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Edited Transcript of BOSS.DE earnings conference call or presentation 5-Nov-19 1:00pm GMT

Q3 2019 Hugo Boss AG Earnings Call

Metzingen Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Hugo Boss AG earnings conference call or presentation Tuesday, November 5, 2019 at 1:00:00pm 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

* Jörg Philipp Frey

Warburg Research GmbH - Senior Analyst

* Jurgen Kolb

Kepler Cheuvreux, Research Division - Analyst

* Melanie Anne Flouquet

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

* Piral Dadhania

RBC Capital Markets, Research Division - Director of Premium Brands

* Thierry Cota

Societe Generale Cross Asset Research - Equity Analyst

* Thomas Vincent Chauvet

Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director

* Volker Bosse

Baader-Helvea Equity Research - Co-Head of Equity Research

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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 Third Quarter Results 2019 Conference Call. (Operator Instructions) I must advise you this conference is being recorded today, the 5th of November 2019.

I would now like to hand the conference over to Christian Stoehr, Head of Investor Relations. Thank you. Please go ahead.

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

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Yes. Good afternoon, ladies and gentlemen. My name is Christian Stoehr, I'm heading up the Investor Relations activities at HUGO BOSS. And I would like to welcome you to our 2019 third quarter financial results presentation. Today's conference call will be hosted by Mark Langer, CEO; and Yves Müller, CFO of HUGO BOSS. (Operator Instructions)

And with that, 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. Welcome to our third quarter result conference call. In the next 20 to 25 minutes, Yves and I will present to you our Q3 operational and financial performance before taking a closer look at our updated outlook for the full year 2019. After that, we'll open the floor for your questions.

As already announced back in October, our Q3 top and bottom line performance came in below our own expectations. In particular, the persistent macroeconomic uncertainties increasingly weighed on consumer demand in some of our core markets, something we were not able to compensate elsewhere. Not only did our business in the Americas experience a further deterioration in the third quarter with a particular weakness in U.S. wholesale, also our business in Asia-Pacific saw a significant slowdown in Q3 as turmoil in Hong Kong had a severe impact on the market and the region alike.

Consequently, the top line performance in Q3 did not show the expected acceleration with currency adjusted group sales in Q3 at the prior year level. In euro terms, sales grew 1% to EUR 720 million as currency effects continue to provide a slight tailwind to revenues.

So let's take a closer look at the regions, starting with the Americas where sales declined 8% on a currency-adjusted basis. As already highlighted last month, and against our expectations, the market environment in North America saw a further deterioration in the third quarter. This can be attributed to a number of challenges that all weigh on consumer sentiment in this market.

First and foremost, the important U.S. market where currency-adjusted sales were down 10%, the tourism spend were significantly lower as a result of the ongoing trade tension as well as the appreciation of the U.S. dollar. Besides that, a general softness in local demand puts a strain on our business. This is particularly true for the wholesale channel for which Q3 was marked by weaker-than-expected order business as well as ongoing promotional activity, especially for the formalwear part of our business. Consequently, U.S. wholesale sales were down by a double-digit rate in the third quarter.

The aforementioned decline in the tourist spend also put the strain on our business in Canada where sales were down 7% in the third quarter, reflecting declines in both channels. Finally, sales in Latin America decreased slightly in Q3 as the strong performance in Brazil was more than offset by lower sales in Mexico.

Coming to Asia Pacific, where sales grew 2% currency-adjusted in Q3, that's below the levels witnessed during the second quarter. While Mainland China once again drove regional sales growth with yet another quarter of double-digit comp store sales improvements, our business in Hong Kong has been significantly disrupted since the beginning of the demonstrations. This became particularly visible during the course of the third quarter as we were confronted with a sharp decline in tourism, which under normal circumstances, represents between 70% and 75% of our Hong Kong business. Consequently, sales in this market, which usually account for approximately 25% of Greater China revenues were down 50% in the third quarter.

In Macau, the store renovations [reflect] earlier this year have been largely completed. In the meantime, however, the Hong Kong protests also affected our business in this market, as the usual tourist travel pattern is a combined Hong Kong, Macau trip. In contrast, other markets of the Asia Pacific region posted healthy growth in the third quarter. And particularly, Japan where sales were up in the high single-digits in Q3.

Coming to our largest region, Europe, where sales increased 2% on a currency-adjusted base and then on a reported basis. With sales growth of 5%, the U.K. stood once again out, driven by a strong momentum in -- on retail despite ongoing uncertainties around Brexit, while our business in France continued to record positive comp store sales increase in Q3, a number of large store optimization projects during the quarter, including the renovation of our BOSS flagship store Champs-Élysées, weighed on the market's overall performance.

This brings me to Germany where currency-adjusted sales declined 5% in Q3, both channels, wholesale, [and] retail ended the quarter below the prior year level. The latter was also affected by the transition to our new flagship outlet near our Metzingen headquarters towards the end of September as we had to wind down the previous outlet operations over several weeks during Q3.

Allow me to say a few words about our biggest outlet worldwide in terms of both selling space and commercial relevance. Located in the heart of one of Europe's largest outlet cities, this new outlet offers our customers a unique shopping experience. While the product offering is clearly centered on apparel covering all different wearing occasions from formal to casualwear and athleisure, it is also offering a broad selection of shoes and accessories. Without doubt, and starting with Q4, the new outlet will contribute to improvements in our overall retail business in Germany and to be more precise, the non like-for-like part of it.

With this, let's -- let us move on to our sales channels, starting with own retail where sales grew 3% on a currency-adjusted basis, reflecting a 2% increase in comp store sales as well as contribution from space of around 1 percentage point. Comp store sales were up at a [lower] single-digit rate in Europe and remained stable in Americas, hence broadly in line with the performance seen during the second quarter. In Asia Pacific, however, comp store sales growth slowed down to a mid-single-digit range in Q3, reflecting the aforementioned sales decline in Hong Kong. Importantly, both our brick-and-mortar business as well as our own online business contributed to comp store sales growth in the third quarter.

Momentum was particularly strong in online where currency adjusted sales growth reaccelerated to 36% in the third quarter. So performance in the quarter benefited from robust sales increases by hugoboss.com as well as the further expansion of the concession business. The latter saw an important milestone in the third quarter as we successfully converted the vast majority of our BOSS casualwear and athleisurewear business on Zalando from wholesale to retail. The intensification of our successful partnership under the Zalando partner program enables us to serve customers' requirements even better than before, while at the same time taking more control over the distribution of our BOSS brand in the online space.

Finally, to conclude on online, the successful rollout of hugoboss com to Scandinavia and Ireland in mid-August made initial contributions to online sales growth in Q3, although to a lesser extent. Allow me to once again point out that the further expansion of our online concession business as well as the rollout of hugoboss.com to new markets will contribute first and foremost to growth of our non-like-for-like business, particularly in the short term. The same is true with regard to our ongoing store optimization initiatives, which include store renovations, relocations and rightsizings. In particular, the rollout of our new BOSS store concept continues to play an important role when it comes to the persistent modernization of our brick-and-mortar store network. In the third quarter, we renovated and upgraded 10 BOSS stores bringing the total numbers of stores offering the new shopping experience to a total of 68 BOSS stores worldwide. The reopening of our BOSS flagship store on the Champs-Élysées on October 5 represents an important milestone in this regard.

Turning to the wholesale channel where sales were down 5% on a currency-adjusted basis. By currency adjusted, revenues in Europe decreased 1% and were hence, in line with expectations. Sales in the Americas were down 20% on the prior year, primarily reflecting the previously mentioned weakness of the U.S. wholesale market in Q3. From a global perspective and similar to previous quarters, Q3 saw ongoing strong momentum with either online marketplaces or online platforms of leading department stores, up at a double-digit rate in total, while stationary retailers continued to suffer from ongoing traffic declines.

Finally, our license business grew at a strong 14% in the third quarter, driven by improvements across all product groups. The important fragrance business particularly benefited from the launch of BOSS The Scent Absolute, which was accompanied by a global marketing campaign starring model Birgit Kos and actor Jamie Dornan. In addition, our eyewear business saw a strong growth in the past quarter, supported by the recent renewal of our license agreement with Safilo.

Let us conclude on the top line with a brief review of the performance by brand. Starting with BOSS, formalwear performed -- broadly in line with casualwear in the third quarter. However, it is important to note that a slight decline in total sales for our BOSS brand is purely attributable to the challenges experienced in North America in Q3. Elsewhere, our BOSS brand continued to enjoy a robust momentum with sales increases, both in Europe and Asia Pacific.

On the marketing side over the last several weeks, BOSS took center stage twice in 2 of the world's most important fashion [metropoles] , Milan and Shanghai. In September, BOSS showcased its upcoming Spring/Summer 2020 collection in Milan. Only a few weeks later, BOSS underpins [a] strategic relevance of the Chinese market by presenting its prefall 2020 collections in Shanghai for the first time in 7 years. The feedback on both shows and the accompanying social media campaigns was overall very positive. Thanks also to the close involvement of international bloggers and influencers.

Moving over to HUGO, where the positive trend from previous quarters continued in Q3. Currency-adjusted sales growth accelerated to 6%, representing the strongest quarterly performance at HUGO in more than 2 years. In line with the brand's positioning in the contemporary fashion segment, sales in casualwear continued to grow disproportionately and were up at a strong double-digit rate. Besides ongoing strong momentum around HUGO's [local-inspired] product, offering various events as well as product and marketing campaigns focused on HUGO's new brand ambassador purchasing a Liam Payne supported brand [heat] in Q3.

Ladies and gentlemen, this concludes my discussion on the top line. Let me now hand over to Yves to guide you through the remaining P&L and balance sheet items before I will provide you with an update on our expectation for the remainder of 2019. Yves, over to you.

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

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Thank you, Mark, and good afternoon, ladies and gentlemen. As always, let's start with the gross margin development, which increased by 80 basis points to 63.3%, mainly due to the reversal of negative inventory valuation effects. With retail growing stronger than wholesale, we also recorded a slightly positive channel mix effect in Q3. This, however, was largely offset by negative currency effects. While all other factors were broadly neutral in the quarter, I would also like to highlight that markdowns have not turned into a tailwind in Q3 reflecting the ongoing promotional environment that we continue to see in some of our markets, first and foremost in the U.S. All in all, the gross margin development in Q3 was not able to deliver the improvement we had initially expected for the quarter.

Operating expenses increased 7% or EUR 24 million in Q3, while selling and distribution expenses were above the prior year level, administration expenses declined slightly despite some one-off expenses related to management changes. The muted top line growth in third quarter, together with the increase in operating expenses resulting in a decline in EBIT and net income of 13% and 12%, respectively.

So let's take a closer look at the individual cost items to explain what's ultimately caused the increase in operating expenses. In particular, there are 4 elements that result in the increase in operating expenses in Q3. Firstly, higher retail cost, mainly associated with the ongoing modernization and sequential expansion of our brick-and-mortar store network over the past 12 months. This also includes higher depreciation as well as an increase in rental and payroll costs in Q3. In addition, expenses associated with the further expansion of the online concession business as well as the ongoing rollout of the hugoboss.com website globally also contributed to the increase in retail cost. Altogether this increase amounted to a low double-digit million euro amount. Secondly, higher marketing expenses reflecting the various initiatives that took place in the third quarter to drive further brand momentum for both, BOSS and HUGO. This includes large brand activation initiatives such as the BOSS fashion show in Milan or the HUGO brand event in Berlin, new collaborations we entered into with brand ambassadors such as Mark Chao and Liam Payne as well as various limited collections that were launched here in the quarter, including the second edition of BOSS meets Porsche.

The increase related to these initiatives amounted to a mid-single-digit million euro amount. As we project brand and marketing investments to also grow in the final quarter, we now expect marketing expenses as a percentage of sales for the full year to be slightly above the prior year level. Thirdly, one-off expenses related to several management changes on the executive Board [in] regional level amounted to a mid-single-digit million euro amount. This also includes a personnel change for our business in the Americas where Stephan Born, currently Managing Director of our U.K. market will take over responsibilities from November onwards.

Last, but not least, negative currency effects due to the devaluation of the euro against major currencies also impacted operating expenses by a mid-single-digit million euro amount. So you can see, ladies and gentlemen, the third quarter was, generally speaking, an OpEx heavy quarter and we clearly took the decision not to cut down on brand and distribution expenses despite the weaker-than-expected top line performance into Q3. We decided to do so because we fundamentally believe that investing in our business is crucial in order to drive brand desirability in the long run.

This said, I would also like to point out that our tight overhead cost management approach in combination with our initiatives to optimize the organizational structure of our company, of which some of have been implemented at the beginning of the year have started to yield positive returns. The fact that general admin costs were kept stable in Q3, despite the already mentioned one-off costs related to management changes has proved positive in this context.

Let's now turn to the balance sheet. Starting with inventories where we have been able to reduce inventory growth for the fourth consecutive quarter. At the end of September, currency-adjusted inventory growth amounted to 1% despite the lower-than-expected sales growth in the quarter. However, let me point out that I'm not satisfied yet with where we stand in terms of inventories. As we continue to put the strong emphasis on tightly managing inventories, we are confident that inventories will finish the year at around the prior year level. And be assured that inventory management will also remain a focus area for us in 2020. It is our clear goal to reduce inventories in absolute terms over the coming months.

Turning quickly to trade net working capital, which at the end of September remained stable year-on-year. As a percentage of sales, trade net working capital grew 110 basis points to 20.5%.

Moving on to our free cash flow development in the first 9 months. In line with our outlook for the full year, capital expenditure increased 37% to EUR 131 million, reflecting the ongoing focus on optimizing our store network as well as further strengthening our IT and digital capabilities. The increase in capital expenditure together with the decline in operating profit largely offset the improvement achieved during the course of the year when it comes to trade net working capital. As a result, free cash flow amounted to EUR 12 million for the first 9 months and was thus at around the prior year level.

With this, ladies and gentlemen, let me hand you back over to Mark who will discuss the adjusted outlook for 2019 in more detail.

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

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Thank you, Yves. So let's change perspective and look ahead at our expectations for the remainder of the 2019 fiscal year. Against the backdrop of persistently difficult market environment, and as you are all aware of, we adjusted our financial outlook for 2019 on October 10. We now expect currency adjusted group sales for the full year 2019 to increase at the low single-digit percentage rate.

Before moving on to the bottom line, let me give you some more color on our top line expectations what this means from a regional perspective. For Europe, we forecast sales growth to accelerate in the fourth quarter, while we do not expect the underlying market environment in key European markets to change fundamentally with the most recent trends, we project that important growth stimuli will come from the non-like-for-like part of our business. In particular, we expect positive effects from the successful conversion of online partners to the concession model as well as the recent completion of large-scale retail projects.

For the full year 2019, Europe is expected to deliver low to mid-single-digit growth. For the Americas, we expect recent weakness to persist also in the final month of the year. In particular, we project that the overall weak U.S. consumer sentiment will most likely continue to lead to traffic declines as well as ongoing high promotional activity and thus also weigh on our sales performance in the fourth quarter.

For the year as a whole, we, therefore, expect sales in the Americas to decrease in the mid- to high single-digit percentage rate. Finally, Asia Pacific is expected to grow at a mid-single-digit rate in the full year 2019. We expect Mainland China's dynamic momentum to continue into Q4, supported by various execution measures both in brick-and-mortar retail as well as via our online partnerships with Tmall and JD. At the same time, we are mindful of the ongoing weakness in the Hong Kong market, which is expected to remain a drag on our performance for the region as a whole.

From a channel perspective, we now expect to grow retail sales in 2019 at the low to mid-single-digit rate. This outlook is based on the assumption that comp store sales will grow by a low single-digit rate. This in turn means that we do not expect the underlying improvement in comp store sales growth in Q4 compared to the first 9 months. Instead, it will be our non like-for-like business that will see an acceleration in Q4.

Let me point out 2 factors that will be decided for the anticipated acceleration in non-like-for-like growth in the final quarter. Firstly, the expansion of the concession model within our online business will push sales growth in the remaining quarters. New e-concessions and those we initiated back in 2018 will clearly contribute to a strong double-digit growth in our own online business also in Q4. As you all know, our Zalando partnership will play a key role in this regard, as Q4 2019 represents a first full quarter in which we are running the BOSS business on Zalando by ourselves. Secondly, we will continue with our initiatives to modernize our global store network. In recent weeks, a number of strategically important BOSS stores have been upgraded to the new store concept and reopened on time as the important holiday season is just about to start.

Besides our flagship store on the Champs-Élysées in Paris, we are also successfully completed the renovation and relocation of our Macau store at the Galaxy Hotel and the renovation of our biggest store in Singapore in Ngee Ann City. We are right on track to also finish renovation at important stores in key U.S. cities such as Chicago, San Francisco and Atlanta in the coming days.

With this, let us move further down the P&L to complete our expectation for fiscal year 2019. Starting with our gross margin, which we expect to remain broadly stable for the full year 2019 as well as for Q4. This implies that we expect a positive effect from a more favorable channel mix in Q4 to be broadly offset by slightly higher markdowns in the Americas.

Operating expenses, however, are expected to slightly improve in Q4 as we expect some operating leverage driven by the anticipated acceleration in top line growth and the nonrecurrence of last year's one-offs at a magnitude of around high single-digit million euro amount. As a consequence, and excluding the effects of IFRS 16, EBIT is expected to come in at a range between EUR 330 million and EUR 340 million for the full year. For net income, we expect a decline at a mid- to high single-digit percentage rate. This includes our assumption of a tax rate of around 32% for the fiscal year 2019 as the ongoing tax field audit, we highlighted earlier this year, has just been completed. In light of the anticipated decline in net income for fiscal year 2019, allow me to say also a few words about the dividend. While it is too early to talk about the detailed implications, I would like to point out that the managing Board of HUGO BOSS is clearly committed when it comes to the absolute dividend for 2019, as we recognize the importance of a reliable dividend for our shareholder base. As always, we lay out all details around that with the publication of our full year 2019 results in March next year.

Ladies and gentlemen, before we start with the Q&A session, let me conclude by emphasizing that we are obviously not satisfied at all with regards to the financial performance in 2019. Clearly, we had planned a different start to our midterm strategy, which we introduced to you almost exactly 1 year ago. Nevertheless, we have to accept that the underlying macroeconomic trends have deteriorated in some of our core markets. As macroeconomic uncertainties will most likely remain high in the short-term, it is absolutely crucial that we remain focused when it comes to successfully executing our strategic initiatives. I'm absolutely convinced that we have the right strategy in place to ensure that we further increase brand desirability in the years to come, while at the same time, also structurally improve the profitability of our company. In this context, I'm encouraged by the fact that despite the various challenges in Q3, all of our 4 strategic growth drivers, the online business, China, HUGO and store productivity continue to grow disproportionately. This is particularly evident around our online business as well as HUGO where growth rates have clearly accelerated in the quarter.

In addition, we continue to make strong stride when it comes to gaining further relevance vis-à-vis the Chinese consumers [in] increasing the productivity of our store network. But of course, there's more work ahead of us and I can assure you that together with my Board colleagues, we will take up each and every challenge that we're facing with high discipline, strong focus and utmost passion in order to be successful in the long run and to live up to your and our expectations. We fundamentally believe in the strong untapped potential that both BOSS and HUGO have to win the consumer and ultimately become the most desirable premium fashion and lifestyle brand.

And with this, ladies and gentlemen, Yves and I are now very happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today is from the line of Jurgen Kolb from Kepler Cheuvreux.

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Jurgen Kolb, Kepler Cheuvreux, Research Division - Analyst [2]

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Two questions from my side. First of all, from your first findings of your switch to the concession business with Zalando, maybe you can share some thoughts with us what you've learned, what you've seen in terms of product demand, in terms of customer traffic, and so forth. I know it's still early times, but still may be some words on that one. And in this way, could you please also breakdown the e-com growth in the third quarter [of] 36%, how much was really driving the concession business, how much was dotcom really? And secondly, we've had this profit warning. We've heard, we've seen the reasons and you mentioned reasons for that. Maybe any findings, any conclusions that you want to put into your strategic outlook that you might to -- want to change something of what you've outlined in the last Capital Market Days or some internal adjustments that you might see necessary in order to arrive at your longer term targets?

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

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Thanks, Jurgen. Let me start with the last one, and I think it's a very relevant point. And I think I finished my comments exactly on this element. So yes, we are clearly disappointed with our performance in the third quarter but reviewing the elements of our strategic growth plan until 2022 for growth elements, we are very pleased that despite the headwinds and maybe some [glitches] in execution in some of the regions that we have mentioned also as part of the call we do see that along this for top line and profitability drivers, we are on track and we even see an acceleration, in particular, in e-com. And I will come to your question in a second in HUGO.

At the same time, I can assure you we are -- there's a relentless focus on productivity improvements in [catering] and capturing the potential of Asian consumers in their home region, but also outside of that. We have tightened the screws when it comes to the cross management and we believe we can see already first results with the tight overhead cost management in the third quarter and can assure you we are -- remain committed to that, not only to the fourth quarter, but also as a base as we move in 2022 -- 2020. We will provide you with more details on our update on the midterm plan in terms of also timing of achieving certain important milestones. We confirmed our 15% EBIT target also in the midterm base. Clearly there's a lot of question around what does it mean in the specific year. I think that's an important question we need to answer, we will come back to that as part of our next Capital Markets Day.

But today, we wanted to reassure that we believe our growth drivers are healthy and in place and they're delivering. And that we are committed to making progress towards our midterm profitability target. Maybe few words on the e-com business. Well, honestly, the takeover of the athleisure and casualwear segments was easier task than the initial start with concession at the beginning of the year with Zalando, where we introduced clothing/dress furnishing because this was already well established, strongly growing business on -- in the wholesale side already for a couple of years. And as we gained experience and attraction with our own fulfillment, I think both partners were very happy that we had with a very smooth transition from wholesale to retail concession in the third quarter. So we're able to build on the momentum that we were -- we have established over the last 2 years with Zalando, we have been able to accelerate that, and I'm very happy that with the expansion into more markets where we now operate with a concession, we have seen the expected acceleration in our e-com business.

We don't break down the overall growth rate of 36% between dotcom and concession but we also have seen clearly because it's not like -- it's a like-for-like number smaller growth rate than our hugoboss.com on a comparable base. This business also benefited from growth from the expansion into Scandinavia and Ireland, but we have seen a significant improvement from the concession expansion, predominately Zalando, but there were also other [products], which contributed growth in the third quarter.

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Operator [4]

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The next question comes from the line of Antoine Belge from HSBC.

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

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It's Antoine Belge, 2 questions. First of all, when it comes to the evolution of cost in Q3, I was a bit surprised by the [manager] of the OpEx evolution. I mean especially, I think there were 2 months between your Q2 publication and then the profit warnings. So I understand that your lower sales leads to less profit but I would say that on average, I think you downgraded the guidance around 10% in terms of EBIT for decline of around a reduction of 2% in terms of sales. So were there any sort of unexpected costs or incremental cost that you are not aware of early August, that's my question.

Second question relates to the -- there are various management changes. Maybe, I don't know if you have mentioned all of them, but can you distinguish maybe with the -- between the management change that people are just leaving the company under those where you had to change something. I should just say I know it was only 2 questions, but just in terms of you do mention the next Capital Markets Day, is it something that should happen more at the end of next year or more something maybe after you've published your full year '19 numbers?

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

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While we haven't not set the date but we recognized a lot of question that we should come back to you rather in the first half of 2020 and this is our plan, but please bear with us that we will share in due time, the timing for our Capital Markets Day. We'll first be in Paris in a few days for a 2019 field trip, but we recognize there are midterm questions to be answered and they will be addressed by a Capital Markets Day that we plan to host very likely in the first 6 months of 2020.

On the management changes, you're absolutely right. In an international group of our size, we'll always have changes to the top management position. I think this is part [of the base] also from the previous year. However, with the change to the top management on the Executive Board, but also a major change in one of our largest markets in the U.S. [where the 2] relevant, the major ones, we flagged them all. They had additional cost impact that we want to highlight, first it needs to be clear that we take decisive and quick measures to address areas where we are not happy with the performance, but we also see this as of a certain magnitude that we need to flag it as part of our cost development, which if you look at our overall development, and I think Yves already gave a lot of color to that.

We remain focus on building brand desirability and investing into important marketing events, be it partnership, be it fashion events, we have to recognize that online concession expansion will come with an increase in selling and distribution expenses because we -- as we convert this business from wholesale to retail, it's clearly an uplift on the top line, but also additional concession fees that we have to pay, while at the same time all other administrative expenses have been flat despite a spike in restructuring charges when it comes to top management positions. So as this has been not a surprise what we were in expecting a stronger recovery in the third quarter as this was part of our conference call 3 months ago, we expected a better performance, not only in Hong Kong, which was clearly affected by the demonstration but also from the effect we have seen in the North American market, which was clearly below our initial expectation back in August of this year.

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

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Maybe just another follow-up. I mean, you I think -- you mentioned inventory valuation impact. I think it was a positive -- sorry, it was a negative number last year and a positive this year. Will it be possible to have the positive -- the negative impact from last year as a reminder on the positive of this year?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [8]

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So Antoine, the positive effect of the inventory valuation is about 80 basis points. But what I said here in the presentation at the end regarding gross margin, we clearly expected more, but we didn't fulfill on the markdown management because of the promotional environment in the United States.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [9]

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Can you remind us last year the gross margin was down more than 200 basis points and if you have that in mind, maybe the negative impact of the inventory evaluation last year?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [10]

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So last year the inventory valuation had around, how I recalled it now, it was -- it's like 1 year over -- I think it must be like the same magnitude of 80 basis points was negative and the other was more driven by more markdowns of 120 basis points, and we couldn't revert this kind of markdown part of this.

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Operator [11]

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Our next question is from the line of Thomas Chauvet with Citi.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director [12]

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Three question please. The first one, Mark, in the media interview this morning, there were a few headlines that suggest that you're sticking to your medium-term EBIT margin of 15%, but it seems you said, not by 2022 as planned. Can you perhaps elaborate on what you actually said? There were no such comments in your press release, and are you still thinking the drivers of EBIT margin increase would be balanced between gross margin and cost efficiencies? Anything incremental on the cost you can extract in Q4 next year?

Secondly, on what has changed since the CMD a year ago. You're blaming the macro in Q3, that's understandable. Looking at the U.S. and Hong Kong, did you think something has intensified also in the environment for premium apparel brands beyond macro, whether that's the commercial environment in retail, the endless pressure on traditional wholesale, the rising costs of doing business in whether that's rents or NP or anything else?

And just finally, housekeeping on the tax rate. Can you give us the euro million amounts of the provision for tax audit you've now identified that seems to drive your 32% tax rate. So will that be all booked in Q4 and no P&L impact next year? Just want to understand how this works and what's the amount.

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

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Yes. Let me start with the first 2 and on the tax rate and I will hand it over to Yves. I mean clearly it was a disappointing moment for all of us to revise our 2019 outlook, our first year delivering against our [2022] target. However, based on what we have achieved in the first 3 quarters and how the growth drivers that have been presented to you in details at the last Capital Markets Day have delivered over the last, I would say, 9 to 12 months. I'm absolutely, confident that our focus on the Asian Pacific market, our focus on retail productivity rather than expansion, and tapping the potential in the HUGO contemporary segment and to be focused on the online business today is right and have proven successful for the group as they were 12 months ago.

What we clearly have to do, we have to continue to run a very tight cost base if to prepare ourselves to weather for a more or less supportive market environment. And you're probably right to assess that we as an upper premium player are less immune to some of these macroeconomic risks than pure luxury players. I think that's just something we from HUGO BOSS have to stay true to our knitting. We are a not luxury group, we are upper premium and maybe our segment and it's obviously a fact that we have to take into consideration has -- not as able to weather these repercussions as maybe some other players are able to do. However, we believe that the 15% EBIT margin have and can and will remain our midterm structural profitability target.

And I can assure you we'll do whatever it takes to deliver against this target. We understand that this is not -- has to be more precise, again be as precise as we presented it to you last year. It was our 2022 target. We have become more vague on our timing because we classified the 15% EBIT target, now as a midterm target. And I would ask for your understanding that we will be more precise on the timing to achieve this target as part of our Capital Markets Day that already mentioned earlier, which we expect to host in the first half of 2020. With that, I would hand it to you Yves on the tax question from Thomas.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [14]

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So Thomas, regarding the tax implications, yes, we will book in the fourth quarter regarding the tax field audit, and so we will come at around a overall tax rate then for the year 2019 of around 32 percentage points. And I mean, going forward, we're living in kind of uncertainties and you never know what's happening regarding new fiscal policies, but overall we're expecting being back on the tax rate of around 26% in the years to come.

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Operator [15]

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The next question is from the line of Piral Dadhania from RBC Capital Markets.

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Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [16]

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The first one just relates to current trading, if I may. Are you able to give anymore or give any color as to what you've been seeing in October and early November. I would argue that perhaps the weather trends have normalized a bit and perhaps the ability to sell autumn/winter product at full price may have improved in some of your key markets. So any flavor on that would be very helpful indeed.

And secondly, just around the e-commerce development in the North American market. Appreciate e-commerce was strong at the headline level, some of which was impacted by concessions and perimeter expansion. But could just help us understand the online versus off-line evolution of the retail channel in North America and whether you're seeing any divergent trends there?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [17]

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Now let's start with the a e-com question. Yes, the North American market is more advanced. We see also many of our brick-and-mortar partners to be already moving very successfully in -- to convert their customers from a brick-and-mortar business to online business. So we see a strong growth, both from our dotcom platform, we see strong growth from our partners that operate hybrid models and we see also in North America, even so we haven't seen in the fourth quarter [and now] any takeovers, also the digital concession that we started to operate also in North America, positive growth. So the shopping behavior on consumers is moving globally and it's moving probably [surpassed us] in the North American market.

Unfortunately, and this is true both in the physical world and the digital, in both channels the higher promotional market, it's where promotions quickly spread through across all sales channel. And our focus on protecting full price business has a price to pay as we have seen in our third quarter performance also in North America. On the trading of the fourth quarter, I would just ask, again, for your understanding, it's too early to comment on the quarter, which is just a bit more than a quarter through it but the trading we have seen in especially on the retail side in the first couple of weeks, reassures us that the revised guidance that we have given in October 10 will be delivered from the group. So it's our commitment to the market and what we're seeing as trading trends, both from a retail and on the wholesale business confirms that we would be able to deliver against the revised guidance.

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Operator [18]

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

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Thierry Cota, Societe Generale Cross Asset Research - Equity Analyst [19]

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I'd like to come back on retail sales. Can you quantify for us the space effect that you expect as a percentage of retail sales in Q4 and in H1 2020, including online of course? And into that, what kind of OpEx inflation do you see in Q4 and early next year? And the other point was given the level of rebates you see this year and you saw last year, do you think that we're currently at a sort of fair level given the brand, given the environment and the market it is in? Or do you think that could be an improvement going forward and help boost the improvement of the gross margin?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [20]

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Let me take the first one. You're absolutely, right that we expect the like-for-like momentum by [reason to stay] broadly stable also for the fourth quarter. So we do see and we expect this trend to accelerate with the renovations for Champs-Élysées was basically, no impact on the third quarter from the new store, which was partially closed for a couple of months to fully materialize.

So without giving you the exact number, the non like-for-like part on the fourth quarter retail development is clearly to accelerate as part of the -- our expectation, but we will not give you a quarterly guidance on non like-for-like business our retail business, but we expect this to be accretive. And clearly, you're absolutely right, there's a related increase in cost [be it] concession fees when it comes to the full year effect from our new digital concession. Same is true also in some of our brick-and-mortar where with the opening of the new stores or renovated stores, additional depreciation will kick in, but giving the sales momentum, we believe that the expansion on our non like-for-like will be EBIT accretive in the fourth quarter. That's delivering the acceleration on improvement and EBIT in the fourth quarter. The second question was on...

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

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On rebates. If you think that where you stand today could be sustained going forward or whether you believe that you could improve it and how the gross margin rise?

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

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Well, on the short term, we guided for a flat development. We believed that with -- as we drive our full price business as we become better retailers that on a midterm, that margin improvement -- gross margin improvement should be helped from a better management of TPR but we don't expect a short-term impact to that, but it's a part of the building blocks that we will detail in more color and more level of details as part of our road to the 15% EBIT target as part of the next Capital Markets Day. So on the midterm, you're right. It has to be one of the building blocks to achieve the higher structure profitability for the group, again.

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Operator [23]

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The next question is from the line of Jaina Mistry from Deutsche Bank.

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Jaina Mistry, Deutsche Bank AG, Research Division - Research Analyst [24]

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I've got 2 questions. My first one is on 2020. I appreciate it might be too early for you to comment on this, but full year 2020 consensus has margin expansion of 50 basis points or EBIT of EUR 358 million. Are you happy with consensus at this level? And my second question is on the store modernization program. And how many stores were shut for refurbishment in Q3? And do you expect more stores to be shut in Q4?

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

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Well, I'll take on the second part. Christian is just checking the numbers on that one, you probably expect those answers. We will not be able to comment on consensus or on expectation for 2020 at this point in time. All eyes at HUGO BOSS are right now on delivering on our revised guidance on 2019, which already includes delivering against acceleration in our improvement on EBIT performance to deliver between EUR 330 million to EUR 340 million this year. We will provide you with more details on our top line and EBIT expectation for 2020 as part of our March balance sheet presentation, but I would ask for your understanding that we are not be able to comment on market consensus or any outlook from our side on 2020 at this point in time. The renovation question?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [26]

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Yes, I think it was the question related to openings and closure. What is the net effect? So how I understood this, so we had in Q3 2019, we had 8 openings and 4 closures. And for the Q3, we expect -- Q4 sorry, we expect 10 openings and 2 closures.

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Jaina Mistry, Deutsche Bank AG, Research Division - Research Analyst [27]

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Okay. So you said that you refurbed the store in Paris, for example. And how many stores were shut for refurbishment in Q3?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [28]

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So we renovated 10 stores in Q3.

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Operator [29]

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The next question is from the line of Philipp Frey from Warburg Research.

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Jörg Philipp Frey, Warburg Research GmbH - Senior Analyst [30]

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I still tried to get my head a bit around the increase in selling expenses for the quarter. And well, if you look at EUR 27 million selling expense increase in the quarter that you had, you outlined EUR 5 million mid-single-digit of higher marketing, which basically means EUR 22 million. Explained then your EUR 5 million probably from 2% from currency effect and you have an increase obviously from higher online concession fees et cetera and cost of your online business, but could be hardly more than EUR 4 million. So you basically arrived somewhere probably around EUR 13 million underlying cost increase for a retail network that's just increased 1% in size. Can you comment is there something special due to the ramp-ups or the movement of the -- of your Metzingen outlet, some special course or how much of this increase was underlying? Still just don't understand that.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [31]

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Okay. Philipp, it's me. It's Yves. So what I explained to you in my presentation, I was trying to explain the increase of 7% in operating expenses was [a slight] increase of EUR 24 million. And we concluded there's a mid-single-digit million amount due to Forex, a mid-single-digit million euro amount due to management changes and there is a mid-single-digit million amount due to marketing expenses. So there's a low double-digit number relating to retail costs. And you have to be aware of the fact that we included several projects for example, the conversion of the Zalando that was in -- during the month of August. So what I'm saying is the cost incurred, whereas, the net sales just started actually to kick in, in August. That's point one.

Secondly, we finalized the 4 countries for the hugoboss.com. It's the same logic. The cost incurred completely in Q3 and actually the net sales came in, in the middle of August. And there was clearly one special effect which was due to the wind down of our Metzingen outlet. We had higher personnel costs due to this kind of transition period and I would rate this to be a low single-digit million euro amount as a kind of special operational moment.

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Jörg Philipp Frey, Warburg Research GmbH - Senior Analyst [32]

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So in the end you're saying basically there is a certain -- a significant -- a periodic and onetime portion in your increase in retake, or is that fair to say?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [33]

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Well, they are not -- from our perspective, they are still operational. So in the old terminology, I would not call them one-offs because they're still operational, but if you would assume a kind of run rate, yes, there are some extraordinary items in there.

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Jörg Philipp Frey, Warburg Research GmbH - Senior Analyst [34]

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Okay. And may I have a second question on your cost savings and obviously, it looks from the chart that you presented that cost savings in the quarter had been a bit around a mid-single-digit euro million amount, is that fair to say or to look a bit further, your EUR 160 million 2020 target in terms of cost savings, how should we -- what sequence in the development of this cost saving should we expect?

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

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So if you look at the administration costs, we could not have lowered the administration costs, if we would not have savings out of the efficiency program. And I would clearly say that the mid-single-digit million savings contributed in Q3 to our results.

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Jörg Philipp Frey, Warburg Research GmbH - Senior Analyst [36]

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Okay. Is it fair to say that this is going to pick up in 2020 or...

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

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We are clearly working on this to improve our profitability and the efficiency program and cost savings is one big part of this.

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Operator [38]

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The next question, that's 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 [39]

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So first one is regarding retail sales trend. If I go back to your retail sales trend, Americas actually didn't really deteriorate this quarter, but Europe did deteriorate -- or actually was the same on a much easier base. So would it be fair to remark that probably the markdown pressure was across market rather than being only U.S. driven and also what is the pressure to [read, that's not] what it is in Europe, please? Were there disruption from stores or anything we should be aware of? That's my first question. My second question is in total, clearly Americas has been under a lot of pressure [not only] from wholesale, but also you have a big exposure to outlet in this market, and you have a pretty low profitability now in this market. Is now a time in your view to take much tougher action on this market and actually reset it?

It's probably too early to say [that having] changed your management, but just if you can share anything with us on this subject? And then, on the concession take back, there was only a 1% contribution of the non like-for-like in this quarter. Is it fair to assume that there will be more than 3x that in quarter 4 given you're consolidating the whole of Zalando over that period plus [you have a few other new] large store openings in the period?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [40]

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Thanks, Melanie. Let's -- let me start with the second question on North America and the concession takeover. I think the question we discussed a bit earlier, you're right, that from the non like-for-like a part of our e-com growth, it's -- the majority is coming from the first time impact from the takeover from our wholesale business into retail concessions. Zalando is the largest, but not the only one we have multiple other opportunities. Some of them actually will only kick in the fourth quarter because they were not part of the base in the third quarter, but largest one is from concession.

So we do expect the increase from what's often called space expansion, which is not actually true when we talk about digital concession but it's from the non like-for-like but we are not able to quantify or we will not quantify that beyond that is an acceleration [worth of the trend] you've seen in the third quarter. And North America, I would give quite some credit of -- for the current management team because already in the last 2 to 3 years, they've taken decisive measures to discontinue off price distribution. And we have walked away from a third party off price distribution that was part of our business until 2016. We have cleaned up this distributions, the management team has pushed strongly for upgrading and renovating stores in these difficult markets and I mentioned 3 major renovations that will come in effect in the U.S. in the fourth quarter, but we have to take it to the next level.

Clearly, we have to up our game in terms of our retail operations. We have to regain lost market share when it comes to major department stores. As their business model is changing rapidly and we have to follow them, I believe one of the things, we have to refocus quickly on the U.S. market. This was only market where we so far have still relied, much stronger than any other market on the formalwear business. So the North American business has not benefited from our strong growth in casualwear, both in HUGO and BOSS as we experienced in Asia and in Europe. And Stephan Born brings a particular expertise with him because he has driven the outperformance in Europe that he delivered in the U.K. and Scandinavia by very aggressively and successfully tapping this growth potential for BOSS in the casualwear segment.

So he -- for me, he is a living proof to our ability to be a very strong if not a leading player in menswear, casualwear and we -- I think with his team to tap this enormous opportunity for us in the U.S. market. So you see, we have a clear plan on what to focus, what needs to be done to rebuild the U.S. business, but you're absolutely right. It has to happen probably without or with very limited support from an underlying market and then has to be driven quarter after quarter by sequential improvement and we will provide you with updates on the performance on the more details to our plans in North America as part of our Capital Markets Day. Clearly the North American underperformance has taken central attention from the management, not only from the leadership, but also -- in the market, but also from us from the managing Board because our midterm success is very much depending on turning around the situation in U.S. and I can assure you we are extremely committed to achieve that. On the weaker trend on...

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [41]

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Weaker trend in EMEA, so if you talk about Europe, we saw if you take retail, we saw an improvement in Q3 at a mid-single-digit rate, but it was different in different countries. So we saw a very good development in U.K., which was even not double-digit. But on the other side, there were 2 markets where we had a negative development, that was France and Germany and that was due to the renovation we did, especially with the big store, Champs-Élysées, that was then reopened on October 5, and the other thing was the wind down of the Metzingen outlets. So these 2 effects somehow were hurting our net sales in the retail environment. And overall in EMEA, we had like plus mid-single-digit amount in Q3. And then...

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [42]

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The comps were relatively easy, right? Last year, if I recall well, notably September being very warm until very late you didn't see the fall/winter season arriving. So there's a -- the reason why you're not accelerating on the easier comp is actually because of the renovations in your view? This is what you would -- you saw that?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [43]

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Yes. That was, in fact, because of tremendous efforts that we did in terms of investing into our business. What we were talking about current trends and we were very satisfied with the trading in the beginning of the fourth quarter at least, especially in EMEA.

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Melanie Anne Flouquet, JP Morgan Chase & Co, Research Division - Head of European Luxury Goods and General Retail [44]

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You're very satisfied with the trend in EMEA in the beginning of the fourth quarter, is that what you're saying?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [45]

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Yes. That's what I said.

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Operator [46]

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The next question is 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 [47]

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A couple of questions from me as well. Firstly, I wanted to go back to the gross margin development, and I wanted to better understand the implied guidance for the fourth quarter, which would mean approximately 20 basis points of improvement just to get to a flat -- flattish gross margin for full year '19. Can you help us understand what are the underlying moving parts you've mentioned that you would expect to be more promotional in the U.S. market but at the same time, in theory you should have a stronger benefit from the e-concessions, given that you're going to have 3 full months on these new agreements.

So what are the moving parts, because I wanted to better understand how much of these improvements in the fourth quarter could be carried forward into 2020, given that the benefits from the e-concessions are going to be in there for at least another half year in 2020. That's question number one. Question number two, I wanted to go back to your EBIT margin target for the medium term. You seem to be absolutely convinced that you're going to get to 15%. And I understand that timing is now a little bit unclear, but what gives you confidence on this 15%?

Do you expect to go back also to the 5% to 7% organic growth that was what you were planning last year or would you see perhaps a low single-digit organic growth as more feasible and therefore, to get to the 15% EBIT margin you would need to be more aggressive on the cost side of things? What are the underlying parts that you see moving given that you're committed to these targets? And is still a part of this question, maybe is there something more structural that you could see happening in your business, for example, the discontinuation of womenswear or a rethinking of the design approach, a stronger network rationalization. So anything that you could share would be very helpful.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [48]

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Thank you very much, Elena, for your questions. So I'll start with the gross margin development. So what we expect actually in Q4 that margin, more or less, remains stable and comes in overall as stable for the remaining of the year and then in Q4 in specific. So the moving parts is, yes, you're right, because of the e-concession expected to grow and retail to grow. We will see a positive channel mix effect on the other side, we'd rather stay conservative when it comes to markdown management, especially in the U.S. So overall, we expect this to be flattish in Q4 overall.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [49]

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But how...

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [50]

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And let me pick up on...

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [51]

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They're compensating each other but what would be the positive effect in your view from the positive channel mix and e-concessions, if you could share that with us?

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [52]

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Well, we do not provide any further details on Q4 actually at this, just to give you an indication on the moving parts.

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [53]

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So let me go back to the second part of your question. The confidence that we also confirm today is clearly coming that we see very tangible and positive results from the 4 strategic growth drivers that we discussed with you as a part of our Capital Markets Day 2018. And we are particularly pleased with the progress we see with our Chinese consumers within Mainland China, but also traveling abroad. We are tapping much better than the past into this growth potential and especially with the repatriation of consumption, the kind of consumers we see. The BOSS brand, in particular, outperforming many competitive brands on the Mainland China with the double-digit like-for-like improvement. And as somebody already mentioned today, the structured profitability of this market. China remains today and in the future our structurally most profitable market. So the growth in China itself that we are now starting to tap into is clearly accretive not only from a top line, but even more importantly, from the structural profitability.

Second, our strong focus on sales productivity improvements, which is demonstrated by rolling out the new highly performing new store format by focusing our collection and merchandising processes to allocate budget and spaces in our stores to drive sales densities, is one of the most important drivers in terms of structural profitability improvement because it focuses on our biggest lever when it comes to driving structural profitability to the group. Nothing pays as much to improving structured profitability than like-for-like improvement in our existing network. And both elements, we do see progress and we are confident that also on the midterm perspective as we said, they would deliver on these as well.

On online, we also gained a lot of confidence over the last 9 months that we are able to grow this important subsegment on our own retail business with the infrastructure that we have built with the competencies we have with on the operational side and coming from today a small base already many parts of our business, our online business be it on concession or dotcom is accretive to our overall retail business. So we have seen element of our retail business, which is also a healthy contributor to our midterm financial targets. And clearly, HUGO in an overall market segment on the premium market with some market segments or product categories are more challenged. We continue to see strong demand for this contemporary brand, which is now I've seen one of the strongest acceleration in growth in the third quarter [versus] 6% growth.

So HUGO as a brand already with -- today with an important profit contribution to the overall group, will contribute with an overproportional growth also in the year to come to drive absolute and relative profitability. Add to that continuous, not only Q4, but for the outer years strong focus on OpEx leverage in the tight cost management, we believe we have the elements in place to improve on a sustainable structure profitability level to 15% on the midterm that we would provide you more details on growth drivers and the timing when to achieve this objective as part of our next Capital Markets Day. But there's no additional measures or other measures that we are currently contemplating. We remain committed to deliver and execute on the strategy we presented to you almost a year ago.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [54]

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Okay. So just to summarize given that all these elements were already there in your last year's business plan, you would argue that you can still get there without other big changes or transformations in your business model.

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [55]

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With the exception that we have removed the target year of 2022.

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Operator [56]

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The next question is from the line of Volker Bosse from Baader Bank.

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Volker Bosse, Baader-Helvea Equity Research - Co-Head of Equity Research [57]

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It's Volker Bosse from Baader Bank. Two questions from my side first on the Americas, you're running through tough times for 3, 4 years now. Business still declining so it seems that there are also structural problems, thanks for your indication to what's going to change going forward, but I would come back to the brand perception. How do you see the brand perception of HUGO BOSS to differ in the U.S. from -- as from the brand perception in China, so are there more challenges in regards to brand perceptions than initially expected?

And the second question would be on the online business, thanks for the details, but I would be curious to get an indication on -- about the time schedule of the international rollout of your dotcom website first and the international rollout of Zalando concessions going forward as I understood so far. Germany is full on-boarded now at Zalando concessions. Germany, [as said,] but more markets are to come, right?

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Mark Alexander Langer, Hugo Boss AG - Chairman of Managing Board & CEO [58]

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Yes. There are, and Yves will take the question on the rollout, on Zalando. Let me answer the question on the Americas. There's a strong substance, especially for the BOSS brand because we have a long heritage in the market. But you're absolutely right that some of the equity distribution that we entertained is still resonating in terms of brand perception. And this is not only in own retail distribution where we still have to further improve the quality of distribution, particularly to focus on the right factory outlets to operate. This will be also in the future markets where factory outlets will play an important role, but we have to ensure that also our factory outlets, important one like Woodbury Common that we have first-class execution benchmarking and Metzingen is a global benchmark for all of our global outlet operations, this is also true in the U.S., but there's still work to be done.

One part, which is more difficult for us to control and we've taken already in the last 3 years' measures to cut off distribution at wholesale partners that we see diluting the brand equity, is the continuous high level of promotional activities that is just a fact in the U.S. market. I think that's not at HUGO BOSS in particular, impact which clearly diminishes our ability to achieve a high percentage of sales at full price relative to the other markets. Taking all these factors together, you're right in your assessment that we see stronger brand equity scores for BOSS in Europe and China but our comparison is not a BOSS brand equity score in U.S. as well as China, but how do we score relative to our important peers within the U.S. market because that's relative comparison base you should take here.

And here, we see it, our relative performance in the U.S. is relatively good [until] to some of our key competition, but we are absolutely not happy with our current financial performance. [So there] is a strong base there's an extremely high brand awareness, there's already first measures implemented in terms of discontinuation of certain [off price] distribution and investment into high-class and new modern stores, but this can only be the base to establish a profitable business. This is also able to weather storms and slowdowns like we have now experience with. There will always be temporary slowdowns in domestic or international demands, but we are not happy with the underlying structure profitability and this needs to be addressed with the new management team.

With that, I would ask Yves to give you more color on the online rollout from the hugoboss.com and the concessions.

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Yves Müller, Hugo Boss AG - CFO & Member of Managing Board [59]

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So regarding online and the dotcom business, so for sure in the upcoming year, in the next year we will add 2 more countries, which will be like Canada and Mexico in the middle of the year. This is what's going to happen regarding dotcom. And to put more color on Zalando International so we are now trading in Germany, in Austria and Switzerland, Benelux, Italy and France. We are not trading in the U.K. and in Spain for the time being because of the Brexit and Spain because of some other factors, which are not relevant because Zalando is not so strong in Spain. And in next the quarter of 2020 we will do Scandinavia from Zalando's perspective. This is what we do for -- from Zalando for the upcoming months to come on what we're trading.

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Christian Stoehr, Hugo Boss AG - Head of IR [60]

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Okay. Perfect forecast. Thanks, everybody for joining today's conference call. And this completes the call for today. And if you have any further questions as always, please feel free to contact any member of the Investor Relations team. And with that, I would like to thank you for your participation and wish you a very good day. Thank you very much. Bye-bye.

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Operator [61]

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Thank you. That does conclude the conference for today. Thank you for participating and you may now disconnect.