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Edited Transcript of BOSS.DE earnings conference call or presentation 9-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Hugo Boss AG Earnings Call

Metzingen Mar 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Hugo Boss AG earnings conference call or presentation Thursday, March 9, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Langer

HUGO BOSS AG - CEO

* Ingo Wilts

HUGO BOSS AG - Chief Brand Officer

* Bernd Hake

HUGO BOSS AG - Chief Sales Officer

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Conference Call Participants

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* Zuzanna Pusz

Berenberg Bank - Analyst

* Thomas Chauvet

Citigroup - Analyst

* John Guy

MainFirst Bank - Analyst

* Antoine Belge

HSBC - Analyst

* Volker Bosse

Baader Bank AG - Analyst

* Warwick Okines

Deutsche Bank - Analyst

* Melanie Flouquet

JPMorgan - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the HUGO BOSS full-year results 2016 conference call. Today's conference is being recorded, ladies and gentlemen. At this time, I would like to turn the conference over to Mr. Mark Langer, CEO. Please go ahead, Sir.

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Mark Langer, HUGO BOSS AG - CEO [2]

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Thank you very much, and good afternoon, ladies and gentlemen, and welcome to our 2016 financial results presentation. Ingo Wilts, our Chief Brand Officer, and Bernd Hake, our Chief Sales Officer, are with me on today's call. Together, we will update you on our progress in returning to profitable growth. We will also outline our financial forecast for 2017.

To understand where we are headed, let's start with where we are coming from. 2016 has been a year of profound change for the industry and even more so for HUGO BOSS. Where we have previously seen smooth sailing over calm seas for a long time, the going has gotten rough in the past 12 months. On the one hand, this was due to a recessionary market environment. According to Bain, the global luxury apparel market shrunk by 4% in 2016, making apparel one of the weakest segments in the overall luxury goods sector.

In many markets, our industry did not benefit from a positive climate of consumption on the whole. Many consumers diverted their spending to high-ticket items, such as cars and real estate or experiences. In contrast, apparel lost share of wallet, which triggered enormous promotional activity that left many brands and retailers struggling.

Yet, this was also due to mistakes we made in the past. Our brand portfolio has clearly become too complex for many consumers to understand. Some of our brands have strayed too far away from the core. Others are not sufficiently distinct, creating overlap in terms of our product lines and pricing architecture. This was exacerbated by a challenging underlying market, and our attempt to capture greater share of the luxury goods market alienated a part of our core clientele.

We acknowledge the global nature of our brand and our business. We are therefore placing even greater emphasis on maintaining a globally consistent brand image, whereas we had accepted regional imbalances in the past. The growing importance of digital channels in particular has made these imbalances unsustainable; however, not only has the Internet become a means of comparing product and prices among different markets, it has become an integral part of many consumers' lives, which we need to turn to our advantage going forward. This will require speed and agility, rather than the complex organizational structures and processes that slowed down our decision-making in the past.

In the last 12 months, we took immediate actions to weather the storm and to recalibrate our course for the future. We slashed more than EUR100 million in cost and investments of our initial budget and we have tightened inventory management. We have initiated a program to close 20 unprofitable stores worldwide and another 20 locations in China we had inherited from former franchise partners.

We started restructuring our US wholesale business and discontinued distribution formats that do not fit our brand positioning. We aligned global price levels more closely, an important reason for why China returned to growth. And finally, we built a foundation for future growth in digital commerce by in-sourcing the fulfillment of our online business in Europe, redesigning our online store, and launching a mobile app.

As part of the action plan, we contritely accepted sales losses. Coupled with further topline pressure, owed to weak consumer demand, currency-adjusted group sales declined 2% in 2016. EBITDA before special items were down 17%, reflecting significant operating deleverage due to declining comp-store sales in our own retail business. The decline would have been even greater had we not taken effective measures to curb the rate of cost expansion. Free cash flow, however, was up year over year, underlining a greater focus in the Group's investment activity in particular.

Let me give you some more details on our financial results in 2016. Starting with the topline, full-year sales were up 1% in Europe. The UK continued to grow solidly and was up 8% for the year. Sales in Germany and France were down 4% and 3%, respectively. In the Americas, full-year sales in local currencies were 12% lower than in the prior year. This was mainly due to the US, where sales were down 17%, registering a decline of almost 30%.

The wholesale business exerted a disproportionate impact here. Approximately half of the decline in this distribution channel was due to the aforementioned distribution restructuring, aimed at improving presentation quality and brand desirability. Above all, we stopped selling to the off-price retailers we had used -- we had been using to clear excess inventories in the past.

Asia recorded a 2% decline after adjusting for currencies. Momentum in China improved considerably over the course of the year, resulting in sales on the Chinese mainland remaining closely to stable. In greater China, however, sales were 6% lower than the prior year, due to primary market-induced declines in Macau and Hong Kong.

By distribution channel, retail sales were 2% higher than last year, ex currency effects. On a comp-store basis, channel sales declined by 6%. While the European region recorded a smaller decline than the average for the Group, the negative impact of the decline in the low double digits in the Americas was significant. The performance in Asia was in line with that of the Group overall, despite slight growth on the Chinese mainland.

Currency-adjusted sales in the wholesale business decreased 9% in 2016, primarily reflecting the tough market environment in the US, just mentioned. In Europe, channel sales were slightly down from the prior year, reflecting declining sales in many key markets in the sector.

Finally, the licensing business generated a robust 12% in sales growth for the reporting period, driven by double-digit growth in the biggest licensing category, fragrances.

Moving below the topline, the Group's gross profit margin held up well, despite significant promotional pressures in the US and many key European markets. At 66.0%, it remained on the prior-year level. Disproportionate growth of our own retail business impacted the margin positively. Negative factors included price reduction in Asia, though partly compensated by increases elsewhere, and higher inventory write-downs than in 2015.

On the cost side, we managed to strike a fine balance between exploiting efficiency potential on the one hand and investing in the future growth on the other. Selling and distribution expenses were up 3%. In the retail business, expansion and renovation related increases were partly offset by lower costs due to store closures and to successful rate negotiations of rental contracts.

Marketing expenses remained almost unchanged in relation to sales and translated to a 6% decline year on year in absolute terms. The increase in G&A expenses was focused on digital commerce and communication, where we invested in both talent and system infrastructure.

Across the entire cost base, we have been able to take EUR65 million out of our original budget, mostly through lower rents and tighter management of administrative expenses. The latter benefited from the efforts of streamlining the Group's project portfolio with a view to identifying which initiative would exert the greatest positive commercial impact and implementing them as quickly as possible.

These savings helped us to curb the EBITDA decline, but EBITDA before special items nevertheless decreased to EUR493 million, a 17% drop with respect to the prior year. Special items of EUR67 million primarily concerned termination payments and write-downs in connection with planned store closures. The remainder was owed to organizational changes at both our headquarters and at regional levels. Including these expenses, net income declined sharply to EUR194 million.

Let me also discuss some key balance sheet and cash flow trends. 2016, we kept (inaudible) capital under tight control. Despite a disappointing topline performance, working capital remained broadly stable relative to sales and also delivered a positive contribution to free cash flow generation in the period. This was primarily due to the improved inventory management. In the US, we successfully completed the inventory clearance started at the end of 2015. In China, we cleared excess stock [still] related to our franchise legacy in this market.

As a result, inventories are down by a double-digit percentage in these two markets. For the Group as a whole, we are able to record a currency-adjusted increase of just 1% at year-end.

Investments decreased significantly compared to 2015, owing to fewer store openings and takeovers, as well as the non-rate occurrence of one-time projects, as in the previous year. The latter concerns expanding our production plans in Turkey, upgrading our US distribution center, and relocating our New York showroom, all done in 2015.

In 2016, the Group's own retail business continued to be the focal point of investment activity. Around one-third of the total budget was spent on the buildout of new stores. Another one-third went into the renovation of existing stores. As a rule of thumb, HUGO BOSS refurbishes existing stores approximately every five years.

The remaining one-third was invested in other areas. Investment in IT of over EUR30 million underscores the importance the Group places on the digitization of its business model. In this context, major projects in 2016 included the in-sourcing of online fulfillment in Europe, the rollout of omnichannel services, as well as system enhancements in customer relationship management and digital communications.

Lower CapEx more than offset the earnings shortfall, so that free cash flow increased by 6% to EUR220 million. Net debt, nevertheless, came in higher than in the prior year, since we stuck to a stable dividend payout in 2016.

To put things into perspective, we continue to be in a rock-solid position financially, with an equity ratio of almost 50%. However, we need to be careful in preserving the strength in order to maintain financial flexibility, regardless of the prevailing economic backdrop and the Group's short-term outlook.

As a result of the aforementioned, we remain committed to offering attractive shareholder returns, but we will never compromise our ability to invest into the business. With this in mind, we propose a dividend of EUR2.60 for the 2016 financial year. While the proposal still reflects one of the highest years in the industry, it also highlights our belief that the dividend should, first and foremost, be based on the Group's performance in terms of profit.

In light of the sharp decline of consolidated net income, it's only logical and in the long-term interest of our shareholders to adjust the dividend accordingly. With a payout of 93% of net income attributable to shareholders, we nonetheless decided to exceed the 60% to 80% corridor stipulated by our dividend policy. We are convinced that this continues to be the right policy.

For 2016, however, we also took the healthy free cash flow generation, the Group's strong financial position, and the expected non-recurrence of significant expenses in connection with store closures in 2016 into consideration. Looking ahead, I am confident that future profit growth will allow maintaining or even raising the dividend again within the framework of the policy I just reconfirmed.

In the past year, we've worked hard on [defining the cross] back to sustainable and profitable growth. Our vision, to be the most desirable premium fashion and lifestyle brand, guides our actions. In our industry, it is brand desirability that makes or breaks long-term commercial success. Obviously, brand desirability is not defined by us, but by customers, who must take center stage in everything that we do.

What might sound to you like a truism requiring -- requires a great deal of change, change we initiated in 2016. We adjusted our strategic direction to make sure we maintain and grow our relevance in the eyes of today's fashion consumers. The demand and attitudes of these consumers have changed in multiple ways. A shopping trip for a new suit now starts online, whereas they once window shopping in the past. Brands unable to demonstrate a unique proposition will quickly get lost in the masses.

Where customers used to accept limited selection available in stores, they now expect immediate access to the full range on offer whenever and wherever. And whereas before they were willing to browse through aisles and aisles of product, they now expect brands to identify the right product for them based on the relationship on equal footing.

With these changes in mind, we redefined our strategic direction in 2016. We are building on what has been the core of our success over the past 30 years, but we are neither shying away from correcting past mistakes nor from exploring new grounds. Specifically, we are simplifying our brand portfolio and clarifying the positioning of our brands. We are redefining our distribution strategy. We are focusing on the digital transformation of our business model and, closely related to this transformation, we are actively transforming our corporate culture to improve speed and agility throughout the organization.

Let me now hand over to my fellow board members to update you on the progress in these areas of action.

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Ingo Wilts, HUGO BOSS AG - Chief Brand Officer [3]

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Thanks, Mark. Progress is indeed what 2015 -- 2017 will be all about. We are working hard on defining the Group's future creative direction at the moment and I'm confident that all the tremendous work we are investigating right now will yield great results.

Let me briefly recap what we announced in November. We will focus on two brands, BOSS and HUGO, going forward. Why are we doing that? Let me give you three main reasons. First and foremost, because we talked to a lot of customers and learned that many simply did not understand what our different brands stand for and how they differ from each other.

Second, because we have punched below our weight in casualwear, despite the fact that casualwear accounts for around half of our current business. And third, because we want to strengthen our relevance again for a younger, more fashion savvy audience.

With BOSS, we will continue to address the status-oriented, rationally-minded customer. The customer wants to dress in an eclectic yet modern and high-quality style, often driven by the desire to belong. The BOSS customer has high expectations when it comes to quality and fit and attaches great importance to a favorable value for money proposition, and, of course, the shopping experience must also meet the highest standards, particularly with regard to personal service. We strive to dress this customer 24/7, in the office, in their leisure time, and when they are active.

I believe that most of you will agree that this is a no-brainer when it comes to business. The business suit is our iconic product and consumers continue to associate the brand with formalwear first. Of course, the formalwear outfit can be much more nowadays than just a black suit with a white dress shirt and a nice tie. Strict dress codes are increasingly becoming a thing of the past and are being replaced by smart casual outfits, such as the one we have included in our presentation.

When meeting with your friends on a Saturday, the BOSS casual outfit will make you look as refined and sophisticated as the one you wore to the office. BOSS casual will build on what you currently find under BOSS Orange; however, the range will be upgraded significantly in terms of quality, craftsmanship, and design, to bring it back in mind the BOSS standards.

And finally, when the same consumer works out, goes for a round of golf, or simply wants to dress in a cultivated yet relaxed and sporty way, BOSS athleisure comes into play. Here, the core of the current BOSS Green line gives you a good idea of what you can continue to expect from BOSS going forward.

The changes I just outlined will become fully effective with the spring/summer collection, which will be in stores from January 2018 onwards. Collection development is in full swing already right now; however, what is just a product sketch or a prototype today will be a complete collection by the end of June. By then, we will be presenting the collection to our wholesale partners and our own retail teams.

The BOSS menswear presentation at the New York Fashion Week in February was an important first step towards the full implementation of our new brand strategy. The collection we presented was focused on the fundamental elements of the brand, precise cuts in construction and a love to detail. Tailored sits in the heart of the collection, but is interpreted in different, sometime surprising, ways.

For me, it was very important to show people that there is a lot of happening at BOSS. I wanted the audience to feel the emotion and the passion that is in every product we design. BOSS has always been very commercially minded, and rightfully so, but we also need to make sure that we surprise the consumer with certain high fashion items, with stories they aren't expecting.

Going forward, we will place these stories bigger and more consistently. Let's take the fashion show again as an example. For the event, we partnered with fashion influencer [Matthew Flores]. His coverage turned the event into much more than just a collection presentation by spanning the entire period from the first preparation up to the after party. The event itself was streamed live on Instagram and we built it on a holistic campaign across key social media platforms, such as Facebook, Twitter, and Pinterest.

As such, the fashion show in New York exemplified three key developments in our marketing strategy. First, we will be concentrating on our marketing efforts on fewer campaigns, which we'll be executing strictly 380 degrees -- 360 degrees. That is, consistently across all consumer touchpoints. As a result, and second, we are making our brand communication even more digital so we can extend our reach and relevance. And third, we are focusing much more on our menswear business again.

Nevertheless, the share of marketing dedicated to womenswear will still be significantly higher than its business share. You may read this as a sign of confidence in what remains an important part of the group. BOSS strikes a balance between ease and elegance. With our collections, we strive to dress the modern woman for whatever the day may bring, knowing that your outfit needs to be just as right for a presentation in the office as for a day of business traveling.

Driven by Jason Wu as the brand's artistic director, the refinement and craftsmanship that BOSS stands for is evident in every piece of the collection. While it is a tailored look that defines BOSS womenswear, we are confident in the brand's growth potential in casualwear. With the upcoming integration of BOSS Orange into BOSS, we will create easy-to-wear looks that complement her wardrobe for the weekend.

The BOSS brand will be our key focus, but we are equally committed to HUGO. I'm excited by the opportunity that presents itself to HUGO today, namely to target more fashion-conscious younger consumers who seek to express their personalities through what they wear. In the past few years, we lost sight of the customer, to some extent by diluting the fashion-forward trend-focused heritage of the HUGO brand.

Firmly anchored in the premium segment and at the same time attractively priced, I'm very confident in HUGO's capability to play an important role in the growing contemporary fashion market, all the more so once we have expanded the brand's casualwear line in 2018.

HUGO will get the resources necessary to grow into a much bigger business over time. We are placing high importance on digital communication to engage with the young fashion-forward audience targeted by HUGO. We are investing into a new store concept, which will lift and press the DNA of HUGO, and we will introduce the new HUGO with a big bang in June. We will present the brand's future creative direction with a fashion show at Pitti Uomo, the world's most important platform for men's fashion, in Florence. And now, over to you, Bernd.

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Bernd Hake, HUGO BOSS AG - Chief Sales Officer [4]

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Thank you, Ingo. Let me tie in with your comments and outline the implications of these changes for our distribution strategy.

Starting on the wholesale end of our business, the feedback from our partners to the changes in brand strategy is clearly positive. The vast majority of them welcome the clarity and consistency of the changes Ingo just outlined will add to the positioning of BOSS and HUGO.

Many partners stress their interest in a more refined and sophisticated casualwear line from BOSS with which they can more effectively exploit the strong growth momentum in this category.

While it will still be another few months before we can present the new collections to the trades, order intake for fall/winter 2017 collection, which still only incorporates a few of the elements that define our new brand positioning, was in line with our expectations. The casualwear line under the BOSS brand performed much better than in prior seasons, reflecting the first discernible improvements in the collection, while demand for BOSS Green and BOSS Orange remained solid, despite the upcoming changes.

Nevertheless, the market environment continues to be tough, a fact that we continue to take into consideration when defining our future pricing strategy. We acknowledge the importance of accessible price points, especially in difficult market conditions, but we also remain firmly committed to the principle of one product/one price. We will be continuing our efforts to align global prices even more closely with the launch of the spring/summer 2018 collection. We do not plan any significant adjustments before this date.

In 2017, improving sales momentum in own retail will stand at the forefront of our activities. In the year ahead, we aim to lay the foundations for the 20% increase in sales productivity we are targeting over the next five years.

Let me recap the five key drivers and their expected impact. First, we are confident that the brand strategy changes will result in a much clearer brand message consumers will immediately grasp. Based on the BOSS positioning in the upper premium segment, we will be expanding and upgrading our product lines at certain entry price points to stimulate traffic and conversion.

Second, we will be correcting a mistake we made in the past by prominently promoting our casualwear line in our own stores. Until only recently, we had been predominately focused on menswear clothing and womenswear, while neglecting to consider general trends in the market towards more relaxed casual and even athletic-inspired dress codes. In response, we have started reintroducing BOSS Green in many stores and our new casual assortment will be provided with ample space when we launch it in early 2018.

Third, we will continue to expand our omnichannel services, knowing that convenience is a key factor in customers' purchasing considerations, especially where the core customer of BOSS are concerned. So rollout of click and collect, order in store, and return in store in both Europe as well as in the US will be completed by the end of the year.

Fourth, we are systematically investing in retail staff training and development to improve service quality and retention. This includes changes in the structure of retail staff remuneration, as well as a new approach to retail training.

Finally, we complete the optimization of our retail network announced last summer. By the end of the year, we will have closed around 15 stores remaining under the program, thereby eliminating what were by far the most dilutive locations from our retail portfolio. These stores diluted the Group's adjusted EBITDAR margin by 60 basis points in 2016, so closing them will support retail profits in 2017 and even more so in 2018.

We will also be closing some stores in locations where we have decided not to renew the rental contract. The other way around, we will continue to size opportunities to expand our network where they arrive. In 2017, for example, we will be taking over three key locations in Dubai from a franchise partner, thereby expanding our business in the Middle East.

In total, however, we will just be adding something like 10 new freestanding stores. Please note that this will all be BOSS stores. At least initially, our focus in the case of HUGO will be on expanding the brand's presence in relevant wholesale accounts via shop-in shops, before opening a few selected freestanding stores in key cities in 2018.

Because the new stores will be slightly larger than the average sizes found in our current portfolio and because we also expect the number of shop-in shops to continue to grow, we project that the network size as measured in square feet will remain more or less stable in 2017. Yet, stable does not mean unchanged. The network is constantly evolving, thanks to renovations, which will account for the lion's share of our retail investment budget. The network will evolve even more once we start rolling out a new store concept for BOSS towards the end of the year.

While it is still too early to go into details, one key element of the new store concept will be the expansion of digital elements, which we will not only use to tell the stories behind the product, but also to create an omnichannel distribution process. Regardless of the rise of digital and mobile, physical stores will not lose their relevance anytime soon. Their function as key consumer touchpoints is only going to become more important, but we need to make those stores more connected to the digital world. The introduction of omnichannel services, as well as the further development of our store concept, are important steps in this regard.

As the lines between online and off-line become blurred, overall retail sales are what counts. However, this should not detract from the disappointing performance of our e-commerce business. In 2016, our own online business -- that is the business generated through 11 HUGOBOSS.com stores worldwide -- declined by 6%. And the fact that many partners saw much better performance with BOSS products in their online business is not much of a consolation. Quite the contrary, it clearly points to the need to improve execution.

Our online business builds on a solid foundation. Thanks to the in-sourcing of key elements of the value chain in previous years, we directly control the online front end, as well as the back end. We are convinced that owning the interface with consumers will be an important competitive advantage over peers. This advantage we will only become magnified as we build up more and more online retailing expertise in house.

In the short term, however, we are going through a learning curve, which puts the commercial performance of our online business under pressure. It is very important to understand that the challenges we face have nothing to do with a lack of resources. We have built good infrastructure, but we are not making enough out of it at the moment.

Let me outline the key starting points to bring our online business back to growth over the course of 2017. Mobile, half of the HUGOBOSS.com site traffic is coming from mobile devices now. As a result, we need to think mobile first. That is why mobile will be given absolute priority in all aspects of online management going forward, from content strategy to navigation to shortening of loading times.

Content, attractive content makes customers spend time on our sites. We will create interesting content to engage with our customers and drive them to stores.

Service, customers expect premium service from a premium brand. We will invest in shorter delivery times in an increasingly curated shopping experience to make the HUGOBOSS.com website the destination of choice for the demanding customer.

And finally, merchandising. From the second half of 2017 onwards, the more commercial and less complex offering will ensures that value-conscious customers find what they are looking for.

For us as a management team, digital clearly is a top, if not the top, priority in 2017. Our goal is not just to ensure that the online business contributes to retail growth again. At the same time, we are working on digitizing our business model wherever it makes sense to do so along the entire value chain. Expect more news on this over the course of the year. With that, I'll turn over to Mark again. Thanks.

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Mark Langer, HUGO BOSS AG - CEO [5]

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Thanks, Bernd, and let me talk about our business development by region. The online business that Bernd was just describing is particularly relevant for our European business, given that Germany and the UK are actually our largest and second largest online markets, respectively, worldwide.

We expect our European business to remain more or less stable overall. Performance in Germany and its neighboring markets will be somewhat more subdued, primarily due to the challenging market environment.

Market data speaks a clear language here. In the first two months of the year, market sales in Germany were once again under even more pressure than they were at the end of 2016. In the UK, solid local demand, as well as continued strength in our business with tourists, should contribute to growth in local currencies. That said, the devaluation of the British pound will depress sales in euros. Note that we have decided against rising prices in the UK, at least in the short term, given that most competitors haven't raised their prices either and the apparel segment is under a lot of pressure marketwide.

In France, the third largest market in the region, performance picked up towards the end of the year, a trend we forecast will also continue into 2017.

In the Americas, our key focus will be on turning around our US business. Without a doubt, 2017 will be still a difficult year. The market environment continues to be tough and marked by significant footfall declines, particularly in full price distribution. Against this backdrop, we expect sales in the US to still be down year on year.

Over the next 12 months, however, we will be laying the foundations of our return to growth in 2018. We will complete the right-sizing of our wholesale business. By the end of the year, less than 10% of sales will be in off-price formats. Our brand will have fully disappeared from the racks of value retailers.

We have also some initial positive developments in our business with department stores, where some first steps we took towards broadening our assortment at more accessible price points for winter collection were very well received.

Now, on operations, we expect that changes in space and merchandise allocation will have improved performance, particularly in the second half of the year. In addition, we just reshuffled our management team by transferring some store operations [now how] accumulated in Europe to the US.

Good growth in Canada and Brazil and, to a lesser extent, in Mexico as well should offset some of the pressure in the US market. As a consequence, total sales for the Americas region should only decline slightly overall.

Finally, we expect solid growth in China to drive sales increases in Asia. China, we will continue to benefit from an innovative marketing initiative with a strong digital focus. Compared to just 12 months ago, we have seen a change in the rate of digital followership on the most important platforms. This provides us with the reach to demonstrate our strength in terms of quality and value to a much bigger audience.

As a result, I'm confident in our ability to deliver solid growth in China in 2017, even assuming the declines in Hong Kong and Macau continue.

In sum, we expect Group sales to remain largely stable in 2017. In wholesale, the order book provides us with good visibility. Mainly due to the US, where we expect channel sales to be down in the low teens, our wholesale business worldwide should see a [potential] decline to the low to mid single digits.

Performance on retail is somewhat more difficult to forecast. The contribution of openings and takeovers to sales growth will be in the low single digits. On a comparable-store basis, excluding the effects from retail expansion in the previous year and the current period, we expect sales will perform within a range of minus 3% to plus 3%. This should improve over the course of the year as a result of the various collection and distribution related measures I outlined.

Considering expansion impact, as well as like-for-like sales performance, growth in the mid-single digit marks the upper end of our guidance range for the total own retail sales.

Finally, the license business should yield solid increases also in 2017. The Group gross margin should improve due to positive channel mix effect and the non-recurrence of prior years' inventory write-downs. However, negative currency effects, mainly associated with the devaluation of the British pound, will curb the margin's rise.

Lastly, depending on the sales performance in own retail, EBITDA before special items is also expected to perform within the range of minus 3% to plus 3%. This forecast assumes continued increases in operating expenses in connection with our transition to a stricter -- strictly customer-oriented business model, including a slight increase in marketing expenses compared to sales.

Carryover effects from the savings initiated last year, as well as store closures, will limit the cost growth. Net income is expected to increase at a double-digit percentage rate, supported by the non-recurrence of costs incurred in connection with the aforementioned store closures. Depreciation and amortization charges, as well as financial expenses, should largely remain stable.

2017 will once again underscore the Group's ability to generate strong cash flows even in more challenging times. Investment will remain at similar levels to those seen in 2016, amounting to between EUR150 million to EUR170 million. Around two-thirds of the budget will go towards store refurbishment and new openings. The remainder will be largely focused on IT, where we will continue to build the infrastructure we need to drive our digital activities.

With regard to free cash flow, the expected profit increase will be offset by cash outflows related to the remaining store closures, the cost of which we booked in 2016 already. Overall, we forecast free cash flow generation in line with the prior-year level.

Ladies and gentlemen, many of those have called 2017 a transition year for HUGO BOSS because the change in our strategic direction from last November will take some time to complete.

Our presentation today should have demonstrated that 2017 will be much more than that. The term transition has a very passive connotation, which is the exact opposite to what's actually happening at HUGO BOSS right now. From a financial perspective, 2017 will be a year of stabilization. From a strategic and operations point of view, 2017 will be a year of implementation. In the next 12 months, we will lay the foundation for bringing BOSS back to profitable growth. That's why I'm confident that we will be able to call 2017 a year of progress when we discuss our annual results in one year's time.

Now we are very happy to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Zuzanna Pusz, Berenberg.

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Zuzanna Pusz, Berenberg Bank - Analyst [2]

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Hello. Good afternoon, everyone. Just a couple of questions from my side. First of all, on the like-for-like range, which is relatively wide at minus 3% to plus 3%, and given that you expect a similar development for the adjusted EBITDA and it looks like you have some additional cost control you could implement should the like for like be at the lower end of the expectations, so would you mind commenting a bit more on that? Where do you see more scope for cost cuts?

And secondly, on the US business, so I understand that you expect another year of low double-digit decline in the wholesale channel. Would you mind just quickly clarifying how much of this is expected to be driven by the ongoing restructuring of the business and what is your expectation for the overall market?

And then, also, maybe very quickly on the CapEx, you have guided to EUR150 million, EUR170 million this year, but I was just wondering if you could share with us the expectations you have going forward for the coming years, whether that could be in the similar range or perhaps a bit lower or higher? Thank you very much.

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Mark Langer, HUGO BOSS AG - CEO [3]

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Thanks, Zuzanna, and let me start with the CapEx question first.

I think it's a good practice for us to give a specific guidance for the current fiscal year, and what we gave today was EUR150 million to EUR170 million, but we also on a more qualitative level outlined that we also expect for the outer years, so 2018 and 2019, despite the fact that we will start to have the first rollout of first HUGO freestanding stores, not the major chains or return through the number of takeovers and white-space expansions that we've seen in previous periods. Also for the outer years, even so we can't quantify it as precisely as we will have done this now for 2017, we expect that investment levels will be at comparatively lower levels than what we have seen in the period between 2013 and 2015.

On your question on like for like, I think a corridor between minus 3% and plus 3% is also something we have seen as likely outcomes in difficult-to-forecast market environments, so we feel comfortable to guide the market under the range when it comes to our like-for-like performance on retail, where we have much more limited visibility, clearly, compared to the wholesale business.

I will answer your question there as well. You're right. If a like for like would fall to the lower end of our development, this might require additional measures that we have also prepared of our budget plans in terms of OpEx and CapEx control to deliver our earnings guidance for the full year, but right now we expect with these measures, contingency measures, in place that we would deploy if we see continuous slump of like for like to the lower end of our development, as a Group we'll be able to deliver also on the earnings guidance for the full year.

On the wholesale outlook in the US, you're right on your assumption that part of the decline is due to the full-year effect from discontinuing off-price third-party distribution, which was only completed during the course of 2016 and will have a full-year impact in 2017. That's one of the elements as I described in the speech of a negative wholesale trend for the next year, but also many of our wholesale partners operating in physical retail full-price operation have experienced very difficult market environments with being similarly affected by a decline in footfall, so also preorder in the full-price business is below previous year, adding to a negative -- or the decline in our wholesale business in the US by 2017.

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Zuzanna Pusz, Berenberg Bank - Analyst [4]

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So just one point to clarify because I understand that in 2016, half of the decline in the US was due to your own actions, so can you give us more or less the idea whether this year it will be also more or less of the decline you expect? Or you can't quantify to that extent?

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Mark Langer, HUGO BOSS AG - CEO [5]

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I wouldn't be as precise -- it's always easier to calculate those numbers with actual data than it is with forecast.

It also depends on some elements. We have not taken full order up yet for the second half of 2017. We know we can calculate the impact of the discontinued operations. That's clear. Let's use the term sizable, but it's probably less than 50% of the decline for the cleanup, but it's still sizable enough to be mentioned as a key factor of the decline on the US wholesale business in 2017.

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Zuzanna Pusz, Berenberg Bank - Analyst [6]

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Okay. That's perfect. Thank you very much.

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Operator [7]

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Thomas Chauvet, Citi.

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Thomas Chauvet, Citigroup - Analyst [8]

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Good afternoon, Mark. I have three questions. Coming back firstly to the retail (inaudible) guidance of minus 3% to plus 3%, can you tell us what the trend was in January and February, which regions improved versus Q4, and what do you mean when you said at this morning's media conference that you were not sure that the strong double-digit growth in China would continue?

Secondly, with regards to your gross margin guidance, slightly up for the year due to channel mix and lower inventory write-downs, can you recap what the [remaining] amounts of those write-downs were in 2016? And do you expect write-downs towards the end of 2017 or in early 2018 after the integration of Orange and Green into Black and the relaunch of HUGO?

And finally, on womenswear, at the fashion show in New York in February you presented a men's only show and no longer womenswear, as Ingo Wilts reminded. You also are reallocating a lot of A&P from men's to womenswear, so when you look at that, if you can think of a standalone P&L of the womenswear business for the year ahead, do you feel that you've now downsized it enough, you've reduced the cost base enough or reduce the breakeven points enough? And can you confirm that Jason Wu without a fashion show dedicated to his collection anymore will still be in charge of womenswear this year? Thank you.

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Mark Langer, HUGO BOSS AG - CEO [9]

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I will answer part of the economic question and then I hand it over also to Ingo, because please stay tuned. We have exciting and relevant news to tell on the womenswear part of our collection, where we are working very closely with Jason to have an exciting not only collection, but also event.

But let me start with the like-for-like brands. Yes, we are now, I think, in week nine or 10 in 2017, so we have some trading trends, but as in the past we will not comment on current quarter's trading before this is completed. But you're right. Also this morning on Bloomberg, I alluded to that we have seen a strong momentum in the Chinese market, which you might recall that we stated already in our prelim data the beginning of February that we have them positively surprised by the resilient and strong momentum that kept until the end of the year.

And here, we are seeing continuation on the mainland China strong trends in the double-digit area. This will annualize in the second half of 2017, so this is what I meant with my comment earlier this morning that we would be shy not to predict the complete continuation of this trend. We will make sure that we have all the resources in place to ensure that the growing middle class is fully aware of this highly attractive offer that we have developed to the Chinese market, so be assured that we will do whatever we can do from our side in terms of greater execution, marketing, brand communication, to maintain the strong momentum that we have now started to enjoy.

In other parts of the world, we already touched on the US market from a wholesale perspective. We see also our full-price business to be under pressure. Some of the improvement that we outlined in Bernd's part of the presentation in terms of merchandising, omnichannel services also for the US market will only be fully implemented during the course of the year 2017. The big bang, if we -- I think is the right term to use, in terms of collection, will come with the spring/summer 2018 collection, which will only become available in the second half of the year.

So in terms of our merchandising, in terms of our pricing decision, yes, we expect financial performance to stabilize, but as our range of like-for-like performance indicates, it is not yet in the current market environment a guarantee to return to positive like for like in the current fiscal year, which is also following the trends we have seen coming out of the fourth quarter and you are aware that we are still in negative territory in like for like in the fourth quarter. In terms of (multiple speakers)

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Thomas Chauvet, Citigroup - Analyst [10]

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Sorry, just to clarify, so if you elaborate the minus 3% to plus 3% like-for-like guidance, it's reasonable to assume that the trends in January and February, despite China, despite the good performance in the UK, have not probably improved versus the fourth quarter, which was minus 3% and improving from the nine-months 2016?

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Mark Langer, HUGO BOSS AG - CEO [11]

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As I said, the first quarter is not over, but clearly we have taken the year-to-date performance into consideration when we create our full-year guidance, so we just want to highlight some market data that also underscores that as the retail environment in many core markets, and especially in the Western Hemisphere, has not improved in the first two months of 2017.

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Thomas Chauvet, Citigroup - Analyst [12]

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Thank you.

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Mark Langer, HUGO BOSS AG - CEO [13]

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To answer the gross margin question before I hand it over in terms of activities on womenswear to Ingo, the write-downs on inventory in particular in the Chinese market and the US market that we booked as part of the inventory clearance were in the mid-single digits euro million amount that we expect not to recur in 2017 as an element, which will help us to grow gross margin in 2017 beyond channel. Having said that, Ingo, please?

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Ingo Wilts, HUGO BOSS AG - Chief Brand Officer [14]

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Hi, Thomas. As you said, the focus on the menswear is still on our strategy, in line with our strategy, and womenswear is still a very, very important part of our business. Even though if we don't do a show, for now we still work and we appreciate the work of Jason Wu and work with him also here and in our New York studio.

Part of the collection we built in the New York studio, especially if we don't do the show, we do editorial pieces, so this is also a kind of icing of the cake, which we show to our wholesale partners and retail partners and especially in our own stores. Besides this, we work also in womenswear in some capsule collections, on some capsule collections, where we partner up, for example, with our license partner or even with a magazine. So there's also a lot of momentum also for the next season on the womenswear.

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Mark Langer, HUGO BOSS AG - CEO [15]

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In terms of the financial performance, I think that was the other part to your womenswear, we always highlighted that womenswear has a sufficiently sized and a very healthy gross margin when it comes to the crux of our business, due to the fact that this has an industrial scale to it.

We never really allocated our marketing spending in terms of the P&L specifically to that. We think that both fashion show activities have benefited both genders in our collection; however, as Ingo explained in his presentation, we think the explicit and strong focus on menswear only was also needed to confirm to the market, to our stakeholders, that we will refocus more resources explicitly on the menswear side of our business. But you will see hardly any changes in terms of space allocation when it comes to womenswear apparel in our retail network and this is purely due to the fact that womenswear continues to be an important and profitable part of our retail business going forward.

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Thomas Chauvet, Citigroup - Analyst [16]

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Okay. Thank you, Mark, and just quick follow-up on the gross margin. Do you expect any write-downs of inventories of the old Black, Green, Orange collection, the old HUGO collection once you roll out the new products at the end of the year?

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Mark Langer, HUGO BOSS AG - CEO [17]

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No, and we have looked into that and we take these steps now very carefully. We will use the investor day in particular where we already sent the save the day to you later this year to update you what are the implications in terms of overall brand complexity, pricing decisions, but also interface out on these collections. But from today's perspective, we don't expect any write-downs in the context of the phaseout of the new and the phaseout of the old collection that we will continue in the current setup.

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Operator [18]

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John Guy, MainFirst.

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John Guy, MainFirst Bank - Analyst [19]

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Good afternoon, Mark, Ingo, and Bernd. Thank very much for taking my questions. If I could just stay with the free cash flow and CapEx, Mark, you just mentioned that CapEx would be running below the average of 2013 to 2015. I think it was around EUR166 million. Are you talking about that on an absolute basis or the average percentage of sales, which is around 6.4%? Maybe you could just give us some clarification on that.

And then with regards to the free cash flow balancing act in 2017, you talked around, I think, roughly a mid-single digit cash outflow on some of the store closures, impact for the free cash flow in 2016, so maybe EUR25 million or so coming into 2017, but partially being offset by retail or channel mix. When we move forward into the 2018 year, assuming that the CapEx is going to maybe come down a little bit. How far away from the EUR300 million cash flow that you think you can get to? I appreciate that there's an element of like for like factored into that, but I'd be curious.

And then, maybe, just an additional question around the marketing side. Could you just maybe talk a bit about how much you are going to spend on digital going forward? Forward marketing fell 6% year on year in 2016. What can we expect as you obviously roll out these changes within the portfolio that you just described again for us? Thank you.

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Mark Langer, HUGO BOSS AG - CEO [20]

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Let's start with the impact on free cash flow on investments. You're right that we have talked about absolute numbers, meaning it has not a major impact on percentage numbers if we are in the face of flattish topline development, but we expect the current fiscal year 2017 similar to what we have seen last year, that the investment as a percentage of sales, but also in absolute terms, will be below the levels we have recorded in the previous years through the period.

And one factor that we do not expect to recur because there are no major franchise operations left to be bought back, which was a source of [adopt] to this rate investment, and we also have taken, as we outlined in London, I'm fair more cautious to the need to capture further white spaces. There are still opportunities, as Bernd mentioned, but they are in a much smaller number than the share that goes into white-space expansion will be also in the foreseeable future will be lower.

There will be an investment need for renovation, and as we all three described to you, we see exciting opportunities to bring new technology, new store design not only to BOSS, but also HUGO going forward, so the Group will be highly committed to bringing the latest functionality and services to our own retail network and this will remain a key element. But to answer your question more precisely, compared to the peak that we have seen in 2015 and 2014, I expect investment for the Group to be as a percentage of sales at a slightly lower level.

Return to a cash flow level of EUR300 million and above is clearly pending not only investment, but first and foremost on a return of sustainable growth, which we guided the market to expect to start more specifically in the year 2018. We have not given any specific target on sales and profit targets for the year, so I would add for your understanding that this was also the reason why we can't give the specific date on when we will be able to reach a EUR300 million free cash flow number as well. But clearly growing topline and net profit development as of 2018 should also result ultimately in an increase in free cash flow, which can be used to growing also the dividend to our shareholders again.

I think we have given just two points in times on the share of digital, so it will be already 70% on our marketing spending, so it would go into digital. Like we believe that physical retail will never completely go away, to a lesser degree we think this also applies to magazines, so the classical print advertising, but also out of home advertising via at airport, city life will be here, so it's a bit difficult to predict is there a target value on how much we will spend online. It will grow and it will particularly grow not so much from banner advertising and search engine optimization; with a much better CM system hopefully in place in the course of 2017, we think that we'll use these digital resources rather to target customers very individually in their needs and interests when it comes to the brand, which accounts for digital marketing, but I would see it as a new generation far more intelligent marketing means than we were able to display in former times.

So, the result, we do expect over this next year a slight increase in digital marketing spending as a composition of total marketing spending.

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John Guy, MainFirst Bank - Analyst [21]

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Thanks, Mark. And maybe just one follow-up therefore on the retail business expense line, you mentioned there's fewer white space that you are going to identify and you are taking a more cautious approach there. Can we assume that that's going to be relatively stable over the course of the next few years? Or will there be a certain allocation or spike in 2017 and 2018 as you look at the HUGO pilots and you think about that reconfiguration?

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Mark Langer, HUGO BOSS AG - CEO [22]

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The HUGO rollout will be driven by just one factor, in that we have found an expandable and profitable business system.

We are very confident from where we stand today with HUGO and the feedback we get from many wholesale partners, it's a predominantly shop and shop brand in core European markets, but with the new collection where Ingo is working on and also with the new global price position on HUGO, we will see how high is the limit in terms of growing this business.

We can assure you we will not be limited by resources if we see that this is a highly profitable business to expand it, but we are cautious already to give you today an amount, number of POS for annual investments behind HUGO. We want to see a proof of concept by the end of this year in terms of collection, in terms of concept. We will have the first result from freestanding stores, and please keep in mind we do have some HUGO stores already in place, which will allow us an immediate feedback from consumers how much more successful these formats are.

Clearly, we need -- and all the three of us are aware of that -- we need a step change in performance, of retail performance, compared to the current HUGO retail performance before we would decide to go into an expansion, but it could and that's why we are cautious not to give the 2019 and 2020 investment of total space expansion number yet. It could be a major driver of retail expansion going forward if, and that's an important if, we see that this is a highly successful retail format for global rollout.

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Operator [23]

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(Operator Instructions). Antoine Belge, HSBC.

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Antoine Belge, HSBC - Analyst [24]

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Hi, it's Antoine Belge, HSBC, three questions. First of all in terms of investment in general, so not only marketing, but products, tolls, et cetera, my understanding from the capital markets day was that you were in a big phase of changes, so I'm a little bit surprised to see that there is no more impact on the margin from those investments. So isn't it a risk that by trying to protect the margin at all costs you're in a way postponing the timing of the recovery at the ground level?

My second question relates to your order intake for the fall and winter collection. I think one of the reasons why you didn't want to provide precise guidance back in November is that you wanted to have a bit more visibility on the order intakes, especially for the Germans' wholesale partner that I'm quite keen to understand the reaction, especially they have already done a bit of a price increase with the entry-level suits going from EUR449 to EUR499, but if you have to implement another bigger step to EUR599, so any feedback would be appreciated.

And then, I have a very boring question, which is actually impacting the consensus figure, is the depreciation and amortization number. In 2016, the increase was almost 20%, which means the depreciation to sales ratio has increased from 5.1% to 6.3%, and I think that consensus was factoring a big decline in 2017, so were there any exceptional in those depreciation? Even the Q4 numbers was quite high. So any sort of guidance in terms of a euro number or as a percentage of sales for 2017 will be welcome as well, because there seems to be a wide array of expectation on those metrics.

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Mark Langer, HUGO BOSS AG - CEO [25]

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Thanks, Antoine. I don't think any of these questions are boring, also the last one. Let's go ahead with the first one.

I think we highlighted the think on gross margin development that we do know will have a positive impact, so it's easy to calculate with the momentum by [phase] channel that we will have a beneficial impact from channel mix growth differential, so we expect retail to grow stronger than wholesale, which will benefit our gross margin.

And I think Thomas asked earlier the question on the inventory write-downs in the previous year and the current fiscal year, which, as we highlighted, will have a positive impact.

Let's leave currency effects to the side. One element that we highlighted in London and where we have now a bit more visibility is our impact on our cost of goods related to where we also said -- I think Ingo repeated that today -- that we are willing to invest into the quality of our product, especially in the casualwear, not in terms of design, but also quality, value for money.

We have done that already with the fall/winter collection. We are in full swing developing our spring/summer 2018 collection, but we are relatively sure that we can balance efficiencies, be it from other sourcing options, be it from complexity reduction where we see them to take advantage of economies of scale with the investment that we take into product. So where needed and where we are convinced that consumers rightfully ask for a higher product quality, and, as we said today, we see that in particular for our BOSS casualwear offer, we are willing to invest that, but we do not expect an impact on our gross margin, at least on the forecast for 2017.

On the order intake, I think we are giving you the numbers by regions. We will not provide order numbers by market. Yes, the German market has seen some declines in the third quarter, but it's recovered very nicely in the fourth quarter, so from our perspective the price adjustment we have done from EUR449 to EUR499 in summer 2016 has been well digested and accepted not only by the end consumer, by many of our trading partners.

And then, Bernd already alluded to that, but also the now-announced price harmonization measures that we plan with spring/summer 2018, that we will charge in the eurozone for the same product the same price, has been overall overwhelmingly accepted as an overdue decision by the Group. We will take into consideration also technical elements like we do that with our US partners and European partners to see where pricing pressures are extremely severe, but we assure you that the price adjustment with the French market, that's the leading market for all European euro price levels, will be the new norm as of spring/summer 2018.

On depreciation and amortization charges, we expect, based on our current forecast, this to be on a similar level to the fiscal-year 2016. It's a bit due to the composition in our -- and depreciation of our asset base. There has been uplift due to the closures to some of our stores, but we expect the D&A expenses to be on a slightly higher level than in 2015, so we guided this to be flat in 2017 relative to 2016. That's correct.

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Antoine Belge, HSBC - Analyst [26]

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Okay. Just when you mean flat, do you mean flat in euro terms?

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Mark Langer, HUGO BOSS AG - CEO [27]

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Flat in percentage -- no, sorry, in euro terms.

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Antoine Belge, HSBC - Analyst [28]

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My question about the investments, were some, I think, linked to maybe just not at the gross margin level, but also in terms of SG&A? There doesn't seem to be a lot of SG&A pressure on your gross margin -- sorry, on your EBITDA margin guidance, so here, again, are you sure that your strategic initiative will not require more SG&A investments? Because my understanding also from your presentation last year was that 2017 would be -- whatever you want to call it, but then 2018, you return to profitable growth would be actually not happening already, so that's why I understood that you would require some kind of SG&A investment as well.

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Mark Langer, HUGO BOSS AG - CEO [29]

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You're right that there are -- we have new teams on the campus that we didn't have two years ago, so I am now also getting my Snapchat and Instagram 101, so we have now content teams that we haven't seen before that are fueling this very hungry channel with interesting content. And if you think about a change in profession, we are desperately looking for people who can be editors on our Snapchat and Instagram account, so clearly in these areas we recognize a need to build more teams.

But keep in mind. We are talking about a 2,500-person headquarter army and this is now shifting in composition. Certain elements to our business in the more general G&A part have to take -- and this message has been well accepted by the organization now. To accept to the new norm of the flattish topline, we have to keep our costs in this area [and space], be it our wholesale distribution teams, be it our finance teams, be it our HR and backbone IT system, and this discipline allows us to invest into certain parts of our business system which are needed in a more digital world.

I just gave you one example to that, but there are other elements in driving the digital transformation where we are willing and capable to do the investment, but it's rather a shift in composition than overall increase in the cost structure. Please keep in mind that this industry has been for many years almost in a state of denial where we have grown our cost base quite excessively, and only as of 2016 we had our sobering moment to come back to a new normal, so this is not starving an organization, but it's more resizing and refocusing our resources where they are more needed to grow our business again.

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Operator [30]

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Volker Bosse, Baader Bank.

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Volker Bosse, Baader Bank AG - Analyst [31]

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I have two questions on the online segment. Good to hear that digitization is a top priority for 2017, so could you provide us also with a kind of online sales guidance for 2017?

And second question is, also, what is your idea about potential partnerships or marketplaces which you might be going to enter? Any news to expect from that side? Thank you.

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Mark Langer, HUGO BOSS AG - CEO [32]

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I think Bernd also touched on this point. We were clearly disappointed with our e-commerce performance overall in 2016, so to some degree we expected a slight [uptick] with the relaunch of the site, which merged our formerly separate content and commercial sites, but I don't want to repeat what we said as part of the call.

We underestimated the importance of the mobile site. Our focus was very much on the desktop solution. And there were other elements, starting with trivial elements you would think of, just loading time of the page, having the right depth and amount of merchandising at the relevant price point, so that we are still on -- we have to be on a much steeper learning curve to be best practice asset from a branded retail space.

So, I think we said it very loud and clear. It's not one is the priority for the management, but we will not cut corners. We will not be excessively pouring market-driving traffic to the page if it's not yet performing at the level that we expect. We will not turn our e-commerce site into a digital off-price channel where you find discounts that you will never find on any other pages, so we know the quick and easy solution to drive e-commerce sales would have to be healthy. As we said, we want to return to a safe, sustainable, and profitable growth going forward.

We are fully convinced that there are these opportunities, but there are no quick solutions. So we do expect that the difficult situation of our e-commerce business might also be part of our reporting also still in the first half year of 2017, so we will not guide on a specific number yet, but we have not found a quick solution to the difficulties in the fourth quarter. Overall for the full year, we remain committed that relative share of e-commerce will increase for the full year.

Bernd, do you want to comment a bit on the partners that we are already with and we are planning to have?

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Bernd Hake, HUGO BOSS AG - Chief Sales Officer [33]

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So at the moment, there are two partners we are actually looking into. One is our department-store partners who actually drives their own websites. Some of them, they already have manage the merchandise; however, at the moment we are with two partners in discussions about a marketplace. Furthermore, the online players, which is, for example, Zalando, MR PORTER, ASOS, the two online players where also we discuss on marketplace sites; however, for us the highest priority at the moment is really to manage our own website first, and thereafter we are putting resources into marketplace opportunities.

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Operator [34]

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Warwick Okines, Deutsche Bank.

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Warwick Okines, Deutsche Bank - Analyst [35]

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Good afternoon, everybody. Two questions, please. Firstly on the licensed segment in your guidance for the year ahead, you talked about it increasing solidly. Can you just frame what that means? Because you describe plus 12 in Q4 as robust and it seemed a bit more robust than that, so do you mean single digit or double digit, please? And secondly, Mark, you began the presentation talking about the operational deleverage that you experienced in 2016. Why are you not expecting any operational leverage or deleverage in 2017?

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Mark Langer, HUGO BOSS AG - CEO [36]

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On the licensed business, we haven't given any more specific guidance I think also in the past. It's, as you know, a business that is even more remote [drive] controlled than even wholesale because here we are benefiting from the work that we clearly have an important role into, but the execution lies with our partners, be it Coty now on the fragrance or Movado when it comes to -- and [Safito], which was the other two measured categories.

So we have to be a bit realistic in our ability to forecast the development of these three major license business. But we see good momentum. We know on all three of them that we have good initiatives in place. We have been very happy how the relationship has started with our new and biggest partner, Coty. We've seen a strong commitment in terms of recent expansions there, attractive opportunities for both of us to capture to a larger degree the US market where we were not as strong as we were in other regions of the world with our fragrance business, and we also see for glasses and watches good development.

Whether it's going to be as strong -- and this is why we use the stronger term for 2016 -- as it will be in 2017, this is just too early to tell, but we do, as you rightfully quoted, expect a solid development also in 2017.

In terms of OpEx leverage or deleverage, it depends a bit on your topline development, I would say. Right now, we are guiding the market for flat topline, so we have to make sure that we maintain the cost discipline, one, investing into areas that we already discussed as part of the call and, at the same time, I think there was the first question asked, also have contingency plans in place if the market environment turns more against us than we now see as a baseline.

So, the cost discipline is there. We have some areas like rent negotiations that will full-year effect as a cost measure that we took, but we also recognize the fact that we will have areas of investment also in SG&A -- that was Antoine's question earlier -- that we will pursue to ensure that we have the capabilities in place also for recovery of the market and especially with the collection in place with spring/summer 2018 that will resonate even stronger with the consumers and have a higher level of desirability than where we are today.

So, operational leverage will be in a period of flat topline a difficult task for us. That's why we guided more or less in sync top and bottom line, but clearly we don't want to lose this discipline once we get back to a more stable topline growth momentum, that we're not only growing absolute but also in relative terms at a structured profitability going forward.

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Operator [37]

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Melanie Flouquet, JPMorgan.

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Melanie Flouquet, JPMorgan - Analyst [38]

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Actually, I have a few questions. The first one is regarding the expectation for like-for-like guidance for this year and the current trend. I understand you don't want to tell us exactly for the current trend, but it sounds like it has not improved markedly on Q4, which is understandable, given that Germany takes time and as I suspect. But my question to you is if it is not improved, what are you expecting to actually term it more favorable to get to your more positive outlook for the rest of the year? Because the comparables don't actually tell much more positive on that metric year after that. And quite a lot of initiatives seem to be hitting in January 2018, so I was wondering whether you can recap what actually can term this more favorably later in terms of your initiatives. That's my first question.

My second question is a bit more focused on the outlets. The outlets were 19% of sales and 31% of retail sales, if I'm not mistaken. When do you see this evolving? You've done a lot of work on continuing by channel and the promotional activity in wholesale, but what about your own retail side of it?

And then, can you help us -- maybe if we look at Q3 and Q4 -- understand maybe a bit more for China and Germany where the most price action took place? What was the actual price decrease in China and price increase in Germany that took place in Q3 and in Q4? Or, rather, what was the average impact of these quarters and what were the growth and declines of each market in these quarters? Thank you.

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Mark Langer, HUGO BOSS AG - CEO [39]

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Thanks, Melanie. I think the line was a bit difficult. I hope I get all your questions right around like-for-like sensitivity, also perspective in the price changes that we did in 2016.

In terms of like-for-like sensitivity, we have a range of plus or minus 3% and, of course, if the group sees a prolonged trend at the lower end to this like-for-like development, we have contingency plans already developed as part of our budget plan to ensure that we follow the prioritization and think that we will first reduce, postpone, or do differently to ensure that our OpEx development reflects also the like-for-like development. I think that's a practice we have now learned in 2016 to ensure the discipline that we can only spend the money that we earned in our retail and wholesale business to begin with. But we have to take decisions on which amount of merchandise to buy; that's something that Bernd and his team are working on very carefully, but there is a certain revenue projection we have to work with, and then we need to be smart and agile in how to shift merchandise to these stores' POS where we see the biggest return for these investments.

And the same applies to our project and investment in OpEx, that we have plans in place also to protect the bottom line when like for like falls. However, as you can see from the range we provided in the earnings guidance, if like for like will fall to the lower end of the guidance, there are also limited means also to avoid a decline in operating profit. That's clearly not our objective, but there will be in a difficult market environment, like we experienced last year, at some point also an end to the measures that are available to us to counter an overall negative market environment.

But we can assure you that we have worked very carefully to ensure that contingency plans are in place to protect also the earnings guidance for 2017.

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Melanie Flouquet, JPMorgan - Analyst [40]

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Can I just (multiple speakers) -- my question was more like the like for like was trending around minus 3% in January and February. What will make it turn to positive within your range in the rest of the year? So based (multiple speakers) year, and a lot of initiatives seems to be hitting us all in the beginning of 2018.

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Mark Langer, HUGO BOSS AG - CEO [41]

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First and foremost, we didn't make any comment on the January/February like-for-like retail trends, just to be sure that you don't read too much on my qualitative comments.

What we said is that we are seeing in general market trends that we had seen in the fourth quarter to be prevailing also in the first quarter, with the stronger demand in China and especially a difficult market environment that we are faced with in the US.

Yes, we -- none of our like-for-like guidance is based on an easier or more difficult comp base. It's rather based on the measures that we have taken in terms of improving one important element of our retail business, which is our e-commerce business, where we expect a more difficult first half year to be followed by a phase where the measures that we have described will take a bigger impact for that. We will see as the changes in our retail network -- two major things that will be helping our retail performance already, based on the first indication that we see. First, you will see a much stronger shift into entry price points in our own retail operation, where we will drive visitor numbers and conversion rates in our stores, plus -- and I think Bernd had this as part of his presentation as well -- we had very limited expansion into casualwear offerings (inaudible) on the Orange and particularly the Green sides yet, but where we introduced it, we have seen very confident and positive reactions to that.

So we think we have some elements in our portfolio that we would describe as self-help measures independent from the market environment that we work with. Unfortunately, not all of them are immediately available. Also on the e-commerce improvement, some of these measures -- for example, loading time on the Web page, merchandise changes that we have executed -- need to be understood and recognized by the end consumer. But over the course of the year, we do expect that these measures will have a meaningful impact to help us to maintain and improve our like-for-like development within the range that we guided you to expect for the full year.

Let's complete your question with the two part on terms of price increases, so the price adjustment we did in the first quarter in China was a price adjustment of around 20% decline relative to the prior year and the price increase that we did in Germany and some other markets -- for example, also the Russian markets we increased prices -- was roughly in the low teens. It was not one specific percentage rate, but it varied a bit by product category, but it was in the low teens that we increased prices in Germany. And as I described, it was very well received from our -- in particular our wholesale and retail customers going forward.

Outlet, as a preferred way for us to clear excessive inventory, we describe we have discontinued to use third-party off-price channel as pure plays. We've never used them in Europe. We have used them extensively in the US. This practice has been discontinued, and we continuously strive also to improve the shopping experience in our factory outlets. Factory outlets with premium luxury tenants are here to stay, particularly in the apparel world, and if there is a high-class set of competitors in that, we have no issues to operate also BOSS outlets there.

The prime purpose remains, however, to clear unsold inventory that we have to take back from our full-price businesses, so over the longer term, over the next year, even though we did not deliver on that one in 2016 yet, but our objective is this remains what we stated in London to grow stronger in our core price business and in our off-price business also when it comes to own retail. There are already very confident signals in some markets, but it will require a return to positive like for like in our core price business that we make more significant focus to that. We do not target a specific share of off-price to full price in retail, but we would procure to the point that in some markets, in particular the US market, the share of off-price is slightly excessive on the longer term and we will do the necessary steps to correct the split between these two sales channels.

So ladies and gentlemen, thank you for your interest in today's call and we look forward to speaking to you again relatively soon with our first-quarter results, which will be on May 3 at the latest.

But also, already today I would like also to take the opportunity to invite you to our investor day, which we'll be hosting in Metzingen, our headquarters, on August 2. So, then, we will look forward to update you on the future plans. We will be walking you through our showrooms, so especially Ingo would like to show you -- let you touch and feel for yourself what we have been talking about because this will be our moment of truth not only by you as our investor and analyst base, but also to our customers to see what is a bit abstract and difficult to grasp at this time. So, thank you very much for your time and have a very nice afternoon.

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Operator [42]

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Thank you. That will conclude today's conference call. Thank you very much for your participation. You may now disconnect.