020. In particular, the upcoming fall winter collection will see a significant reduction in the overall order volume. That includes agreeing with our key suppliers on significantly reducing orders as well as adjusting our own production in Izmir, in Turkey to lower demand in the short term. In addition to this, we are taking a very conservative approach when it comes to the replenishment business for the current Spring/Summer collection while, at the same time, planning to carry over the high share of styles between the 2 seasons.

Last but not least, as already announced last month, we, as the Managing Board, together with the Supervisory Board, decided to propose to the Annual Shareholders' Meeting on May 27 the suspension of the dividend payment for fiscal '19, except for the legal minimum dividend of EUR 0.04 per share. The retention of net profit will further strengthen our financial flexibility in the 2020 fiscal year. I'm absolutely convinced that the execution of all these measures will enable us to protect our otherwise very healthy balance sheet and provide us with the right amount of financial flexibility. Securing sufficient liquidity is and will remain our top priority in the short term.

Now before I come to an end, ladies and gentlemen, allow me to say a few words on our expectations for the full year and the second quarter in particular. As you would expect, the ongoing temporary store closures will continue to weigh on our top and bottom line performance in the short term. At the same time, the level uncertainty remains elevated as we speak, as nobody ultimately knows today how long the situation will last and how quickly we will be able to return to growth. This in turn means that it's still impossible to quantify the resulting negative effect for the 2020 fiscal year at this stage. Nevertheless, we have to be prepared for a challenging second quarter. This is particularly true with regard to our business in Europe and in the Americas, which under normal circumstances, represents a good 85% of group revenues and which remains heavily affected by the ongoing store closures. Consequently, we expect both top and bottom line declines in the second quarter to be more severe than those recorded in the first quarter, with currency adjusted sales projected to be down by at least 50% in Q2. The latter will, of course, heavily depend on how long the lockdown will last and how quickly the brick-and-mortar business will be able to return to a more normalized trading. The expected top line development, together with a more pronounced impact from inventory write-downs that I mentioned to you earlier will significantly weigh on our operating result, which at this stage is estimated to be negative by more than EUR 100 million in the second quarter.

Despite the current situation and a rather difficult second quarter ahead, we are confident that from the third quarter on, the retail environment will gradually improve. This should also positively impact the group sales and earnings development in the second half of the year.

Until then, the key priorities we are focused on and executing against remains clear. One, working with highest discipline on our measures to secure the financial stability of HUGO BOSS, while at the same time, driving and exploring our huge opportunities within our growth drivers online in China. And with this, ladies and gentlemen, Mark and I are now happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from the line of Jaina Mistry from Deutsche Bank.

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Jaina Mistry, Deutsche Bank AG, Research Division - Research Analyst [2]

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Can you hear me?

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

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Perfectly.

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Jaina Mistry, Deutsche Bank AG, Research Division - Research Analyst [4]

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I'll stick to 2. Firstly, on inventories, based on your commentary, by when do you think the inventory position will be clean? And what proportion of your inventories today are evergreen versus seasonal? My second question is on cost savings. What magnitude of cost savings did you see in Q1? And of the EUR 150 million that you've guided to, what will be the phasing over the year?

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

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If you want to go with OpEx and I take the one on inventory?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [6]

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Yes. Clearly, like we said, we expect savings in the OpEx side to be EUR 150 million. We had only some savings in Q1 because as you might know, the lockdown started in the majority of our business in the mid of March, and so the EUR 150 million will be, well, more or less spread over the next quarters, I think, with a certain effect in Q2 and Q3.

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [7]

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On the inventory side, we do about 20% on our business with evergreen articles, so that have no specific connection to the Spring/Summer or Fall/Winter collection. Even so, this trend seasonal share of our collection has grown, so we are quite confident that already part of our Spring/Summer collection will now be used to merchandise our stores as we restart our business. As Yves already explained in detail, we have seen already our ability to slow down the inflow of fresh merchandise in the first quarter. So despite the lockdown and depressed sales levels in retail and wholesale due to the lockdown, we have seen a very modest increase in inventories versus the previous year. We have clearly adjusted now our production volumes both on the retail and wholesale side for Fall/Winter and beyond. We will use these inventory that we are not able to sell at full price now as inventory for our factory outlet business for first half year of 2021. So we have adjusted both our production volumes for full-price business as off-price business. And I think we already gave you the indication that we have already identified and implemented measures to improve our inventory situation by around more than EUR 200 million until the end of 2020, which would give us a relative size of the inventory to the business size comparable to previous year. So at this point in time, we expect a normalization on the inventory in terms of its structure as we go into '21, but we expect our healthy relationship between inventory and business size already in the second half of 2020.

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Operator [8]

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

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Jurgen Kolb, Kepler Cheuvreux, Research Division - Analyst [9]

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Yes. Also on the inventory side, maybe one quick one. And what exactly are you writing off or are you indicating to us that you may want or you want to write off in Q2? Spring/Summer, but is that also Fall/Winter and the upcoming Fall/Winter collection? And maybe some more indications on how much you think you have to reduce the price of the merchandise when you ship it to the factory outlets? And secondly, I noticed HUGO had, even in the Q1, a very strong casualwear business, which was even in the second quarter up double digit. And I was wondering if you could maybe give us some indication what kind of products we're selling so well here and what the share of the leisure or the casualwear share is right now at HUGO.

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [10]

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Yes. So to be very clear, we have taken already quite significant adjustment measures on the Fall/Winter merchandise. So this is such merchandise to write here, so there's no write-downs on the Fall/Winter. However, what we flagged out is that we do expect, due to the low volumes, some movement on the Spring/Summer merchandise due to the lockdown that our SAP system will indicate write-downs both on Spring/Summer '19 merchandise we were not able to sell at the expected speed in our off-price business and same is true for the Spring/Summer '20, in our full-price business. Yes, we do expect that our SAP valuation runs will indicate and ask or lead to write-downs on the inventory on the spring merchandise. Because on the spring merchandise, as you probably know, we had no chance to react because as we were hit by the full magnitude of the slowdown in the end of March. So the -- what we indicated as we expect second quarter to be affected by inventory write-down, this relates to the Spring/Summer 2019 collections. You're right to highlight one of the encouraging trends that we continue to see. HUGO maintains its momentum especially in the casual side of the business. You remember that's one of the elements of our midterm growth plan, they clearly delivered. And we have seen also in this global depressed first quarter a double-digit growth in casual, which has brought the casualwear business at HUGO now almost on par with the formal business. Due to the category remigration, the business part is overly affected by HUGO, but we have seen a 12% growth in HUGO casualwear. So we are clearly -- in the circumstances of the corona pandemic, we have seen still a strong underlying demand for the HUGO contemporary segment.

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Operator [11]

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Next question is coming from the line of Thomas Chauvet from Citi.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - MD [12]

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Two questions, please. The first one on your online business. Are you capable of coping with the triple-digit growth in April for another couple of quarters or more from a logistics standpoint? How do you ensure you won't miss revenue opportunities as well as maintain a high level of customer service? And secondly, maybe for Mark. I know there's no crystal ball, you've said that for many years in this industry. Can you give us a bit of a -- kind of a demand-recovery scenario update in Q3 and Q4? It seems you want to be quite positive on Q3 and maybe the beginning of Fall/Winter. If H2 was worse than expected, what level of incremental cost savings could you implement? I think you mentioned in an interview this morning a potential headcount reduction. And just a follow-up on Jurgen's question earlier, and the casualwear of HUGO, when do you think you could translate that very brand-specific momentum into BOSS? We're still seeing boss casualwear not performing as perhaps it should be even in this environment.

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

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Yes. Thanks, Thomas. Be cautious we highlighted above 100% doubling business for the month of April, but this is not a full year indication to that. But your question was not whether we forecast doubling for the remainder of the year, but whether we are capable to deal with that. Our ability to serve customers with our multichannel warehouse setup has clearly proven itself to be beneficial and a strategic asset for the group in this times of lockdown. We are not depending on any third-party in fulfilling these online orders. We don't have to fight for getting our right place in queuing systems. It's all run by HUGO BOSS's one inventory pool. So we have been very swiftly able to shift inventory that we initially bought and allocated to brick and mortar to bring this inventory to the online side of our business. So under the assumption we would see a high double-digit growth or even triple-digit growth in e-comm, our logistical capabilities will be no limiting factors to fill these demands. We also monitor very carefully service levels in terms of fulfillment. As you know, a lot of our business now comes also via concession third-party platform. Zalando is working very closely with us to ensure and monitoring our service levels relative to the industry. And I can assure you that HUGO BOSS stands out in terms of service quality relative also on these multi-brand platforms, which is also proof on the sophistication and capabilities of our e-comm platforms. As we indicated in our outlook on the second quarter, we do expect a continuous release on the lockdown in core markets. We have seen already first indication in Europe. I think you're well aware on some of the trends we also see on the other side of the Atlantic happening in the U.S. And I think Yves also spend some details on that we are quite encouraged by the trends we have seen in China. Also April, latest trading days was even better than what we have seen at the beginning of the quarter.

So I think there's a clear sign that we are on a recovery path as stores begin to reopen. But since the range of potential outcome for the third quarter, as we, on the one hand, expected gradual improvement, however, there's a wide range of potential outcome, it makes it difficult for us to predict already -- or to give you a full year guidance. So I would leave it at this point in time that we do expect an improvement in the second half of the year. We expect second quarter to be the low point on the performance, but we can't provide you with more color on the second year and the full year development.

I would spin your question on BOSS Sportswear versus HUGO Sportswear positive -- slightly more positively, speaking on behalf of HUGO BOSS, of course. So we do see overproportional growth also on the BOSS Sportswear side. And also the 2-brand strategy has clearly shown that the consolidation of our -- at least our casualwear and smart casual offering has driven -- was one of the key elements driving better sales density and performance in our stores. And also the feedback that we provided you in our previous quarters that BOSS on the wholesale side has started to gain traction. We mentioned already the development in the U.S., where we stabilized and we have seen good momentum in the first 2 months of 2020 under the new leadership of Stephan Born, gives me a lot of confidence that when we -- once we overcome this crisis, BOSS Sportswear will be the key growth driver for the group for sustainable growth. So in terms of collection, in terms of merchandising with the new setup, I'm absolutely confident that once we have this crisis behind us, BOSS Sportswear will be an important growth driver for us in core markets, be it in Europe but also in our 2 non-European markets, in the Americas and also on -- in Asia.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - MD [14]

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Mark, wishing you very well in the coming months and the future.

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [15]

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Thank you, Thomas.

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Operator [16]

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Next question is coming from the line of Antoine Belge from HSBC.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [17]

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It's Antoine Belge, HSBC. Two questions. First -- actually my first question for Mark is -- actually has 2 parts. So first of all, were there any difference in views in terms of the strategy at HUGO BOSS for you to leave the company? And also, can you provide an update about the search for a new CEO, what type of profile and what could be the time frame?

My second question is back to this guidance for Q2 of an EBIT loss of at least EUR 100 million. And so what would be the gross margin evolution in that -- on that assumption? And also, how much -- how many basis points will represent the inventory valuation effect that you already flagged? By the way, I mean it seems that other companies, if I look at adidas, for instance, they took inventory already in Q1. So what's the reason for delaying that to Q2?

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

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Let me start with the first one, and then Yves will kick in on the second. So as always, I ask for your understanding that any details or reasoning why on my departure end of September is something that we will not discuss in public. But it's important on this one, I'm very aligned with the Supervisory Board and also with the Chairman, that was not based on any disagreement on the strategy of the group, which we as Managing Board and also Supervisory Board fully endorses. I'm also unfortunately not the right person to ask on the status on the profile of the new CEO. That's fully the obligation on the Supervisory Board. So this is something that neither Yves or I can give you any further color to it. Of course, I will be in my current role until the end of September. I agreed to serve as an -- in an advisory role until the end of 2020. But I'm also absolutely confident that with the current Managing Board, the company is in very good hands in these clearly difficult times. Yves, you want to give a bit more detail on the gross margin topic?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [19]

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Yes, Antoine. So regarding your second question regarding the guidance for Q2, clearly, we expect an EBIT loss that will be exceeding EUR 100 million negative. But for the time being, we cannot -- because of the high level of uncertainty, we are really not able to provide us with any guidance regarding the gross margin because any factor, they are so uncertain for the time being, it will be very difficult. And relating to your question 2b, I would be saying regarding inventory valuation. Since you all know, I mean you have, of course, your valuation routines at end of Q1. And be aware that the majority of lockdown, especially of 85 of our business -- 85% of our business in Europe and in the United States just started in the middle of March. So the aging structure and the coverages, that these are the 2 main determining factors of the inventory valuations, were actually in a fairly good position at the end of Q1. But what we expect is that due to the closures we have experienced in April and our expectation for the remaining Q2, we expect that the inventory valuation will hurt the gross margin in the second half of -- in the second quarter of the year.

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Operator [20]

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The next question is coming from the line of Thierry Cota from Societe Generale.

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Thierry Cota, Societe Generale Cross Asset Research - Equity Analyst [21]

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First, coming back to the 50% minimum sales drop you expect in Q2, can you give us some granularity on your thinking, whether you think that there should be a difference in trends between wholesale and retail and whether you think Europe and U.S. should be, as in Q1, pretty much [the same] or not?

And secondly, on online, if I'm not wrong, the growth was a little slower in Q1 than in Q4. I was wondering if there was any less visible space impact last quarter versus the previous quarter.

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [22]

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Now let me start with the online question. I think to give you a bit more color through it, also online was not completely immune to the -- I would even call it shocks as the coronavirus became a global pandemic. So there was clearly a period starting basically mid-end of February until early February, where on the top of consumers' minds as they search the web was not necessarily apparel but sanitizers and toilet papers, at least in some markets. So this has changed. It has strongly changed. It has changed already with good growth numbers in the second half of March. And as I said, we are very pleased with the momentum we have seen in April. So we do believe that customers have adopted to that. There continues to be very -- there's a high interest in our brands. So our CRM activation continues to work, maybe not to the full level as it is not able to drive people to our stores, but we are happy with the traffic it generates at our site, and as I already said, also our concession partners. Clearly, the biggest one, Zalando, where we have taken our control for the BOSS side of our business, I'm extremely happy with the underlying demand for our collections, coming back to the discussion we had on HUGO and BOSS Sportswear, and the results that we generate. So the 39% online growth in the first quarter was not an even number. We had a very, very strong start then the base business slowed down significantly, to restart, as I said, at the beginning. And we take this momentum now at play, we would like to work with that as long -- and this leads over to the question where Yves will give you a bit more detail. On the drop, we do expect in the second quarter, which is predominantly driven by the vast majority, 85% of our business, which has now been closed for already 6 weeks into the quarter. And we see only a very slow gradual reopening strategy. But Yves, please, if you provide a bit more detail to Thierry.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [23]

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Yes, Thierry, as you know, like especially in Europe and in the Americas, these 2 together are like 85% of our business. And actually, we now expect that the lockdown will be gradually relieved in some of those countries. This will take a while. And actually from our expectation of channels, it will be evenly somehow be divided between retail and wholesale as both channels are now starting to trade in these respective countries. And be -- of course, as you know, as almost the wholesale business in APAC is almost negligible. But still keep in mind that even in the Asian region, there are some countries like Japan, for example, and Singapore, that it's more likely that there will be no trading in May because of governmental regulations. So we will see a gradual pickup there in -- earliest in June if we talk about, for example, countries like Japan and Singapore.

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Operator [24]

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Next question is coming from the line of Kathryn Parker from Jefferies.

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Kathryn Parker, Jefferies LLC, Research Division - Equity Analyst [25]

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Can you hear me okay?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [26]

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We do hear you loud and clear.

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Kathryn Parker, Jefferies LLC, Research Division - Equity Analyst [27]

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Great. So, my first question is on the store performance in China. And -- so obviously, you've given the April figure, but I wondered if you could tell us what the exit rate for the month was and if there are any trends in [50-odd] segments of consumers that are outperforming? And perhaps, whether you expect to turn positive in May or June?

And then my second question is on wholesale, whether you would consider buying back any unsold stock from your wholesale partners to prevent them from discounting it? And how much control you actually have on the timing and depth of discounting in your wholesale business?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [28]

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Yes. Thank you very much, Kathryn, on both question. As we said, we have seen from the low point as China was hit first, basically the same as we now see in Europe, a complete lockdown, more than 80% down. We've seen quite a steady improvement. And I think for -- if you look at the full month base, we have seen our business at the end of the quarter already recover to business that has already recouped 80% to 85% to the pre-corona level. We have seen in the recent weeks, but we are too -- it's too early to tell whether this is predictive for the first -- full second quarter, we have seen further encouraging signs. But we will not give you a full quarter guidance for the Chinese markets in particular because we think the data set is still too, well, uneven and not gives us a full trend. And also keep in mind that 2 important subsegments of the Chinese markets, Hong Kong and Macau, continue to be severely affected. So if you take just a certain regional part of China, we might be even right or you're right to assume that we might see already for the full quarter, a flat or even positive development to that. But we are still cautious on the outlook of total of China for the second quarter. So we would ask for your patience. We will give you more color to it as we have the full second quarter results whether we see -- or when we do see a return to growth for the Chinese markets. But it's absolutely clear also for us that China will be clearly the region and the markets where we do expect return to growth the first for HUGO BOSS.

As you can imagine, for most of our wholesale partners, we are the #1 menswear apparel partners. So we have spent a lot of time now with them to weather the crisis. The part that we have adjusted the first was clearly that to adjust their buying budget for Fall/Winter because also to the improvement working on the operational side of our business, we were able to postpone or cancel some of the production orders which were not fully placed at our production site, be it in-house or third party, which takes away inventory pressure both from our balance sheet but also from our wholesale partners, which gave a mandatory preorder in January, February to us. We are also evaluating very carefully and then on a case-by-case base how we deal with trade receivables. Then we try to spread the challenges that we all face in an even way. Some of these wholesale partners are even our landlords on other side because we're working with them sometimes on a hybrid deal that part of our business is wholesale with them. Otherwise, we are also there, our landlords on the concession side. So we try to find mutual acceptable ways to weather this difficult situation with us. But there's one thing that we are not going to be offering, and that's a return of inventory. That's -- it was a decision from our partners to buy inventories at the current levels. It's a situation that we clearly have to deal with an excessive Spring/Summer inventory situation ourselves. So we do not expect to have any inventory returns from our wholesale partners.

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Operator [29]

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Next question is coming from the line of Elena Mariani from Morgan Stanley.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [30]

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A couple of questions for me as well. The first one, going back to China, I would imagine that you are not benefiting massively from a repatriation of purchases, but still to a certain extent, you are. So maybe can you remind us what's historically been the percentage of sales to the Chinese cluster that was happening outside of China. And maybe if you have any view on how the cluster has been developing recently as opposed to the specific sales within Mainland China. And then you were kind enough to talk about very recent trends. Have you seen anything interesting in Germany in the very recent weeks? I'm asking because there was another brand today that indicated very encouraging trends, even better trends than China. So maybe if you have some observations, it would be nice to know.

And then final question is about all the measures that you have put in place to protect your free cash flow. I was wondering whether you think this would be enough to protect your liquidity situation in case of a worst-case scenario. So in other words, if the situation does not improve in the second half of the year as quickly as you expect, do you think that what you've done is enough? Or would you need to do and put together incremental measures to protect your liquidity and balance sheet?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [31]

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Thanks, Elena. Let me take the first 2 questions. So we expect that we do about 10% to 15% on our revenues with Chinese consumers clearly at home but also as they travel the world and shop with our BOSS stores in Paris, London or in the Americas. As they are also now restricted to travel, we expect that they also are part of our recovering volume or momentum that we see now in China. Even so, as you can imagine, it's hard to predict whether the transaction we are now -- have with these customers is something that in normal circumstances might have happened in Korea, Japan or in Europe. But based on the feedback that we also get from our Chinese colleagues, we do believe that part of the recovery path that we now see in China is due to the fact that Chinese consumers are being forced to shop at home with also for the foreseeable future, it's very unlikely of these tourism to return or to return to shopping habits outside of China, which might have other repercussion on our global business setup.

In Germany, I think we already gave you all the information we have at this point in time. We are quite happy from an operational perspective how the startup of operation has been. I think we are well prepared in terms of processes, new hygiene standards, staff training to serve our customers under these circumstances. Our observation is that traffic through the inner cities to the shopping malls where we do operate in Germany, and keep in mind, it's I think just a handful of stores that we have started to operate, so no factory outlets, it's all based on the sample of the full-price stores that we operate. We have clearly seen the impact of very reduced numbers of visitors to the inner cities also coming to our stores. We have seen a steady improvement at -- roughly at the rate that we expected. In Austria, even a bit more than we initially thought, but it's not a more rapid return to more normalized levels like we have seen in China. Actually, from our perspective, the recovery in China is, week on week, stronger than the recovery we have seen so far in Central Europe.

Yves, you want to talk about the stress test, the impact on cash flow?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [32]

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Yes. Elena, what we are -- I think it's -- first of all, I think it's important to know what is our starting point. And I think if you look at our last balance sheet of the annual financial statement, we had net debt of EUR 88 million. So actually, we are starting with a very solid balance sheet. And somehow, we as Managing Board, we're somehow very often criticized for such an unleveraged balance sheet. At least now we know what is this good for. And I think it's good to have enough time to breathe now. And I think this is very important, point number one, and always to prepare for the uncertainties. Secondly, I think we did all the cash measurements, like the EUR 600 million that I'm alluding to. We did a cash flow forecast. And clearly, we did this on a kind of monthly basis. And still, if you draw this down on the monthly basis, even the worst case would be covered in terms of our liquidity position. So I'm very confident that we do everything to secure the liquidity. But I think it's always good to be prepared for more uncertainties. And of course, we are preparing this as well.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [33]

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Very helpful. Sorry, just one thing. I have missed what you said in terms of percentage of sales to the Chinese happening abroad historically. Did you say 10% to 15%?

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

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Yes. Thanks, Elena. And I think we have one more question. Is that correct?

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Operator [35]

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Yes, sir. The last question is coming from the line of Melanie Flouquet from JPMorgan.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [36]

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Yes. The first one would be -- I'm bouncing back on the comments you made about the Chinese spending more at home. Clearly, you had less exposure to travelers, so there is less repatriation impact. But also I suspect that this raises another question mark that you are leading to, which is whether you should accelerate your expansion because you are still relatively small with the Chinese consumer compared to other premium brands and other luxury brands. So could we see a reallocation of your store plans in the coming 2 years with more accentuation on China and less, for instance, in Europe or in other adjacent countries? Could that be a consequence of this crisis?

My number two question is on e-commerce. Would you be so kind to maybe share with us what are your teachings of the e-commerce performance? Are you seeing -- are you noting any big product doing particularly well? I imagine casual is doing well. What are you seeing by price points? Can you share anything on the -- on what is going on in e-commerce, the sort of best part of the business today?

And my last question, sorry, is on allowances for wholesale accounts that you referred to in quarter 1 of high single-digit million. Is this a one off -- a big impact that you took straightaway? Possibly, I was thinking linked to some U.S. department stores' difficulties. Or should we expect some of these charges to continue in the coming quarters, and this was solely regarding Q1?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [37]

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Thanks, Melanie. And clearly, China, as you know, has been a key pillar of our growth strategy prior to corona, and it has proven itself to be the absolutely focal point of the growth through crisis. So in terms of CapEx adjustments, the country least affected because from our perspective is least penetrated and offering the best financial terms also in terms of growth is China. And during our approval processes over the last couple of weeks, I can tell you it was -- the vast majority of projects, be it renovation, relocation or new stores, was the Chinese market. So we -- you're absolutely right in your assessment that we will do and fund all business endeavors now to enlarge or to grow our also physical retail network in China.

And I was just visiting China a couple of weeks prior to the shutdown, meeting also some landlords. And especially in the menswear apparel segment, the feedback I received relative to our peers was extremely strong, and we were able to secure bigger and better-located locations relative to other menswear players. So this is one element we pursue. What we are also seeing that the Chinese market is also quite innovative when it comes to omnichannel services. So during the period of the lockdown, we have worked with our Sales Associates to use WeChat, also to stay in contact with our customers, to introduce them to a new offering, to find a hybrid, almost, I would say, even personalized service where we use our e-comm platforms together with our physical distribution network to connect during the time of physical lockdown to our consumers. And we have decided now with our Chinese management also to scale this business now to serve customers in these times where physical traveling is restricted even more. So just to clarify the earlier question from Elena, when we talked about 10% to 15%, that's the total business that we believe we do with Chinese consumers, combining our business in Greater China and outside of Europe. And we -- you're absolutely right, we think this is a number we can grow significantly in the years to come with physical expansion but also the growth on the e-comm platform. Just another anecdotal evidence is that both Tmall and JD, I think I just briefly mentioned that in my speech, were extremely happy with the growth that BOSS has demonstrated over the last couple of weeks. Both platforms also benefited in China from the development or the impact from the coronavirus. And the BOSS brand in particular moved up quite significantly in the relevance as a leading menswear brand also when it comes to menswear apparel platform.

On -- help me, on e-comm was...

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [38]

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Yes. Did you note any declines...

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [39]

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Oh, yes, the product category.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [40]

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Yes, yes.

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [41]

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Well, we knew already in the past that the baskets look differently on the e-comm business relative to brick-and-mortar. And the short answer is this has not changed fundamentally after the coronavirus. So there are certain product categories that are easier to purchase online than to buy in stores. So the suit that you wear for the most important interview, if you do your interview at JPMorgan, it's probably something you buy in a store. The dress that you buy for the most important dates that you have meeting your parents in-law is probably the one you still would like to try on in our boutique on Regent Street. But there is clearly now a push. And hopefully, you have seen our CRM mailing on comfort loungewear that resonated very strongly with the consumers. So clearly, we took tactical measures in our CRM communication, the product questions that we had on our e-comm site to help people to feel comfortably but also classically -- in a classic way dressed as they spend more time in front of the Skype and Zoom monitors than with their colleagues in the office. But the short answer is that we have not seen a fundamental change in consumer demands in the crisis. And I think the third question was on allowance on wholesale, yes.

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

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Was on the receivables on the allowances. Like we said, we had an impact in our P&L for high single-digit million euro amount. And the question was whether there are some individual wholesale accounts. Overall, as you might know, there are 4 of our customers that have filed like Chapter 11. These are Lord & Taylor, Neiman and Marcus, Galeria Kaufhof, Karstadt and (inaudible) Germany. So all these have an exposure which is less than EUR 2 million, which we have some now booked in allowance. And the remaining part is a kind of reserve we especially have as a prudent businessman that we booked because we are doing a lot of sizable business with international markets. So this is the kind of reserve that we book in the Q1 based on our own expectation estimates.

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

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So this is -- we should treat this as a one off, right, that it's not a repeat that we'll see every quarter, you took a big lump for the light impact of the year?

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

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Yes. But of course, you never know what happens on the wholesale because as you know right now, the whole industry is affected. But yes, this is a one off as a kind of bad debt allowance. Yes.

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Christian Stoehr, Hugo Boss AG - Head of IR [45]

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Thank you, ladies and gentlemen. I guess that completes our conference call for today. If there's any question that was not answered, then please, as always, be free to contact any member of the Investor Relations team. And with that, I would like to thank you for your participation. Wishing you a very good day. And stay healthy, and bye-bye.

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Operator [46]

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