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Edited Transcript of BRBY.L earnings conference call or presentation 16-May-19 8:30am GMT

Preliminary 2019 Burberry Group PLC Earnings Call

London May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Burberry Group PLC earnings conference call or presentation Thursday, May 16, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Annabel Gleeson

Burberry Group plc - Director of IR

* Judy Collinson

Burberry Group plc - Chief Merchandising Officer

* Julie Brown

Burberry Group plc - CFO, COO & Director

* Marco Gobbetti

Burberry Group plc - CEO & Executive Director

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Conference Call Participants

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* Flavio Cereda-Parini

Jefferies LLC, Research Division - Equity Analyst

* John William George Guy

MainFirst Bank AG, Research Division - MD

* Luca Giuseppe Solca

Exane BNP Paribas, Research Division - Former Head of Global Luxury Goods Research, MD & Analyst of Luxury Goods

* Rogerio Fujimori

RBC Capital Markets, LLC, Research Division - Analyst

* Thomas Vincent Chauvet

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

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Presentation

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [1]

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Good morning, everyone. Thank you for joining us today for Burberry Preliminary Full Year Results Presentation. In terms of our agenda, I will start with a brief introduction, followed by Julie, who will cover our financial results, guidance and Operational Excellence. After this, I will give you an update on our strategic progress; and Judy Collinson, our Chief Merchandising Officer, will comment on our product evolution. We will close with a Q&A.

Last year, we embarked on our multiyear journey to re-energize Burberry, and over the last 12 months, I'm pleased to say we have made excellent progress. As I will shortly show you, we have transformed the way luxury consumers sees Burberry, substantially evolving our communications, product and distribution.

In tandem, we continue to manage the business with a focus on operational and financial discipline. In line with guidance, we have delivered an increase in group revenue of 2% adjusted for Beauty wholesale at GBP 2.7 billion and maintained adjusted operating profit at constant exchange rates.

At the end of February, the new collection became available to buy, and the early results are very promising. Feedback from consumers, press, influencers and wholesale partners has been extremely positive, with sales in March reflecting that. As the new collection remains a minority of our product, it will take time for our growth to accelerate, but we are energized by the early results and we confirm our outlook for fiscal '20.

I would now like to turn invite Julie to take you through the numbers.

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Julie Brown, Burberry Group plc - CFO, COO & Director [2]

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So thank you, Marco, and good morning, ladies and gentlemen. So around 18 months ago, we set out our vision to firmly establish Burberry in luxury fashion. And as we said at the time, this is a 2-phased plan. The first 2 years are foundational, where we're reenergizing the brand, rationalizing and investing in distribution and managing our creative transition, after which we will accelerate and grow.

We made several financial commitments in November '17 around the foundational years of '19 and '20, and I just wanted like to summarize how we're tracking. So the first thing we committed to, broadly stable revenue and op margin over the 2 years. And we've delivered this, this year and we're confirming our guidance for next.

Secondly, we committed a cumulative cost savings of GBP 100 million in full year '19 and GBP 120 million in full '20. We delivered ahead of target this year to GBP 105 million, and we're on target for GBP 120 million next as well as increasing our program to GBP 135 million by full year '22.

Third, we guided to a reduction in the tax rate of around 200 to 300 basis points by full year '20. And to date, our tax rate is reduced by 270 bps with a further 100 expected next year.

And finally, we guided to CapEx of GBP 150 million to GBP 160 million per annum, around GBP 300 million over 2 transitional years, and we're maintaining the guidance with an investment of around GBP 200 million planned in the coming year.

Now I will turn to our full year financial performance. During this presentation, unless otherwise stated, I will refer to growth at constant exchange rates. So revenue was GBP 2.7 billion, a decline of 1%. However, excluding the impact of Beauty wholesale, we delivered growth of 2%.

Adjusted operating profit was GBP 438 million, and op margin was 16.1% impacted by currency. Margins were stable at constant exchange rates as guided. Adjusted diluted EPS was up 7%, benefiting from a reduced tax rate and share repurchases. And as guided, exchange was a headwind, resulted in adjusted EPS at reported rates being flat on the prior year.

Free cash flow was GBP 301 million and cash conversion remained high at 93%. And finally, we're paying a full year dividend of 42.5p, an increase of 3% in line with our progressive dividend policy.

Now looking at the revenue performance in more detail, excluding the impact of Beauty wholesale. In retail, we delivered comparable store sales growth of 2%. However, space and accounting adjustments reduced the overall retail revenue growth to flat. In wholesale, we delivered 7% growth, excluding the impact of Beauty, slightly ahead of expectations due to the timing of shipments.

The first half grew double digits with Asian travel retail accounts benefiting from exceptional growth from Chinese tourists. The second half was impacted negatively by our decision to rationalize nonluxury wholesale doors. And finally, licensing benefited from the transition to a license model. Beauty benefited from licensing.

Now to give you a bit more color on the regional retail comp performance. In the full year, comp sales grew 2% with half 1 at plus 3% in half 2 at plus 1%. Globally, the Chinese consumer, our largest nationality, grew by low single-digit percentage, broadly in line with the trends we've seen over the first 9 months.

However, we did see a shift in their spending patterns between the halves. In half 1, this benefited Asian tourist destinations such as Hong Kong and Korea. Whilst in half 2, Mainland China benefited from the repatriation of spend. In total, Mainland China grew low single digits in the full year.

The Americas, which is predominantly a local market, saw softer footfall trends in the second half and delivered low single-digit growth. And finally, EMEIA grew low single digits. Europe improved in the second half driven by better tourist spend.

So now turning to products and looking at retail and wholesale performance combined. Accessories declined 3%. And as discussed, we're undertaking a significant transformation of our leather goods business. The early customer response has been strong. For example, the Belt Bag has been one of our best-selling bags in the year, and the initial reaction to the TB and Grace Bags have been very positive. However, the overall performance of the category continues to be impacted by softness in all the styles.

In apparel, our women's business grew 3% and men's 8% in the period. And our full look merchandise initiatives grew strength in tops, skirts and trousers, including exceptional growth for men's jersey wear. The first deliveries of Riccardo's product arrived in-store at the end of February, and the initial reaction from consumers has been very positive, with sales of the new collection delivering strong double-digit percentage growth, consistent with our ambitions. And Marco will cover this in more depth later.

Turning to the income statement. Gross margin was 68.4%, down 100 bps due to foreign exchange. Excluding currency, gross margin was broadly stable, with investments in design, product and quality offset by favorable movements and inventory provisions and duty credits. Beauty also transitioned to a license model, benefiting the gross margin.

In line with guidance, adjusted operating margin was stable at constant exchange rates with a GBP 29 million currency headwind taking our reported margin down to 16.1%. On an underlying basis, margin benefited from the cost-saving program offset by investments in the business. The adjusted EPS was up 7% at CER, ahead of profit, due to a 200 basis point improvement in tax and the accretive impact of the buyback.

So moving now to cash. We generated free cash flow of GBP 301 million, and cash conversion remained strong at 93%. The main movements were similar to the prior year with the major change being working capital with a GBP 45 million outflow. And within this, inventory was GBP 59 million up year-on-year plus 10% at CER, reflecting our investment into product quality, our ongoing product transition and higher raw materials due to the acquisition of Burberry Manifattura.

Trade and other receivables were up GBP 52 million largely resulting from nontrade-related factors such as indirect taxes and prepayments. Capital expenditure was GBP 110 million, and we expect a step-up next year to around GBP 200 million to reflect the store refurbishment program.

So looking at our net cash position, we generated free cash flow GBP 411 million before capital expenditure. We invested GBP 110 million and we returned over GBP 320 million to shareholders by way of dividend and buyback. And today, we further announced a share buyback of GBP 150 million.

We also completed the acquisition of our leather goods center in Italy and made a payment related to Burberry Middle East. So in total, our net cash was GBP 0.8 billion in line with the prior year. And on a lease-adjusted basis, we have net debt of GBP 0.4 billion with an adjusted net debt-to-EBITDA ratio of 0.5x, which is well within our capital allocation guidelines.

During this foundational phase, we are balancing our priorities to ensure appropriate levels of investment in customer-facing areas. So I wanted to give you a bit more color about the key investment areas in full year '19 and '20.

The first is product. At this stage in our transformation, we're investing in design and product development, enhancing overall quality, ensuring value is perceptible to our consumer. In financial terms, this translates into a gross margin headwind. We experienced this in half 2 this year and expect to continue this into the first half of next.

The second area is investment into customer experience. And here, we're investing in our retail excellence program, our people and our leadership and also into our store portfolio, which I'll now come on to.

So thinking about our retail footprint. We're optimizing the store network with a focus on 3 main areas. So first, we are investing in new stores and relocations to ensure luxury positioning with a particular focus on China and Japan. Secondly, we're investing in existing stores through an accelerated refurbishment program.

And finally, to optimize our network, we're closing 38 retail stores in nonstrategic locations to enhance productivity. This program has now commenced and it will continue into next year. So by the end of full year '20, we will have over 80 retail stores aligned to our new creative vision.

So now before turning to guidance, I'd like to update you on Operational Excellence and our cost-efficiency program. Our progress is significant. We're ahead of plan, with savings of GBP 41 million delivered this year, taking our cumulative to GBP 105 million and putting us 3/4 of the way to delivering the overall program. We've also increased cumulative savings guidance to GBP 135 million by full year '22.

The cost of the restructuring program remains at GBP 110 million, and this now incorporates the additional cost of closing the nonstrategic stores. This cost-saving program is an important part of our overall 5-year plan as it supports profitability at the time of closing nonluxury distribution and provides headroom to invest in customer-facing areas.

So turning to guidance. We confirm our full year '20 guidance of broadly stable revenue and adjusted operating margin at CER. As you know, this is the second year of our transition and again a year of significant change.

So taking revenue first. Riccardo's product will build through full year '20 from 15% at the start to 75% of our mix by the end of the year. Early signs are promising, with the new product growing strong double digits consistent with our ambitions. Our retail network will undergo a major refresh with store openings, closings and refurbishments, all designed to enhance the consumer experience. We expect minus 1% from space in half 1 and a plus 1% benefit in half 2, therefore flat for the full year.

Our decision to rationalize nonluxury wholesale will cause a mid-single-digit decline in the full year, and in the U.S., it will be more pronounced with a double-digit decline expected. By the end of full year '20, we will have aligned more than 80 stores to our new creative vision and closed 38 nonstrategic stores. We also expect to have completed the majority of nonluxury door closures in wholesale in the U.S.

So turning to margin. As I said earlier, we're investing in design, product development and quality to ensure value is perceptible to our consumers. And this means gross margin headwinds of around 100 basis points will be seen in the coming year and this will be more pronounced in the first half.

The cost-saving program will reach GBP 120 million cumulatively, supporting profitability through our period of rationalization. And as mentioned, we will step up our investments in CapEx to around GBP 200 million.

Now a word on phasing. We expect the weighting of profit in half 2 relative to half 1 to be more pronounced than the prior year. The first half last year reflects a strong comparator of plus 8%, and this, together with our strategic actions, will lead to a decline in profits in half 1. Growth will be reestablished as Riccardo's product builds through the year.

Turning to currency. We've run our usual FX model at the end of April spot rates, and this implied a headwind of GBP 20 million on revenue and GBP 7 million on adjusted operating profit. Our currency model and other elements of technical guidance are included in the appendix together with the estimated impact of IFRS 16, which we will now adopt for the coming financial year.

So to conclude, we are pleased with our progress this year. We've delivered enormous foundational steps whilst consistently delivering financial results in line with our guidance. The early signs in our business are very encouraging.

And with that, I'm really pleased to hand over Marco.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [3]

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Thank you, Julie. I'd now like to give you an update on our strategic progress, starting with our brand. Over the last 12 months, we have completely changed consumers' perception of our brand, bringing to life a new creative vision and, importantly, building heat and desire for Burberry.

This year, we unveiled a new logo and revived the Thomas Burberry monogram. We merged consumers in our new branding through exciting activations in high-profile locations and by putting our campaigns in unexpected places.

For our Spring/Summer '19 campaign alone, we more than doubled the number of outdoor sites used with over 1/4 of them new to the brand, and collaborated on innovative digital activations, including taking over image-leading sites as you see here. So rounding this brand transformation was the reveal of Riccardo's first collection, Kingdom, last September; followed by his second, Tempest, in February.

As you know, brand heat is ignited by building the right image with the right people. And in the past 12 months, our new brand and product have been organically endorsed by some of the world's most followed celebrities and influential fashion icons.

In terms of numbers, influencers' endorsements around our fashion shows have significantly increased. For instance, in February, we tripled our earned media value from influencers at the show compared to Riccardo's first show in September. Press reaction to our shows has also been exceptional with coverage growing significantly versus last year. Over February, we saw double-digit growth in the number of full-page editorials and in our editorial return on investment.

We also saw a step change in the quality of press coverage. For the new collection, we landed a significant number of important covers for the first time in several years. And for the second show, press reception was outstanding, praising the desirability of the collection, particularly the outerwear and the leather goods business.

Heat with influencers, press and industry has started to spread to consumers, resulting in much higher social reach and engagement than last year. Across key markets, we have seen our followers increase by more than 3 million. As you know, changing wider consumer perception takes time, but these are encouraging results.

A year into our transformation, I also wanted to highlight some of the excellent progress we've been making in our product evolution. I'd like to welcome Judy to say a few words on this.

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Judy Collinson, Burberry Group plc - Chief Merchandising Officer [4]

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Thank you, Marco. Good morning, everyone. Riccardo's first runway redefined Burberry as a design house. [He showed us] his manifesto. He laid out his road map, the architecture of his vision. He began to define new language for the brand and new house codes, which teams are now establishing.

The first, he's updated the check, a 1980s version, sensitive to color that works well for both men and women. This archive check is a more neutral, cooler version. The icon stripe is actually the check deconstructed, the warp without the weft. This stripe refreshes the brand: a gorgeous silk satin blouse, a men's knitted short, a charming childrenswear collection.

The Thomas Burberry monogram is inspired from the archives by an original drawing of Thomas Burberry's initials. Designed with Peter Salvo, the motif opens huge product opportunities. It is our past and our future. Initially launched on jersey as a tease to the first show, it was subsequently released through the B Series. It debuted on the runway as the luxury is 24-karat gold-plated hardware on a classic cross-body bag. It is a new belt for both men and women. It is embroidery on the men shirt, a hoodie, a nylon water car coat.

The Thomas Burberry monogram print was its logical extension, interlocking the TB into a new branded pattern. It launched in light honey and vermilion red. This print has great potential for every category from leather goods to ready-to-wear to shoes to outerwear. It is a powerful new language, another defined historic brand element, a way to enrich the brand and give Burberry a stronger competitive foothold.

Riccardo's first show was a love affair with Britain. He quoted Shakespeare Richard II even on T-shirts. He talks about Britishness. He announces his penchant for pistachio, the color for the first rose received upon moving to London. A pleated backless jersey day dress, a relaxed men's suit silhouette, the lining of his new packaging.

This collection begins to define his silhouettes. They're classic: silk pleats in a tied neck blouse. They're street: Victorian corsets and cotton trench fabric. He gives his evening a start. Black jersey with gold Victorian showgirl-inspired trim, not so quietly chic.

His defining looks: wardrobing. The collection is balanced and for different customers, different moments for the same customer. The focus is on the total look. Burberry has been an outerwear brand, it now feels more complete.

Burberry's leather goods are being redefined with the new house codes. We are building by function, by customer. We are building the identity and the credibility of this important category. It will complete over time. The new TB bag walked the runway: box leather, rich hardware, silk-like gold-plating, an envelope and a waist bag.

Grace also launches this first season. Refined. Irreverent. It breaks the Burberry dress. Heightened quality at a not-so-heightened price. This is a strategic modern approach.

The ready-to-wear transition is to a mix of streetwear and luxury that represents the modern dichotomy of a casual and elegant lifestyle. This collection alludes to the potential we have in fashion jersey, from men where we already have a strong business and especially for women. This collection gives us total looks, strong skirts and trousers, great shirts. Riccardo shows a proclivity to fashion rainwear. We set a new direction in outerwear with sophisticated and integrated branding.

Our price strategy remains to protect the entry price while building the business in higher-price bands. New categories have been introduced at accessible price points: jewelry, silk, headwear. We are investing in quality, creating a strong sense of perceived value. The intent is that our range of products and prices will sustain a broad range of customers, of fashion customers.

This first runway opened a whole new conversation with our customers. We will continue to engage frequently and with fashion product. The response was strong to the Vivienne Westwood collaboration. We see double-digit growth on newness. Our goal is a constant and a creative conversation.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [5]

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Thank you, Judy. As Judy described, this year, we have transformed our product offer, and I'm delighted to say that we can see consumers responding well to it.

The new collection became available in stores globally at the end of February and has already delivered strong percentage growth, well into the double digits versus last year. While this is very encouraging, our replenishment lines will take longer to transition as we build new icons for the future.

The collection has resonated particularly well with key consumer groups such as our elite, top-spending customers and, importantly, our Chinese customer base. We still have work to do to recruit significant numbers of new customers to the brand, but this is a good start.

In terms of leather goods, the response to the new assortment has been very good with our new bags performing well. In addition, in this last market, our wholesale partners increased their orders of accessories by double digits compared to last year, welcoming the pricing architecture and shapes of our new handbags and commenting on the perceptible improvement in quality.

As I said before, building a collection architecture and credibility with consumers in leather goods takes time. We continue to invest significantly in quality, a fundamental sign to consumers at this stage of the transformation, including through our Burberry Manifattura.

To develop and deliver our new product this year, we have innovated our supply chain from product design and sourcing to deliveries. Our focus on agility and efficiency has allowed us to deliver monthly drops of product as well as frequent capsules.

In tandem, managing inventory to make room for the new product has been a priority. We have changed the way we buy to ensure our stores invest in and maximize the availability of new product and freed up back-of-house space in stores to make room for it.

While we're pleased with the strong sales performance of the new collection, it currently makes up a small proportion of our overall mix. The chart here shows for the coming year the proportion of Riccardo's product at the end of each season as each collection delivers over multiple floor sets. As you can see, the new product will only become a meaningful part of our business from the second half of this fiscal year.

In line with product, we have also begun to transform the customer experience in our retail network. We have completed a number of store refreshes starting from stores in key fashion cities, including 57th Street in New York, Via Montenapoleone in Milan and Faubourg in Paris.

We also refreshed a number of our key flagships, including Rodeo Drive in Beverly Hills, Mall of the Emirates in Dubai, Kerry Centre in Shanghai, Omotesando in Tokyo and Seoul, among others. We continue to roll out these updates at pace, refreshing and relocating stores around the globe all with a bespoke aesthetic suited to each location but all telling our new brand story.

By the end of this fiscal year, we will have transformed more than 80 of our retail locations. As Judy says, through our ongoing efforts in store rationalization, we continue to ensure that our footprint is well positioned and productive, and that we're focusing our resources in the most impactful locations.

We also expanded our retail presence beyond our own stores through a series of exciting pop-ups around the world, including the Burberry Conservatory featuring the Belt Bag. And most recently, pop-ups featuring the new collection like the one you see here in Shin Kong Place, Beijing. We will build on this in the coming year with over 30 pop-ups already planned for the next few months.

Within the store, we have also updated the parts of our brand experience which are most visible to customers. Firstly, I'm particularly proud of our new packaging, which is fully recyclable and certified by the Forest Stewardship Council. We began rolling out the new packaging in February and are planning to cover the full store network by September to ensure minimum waste.

We also updated our uniforms, often the first thing a customer sees when arriving at our stores, to reflect our new aesthetic: modern, chic and playing with British tradition.

At this point in our transformation, wholesale is particularly important. It's where luxury customers and fashion influencers shop and where we can build our image and drive heat. So for the launch of the new collection in February, we made sure we had exceptional visibility in the most coveted multi-brand environments in the world.

For example, for New York Fashion Week, we took every window at Barneys New York and built stunning pop-ups and window displays with The Webster. During Milan Fashion Week, we built a bespoke display for Antonia, and installed a 2-meter deer in the entrance of Dover Street Market for London Fashion Week. We also took over the Elephant Room at Dover Street Market in Ginza.

Partners placed us in their best locations in stores and online. As a result, we have seen a strong sell-throughs in wholesale for the new collection. In addition, we had great feedback from wholesale on Riccardo's second runway, with strong growth in orders versus last year. While these are very encouraging results, runway remains a very small portion of the wholesale order book overall.

In the U.S., we have made excellent progress in aligning our presence completely to luxury. As this chart shows, all the orders at our last market in November were from luxury accounts. However, in financial terms, we will not see the impact until later this year given the 6 months lag in product deliveries. And this will remain a significant headwind to our numbers as reflected in our guidance.

This has also been a great year for digital innovation. The B Series continues to provide us with an exciting way to communicate with consumers. Recent B Series drops have sold-out in a matter of minutes, and they are also a source of recognition for us externally. We recently won a Webby, which I'm sure is the Oscars of the digital world, for the Best Social Experience in Fashion and Beauty and the first time that Burberry has won this award.

We apply the spirit of innovation to the way which we launch the new collection with partners like Farfetch, NET-A-PORTER and image-driving accounts like Essence. We made sure we have maximum visibility across all digital channels: websites and e-mails and high-profile social accounts.

We have also partnered with Instagram in the U.S. as part of our efforts to innovate the customer journey by being one of the first brands to launch on Instagram checkout. As of last week, this also meant that customers were able to buy our products directly through influencer posts without leaving Instagram. Looking ahead, we have significant plans on digital for some of our upcoming launches, so stay tuned.

And lastly, a word on our people and sustainability efforts. In showing our people are inspired, motivated and proud to work at Burberry is key to our business. This year, we invested in driving engagement and developing our leaders. We also embarked on a new diversity and inclusion program, focused on increasing understanding, diversifying the pipeline of talent and championing those who help others. In sustainability, we were named the leading luxury company in the Dow Jones Sustainability Index for our constant innovation and leadership in this space.

Looking back over the year, I am very happy with our progress. We have transformed the way the luxury consumers sees Burberry, reaching millions of consumers around the world and establishing Burberry's creative identity. We have ignited and sustained brand heat, ensuring the brand is top-of-mind for press, influencers and partners and desire builds among consumers.

We have created an entirely new foundation for our product offer, investing deeply in quality, and the first pieces that arrived in our stores received great feedback and sold very well. We moved quickly to update our stores and ensured we have a well-positioned productive footprint. And we have continued to progress our transformation across the business, making huge strides on each of our strategic pillars.

Looking ahead, I'm reminded how much of our transformation is still to come, but the amount we have achieved this year gives me huge confidence for the future. We will continue to manage the business to maintain stable results. We will surprise and excite consumers with innovative new content and product launches as you see here from the campaign we launched this week. We will move at pace with the transformation of our product and retail network. And we will sustain heat and the momentum driven by the positive early results from the new collection.

I would like to take this opportunity to thank the teams who made that this year so successful. The passion, effort and energy shown by our people has been remarkable, and I'm really proud of what we have achieved. I'd like to close with a short video.

(presentation)

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [6]

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And now I'll open the floor for the Q&A.

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Questions and Answers

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Annabel Gleeson, Burberry Group plc - Director of IR [1]

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Okay. John, do you want to go -- I'm at looking at John, do you want to go first?

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John William George Guy, MainFirst Bank AG, Research Division - MD [2]

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Marco, Julie and Annabel, 3 questions, please. If I could just start with margin and thinking about some of the moving parts. Your OpEx was flat. Gross margin was down, appreciated on reported and flat in constant. D&A was down around 18%, giving you that EBIT that was slightly down. But how do we think about the margin in terms of investments going into product, in particular in leather goods? Could you give us some sort of quantification as to how much was invested there? And as the store network continues to shrink, are we going to be able to see, I guess, a further D&A reduction? Judy, that's for you.

The second one is on the double-digit growth in Riccardo's new collections. Are you able to provide us with a bit more information in terms of looking at volume versus price in terms of growth that you've seen there? And on Mainland China, Marco, why do you think it was relatively soft? If we're looking at some of the peer groups at the moment, we've seen a repatriation of consumption there. Your numbers seemed a little bit lackluster relative to peers. Could you maybe just talk about what you see in that particular region?

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [3]

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Julie, do you want to start on the margin?

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Annabel Gleeson, Burberry Group plc - Director of IR [4]

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Let's with start the margin, yes.

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Julie Brown, Burberry Group plc - CFO, COO & Director [5]

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So in terms of the moving parts in the gross margin, the overriding thing really is, as we mentioned, around investment in product, design and product development. Because at this stage in our transformation, it's really important that the consumer sees the value of the Burberry product relative to the peers and in some cases, in some categories, more than others. As Marco mentioned, we're on a journey with leather goods. This is one of the areas of focus.

So in the year that we just had, in full year '19, there was pressure on the gross margin for that reason because we were investing in product. And clearly, the other priority we have at this stage is to be able to manage the inventory and be able to prepare for Riccardo's product coming in to our lines and into our stores. So that was one of the drivers of gross margin on a CER basis in the second half.

Offsetting that, we did have the benefit of the stock provisions that were lower. You will probably recall at the end of '18, we put in some additional stock provisions related to the creative transition, and so we have some credits in '19 and also we had some very good outcomes in terms of duty credits going through the margin. So those 2 combined were around 100 basis points. The reason, therefore, net-net, that you see the margin come down by 100 basis points for the full year is simply due to currency because those factors were offsetting each other mutually. I think that's the main thing.

In terms of store network. So yes, in terms of store network, we are making extensive changes to the store network. Marco shared some of the imagery. And by the end of this coming year, we will have refreshed more than 80 stores in line with the new creative vision. At the same time, we also undertook a very thorough review of the mainline stores network and made the decision to close 38, what we would call, nonstrategic secondary stores because we're very focused on the productivity of the footprint. It will allow us to be more productive. And very importantly as well for Judy and her team, it allows better allocation of merchandise and inventory management. This is one of the other drivers of doing this.

Net-net, as you've seen from our CapEx, we are investing incredibly in stores. We are more than doubling the CapEx investment in the store portfolio. That's the main reason for the uptick between '19 and '20. Because what we find is when we've got Riccardo's product in the store and the refresh store, the customer experience is incredible. And this is what we're driving towards over the next 12 months.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [6]

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So as we said, we want to move really at pace on the refreshing or the refurbishment of the stores. So I think that we have 14 that have been done now already, and we plan to be over 80 by the end of this fiscal year. So we have a lot in the pipeline to do.

To your other 2 questions, I think that the sales of -- the first collections designed by Riccardo have been strong across, I would -- across gender, so across men, women, children; has been strong across different categories, I highlighted some of them but not only. I think we did a very good job in also cross-selling and merchandising the categories together. It's not been either price or volume. It's been both combined that have driven the growth. So I think what we have seen is very encouraging and very positive.

In terms of China, I think the numbers of Chinese customers in China and abroad have been more or less in line with the rest of the year. So I think you have to look at this more in the context of Burberry than in the context of the transition we're going through rather than the Chinese economy or the performance of luxury in general. We remain extremely confident on the growth opportunities in China both structurally from the growth of middle class and the spending power in luxury and from a Burberry perspective, knowing that we have huge opportunities with the traction that we hope to get over the next few months.

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Annabel Gleeson, Burberry Group plc - Director of IR [7]

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Luca?

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Luca Giuseppe Solca, Exane BNP Paribas, Research Division - Former Head of Global Luxury Goods Research, MD & Analyst of Luxury Goods [8]

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I was interested to understand the dynamics within the leather goods part of the collection. You were saying that the new styles are selling very well, but that was partially offset by the old styles sort of fading. I wonder that -- I wonder if in the overall mix you are seeing your ambition realized to increase the average price of the handbags that you sell. When you say that 80 stores by the end of the current fiscal year are going to be realigned to the new image, how much of that is in terms of retail sales overall as you're starting from the most important stores?

And then thirdly, you're a pioneer in developing digital and digital distribution. You were mentioning that you are engaging now with a number of retailers, multi-brand retailers and platforms. How do you see the endgame of your digital strategy? Clearly to piggyback on traffic and make the most of that, I presume you're leveraging platforms. But do you see mono brand distribution online as a continuing focus of yours?

And maybe if there is time, just a last one. A tight grip on inventory, is it possibly penalizing the speed of your recovery? And how much traction are you getting with the new styles?

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [9]

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Okay. So starting with leather goods, as I said, we saw some very positive signs from the sales of the new models that were launched with the runway collection. The leather goods is -- when you look at the big picture, the leather goods is our biggest transition that we're going through. Because while in other categories of ready-to-wear, we had very strong foundations and we had very strong pillars, the assortment of leather goods was based more on a logo play on check or on logo. So we are in the process of really building those icons, those pillars, on which we can build the rest of the product architecture.

So we think we have some of those that are starting to come out from the first collections, the first design of our team. Clearly, as you said and as we said in the presentation, we balance that in this transition with the exiting and the reduction of the other lines. So that makes for, frankly, a planned slowdown and of the leather goods activity in this period of transition, which is supported by instead of good performance that we're seeing from the ready-to-wear categories, whether it's men and women, particular men's. But in general, ready-to-wear is supporting that. So all of this is kind of an overall plan that we have.

And in terms of pricing, we said from the beginning -- and I think I'm actually quite pleased to see that we have been able to stretch our prices upwards with the introduction of the new collection. So the TB Bag, Society, a couple of these bags that are coming in have really taken us to a price level which was very difficult for us. Somehow it was a price that was very runway-related and were items that were very seasonal.

What we're building, we're building items that have the possibility of staying and becoming icons for us, like the TB bag. And those are in the GBP 1,400, GBP 1,500 to GBP 2,000 category, okay, which we find this is still a very competitive price for a handbag that is fully made in leather, lining in leather with a very -- with a gold-plated closure is really a fantastic bag that we have there. And I think that we have -- the reason, as I said before, a real perceptible value from the customer.

But at the same time, we're introducing new styles like the Grace that was introduced now in the category around -- between around GBP 800, which is another key category of entry price for our customers particularly for a younger, just a more dynamic type of customer. So it's too early now to call in terms of the price effect of all of this because we've had a few weeks of sales and mainly from runway products. But we think that we are -- we think we're really on target with our plans there. I don't think that we're calculating necessarily the growth, your question was about growth from stores that are being redone, that are being...

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Luca Giuseppe Solca, Exane BNP Paribas, Research Division - Former Head of Global Luxury Goods Research, MD & Analyst of Luxury Goods [10]

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I was asking how much [main] stores represent as a percent of the growth of retail sales.

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Julie Brown, Burberry Group plc - CFO, COO & Director [11]

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Okay.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [12]

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It's a sizable percent.

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Julie Brown, Burberry Group plc - CFO, COO & Director [13]

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It's -- I think it's approaching 50% in the main cities, in the top 15 cities.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [14]

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It's shy of that, I think. But it's a sizable number or is a sizable part of the sales because we start from the key stores, so flagships and stores in key metropolitan cities. In terms of platforms, clearly, we think that platforms are an opportunity and are a place where customers shop and continue to shop. They enjoy the diversity of the product they found and the ease of shopping there.

So we have an early play there. I think that what we have done with Farfetch, frankly, when you look at it from a back-of-house point of view, is quite remarkable because our stock is fully and completely plugged into the platform and that is, I think, quite an achievement. And that is growing extremely well. And Tmall is the same thing in China, and we're seeing great results there.

Platforms, I believe, we believe, are going to continue to be very important. And I think we will see dynamics of new arrangements between brands and platforms that will evolve over time and find forms that are more and more qualitative for the customers. And in terms of inventory, do you want to say a word on inventory?

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Julie Brown, Burberry Group plc - CFO, COO & Director [15]

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Yes. So in terms of our inventory, it's increased 10%. Part of that is the acquisition of Burberry Manifattura, so we picked up, obviously, the leather goods center. In terms of the element of the finished goods inventory, it's a rise of 9%. We were expecting it to be ahead of sales growth at this stage because, clearly, we've got a different product positioning, so the inventory balance will run ahead of the sales growth. And in addition, the move more towards fashion means the ordering cycle is different from replenishment because you're ordering ahead.

Having said that, we're clearly, at this point, going through the creative transition from one creative leader to another and that means managing the inventory of the collections throughout really the next 12 to 18 months. But I think over that period, we would expect the growth to be more normalized as we reach those 12- to 18-month period.

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Annabel Gleeson, Burberry Group plc - Director of IR [16]

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Thomas, Citi.

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Thomas Vincent Chauvet, Citigroup Inc, Research Division - Head of European Luxury Goods Equity Research and Director [17]

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Three questions. The first one, how much CapEx is dedicated to these 80 refurbs in pound million? And what are you expecting in the outer years? Secondly, as you're phasing out the old collection, have you seen -- in the fourth quarter, are you expecting for the March '20 a pickup in LFL in outlets versus full-priced stores? How are you thinking about the maybe step-up in shipments of merchandise to the outlet channel?

And coming back to leather goods. If I remember well, you've historically had a lower margin in this category versus apparel, which is a little bit counterintuitive relative to some of your peers. I know you don't have the same size in leather goods. Could you tell us, Julie, roughly what's the gross margin differential between bags and apparel, bags and trench coats? And what are going to be the driver of gross margin improvement in that category? Is it all about scale effects and, as Marco was talking about, just increasing the ASP on higher brand perception of the category?

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Julie Brown, Burberry Group plc - CFO, COO & Director [18]

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Okay. Yes. Shall I take the CapEx and -- yes? Yes, so in terms of CapEx, the -- when we laid out the 5-year plan, we were really flagging that we would have about GBP 300 million in these 2 transition, years over the 2 years. The phasing is different. We've done GBP 110 million, we'll do approximately GBP 200 million in the coming year. And then we guided that the CapEx would be around GBP 190 million to GBP 200 million. I think we're still expecting it to be in that ballpark. Our ambition is around the change of the store network. We've done some reprioritization of that, but they're broadly in line with where we were with at the 5-year plan. So no change really overall to the view that we articulated before.

Just in terms of the question about the phasing out of the older collections and how we anticipate that working through outlets, et cetera. I think we got a very broad, diverse business with multiple channels at our disposal, including mainline. Obviously, we've got the wholesale business and we've got outlets. And we will use all of the channels to be able to manage the inventory situation as we move from one creative leader, Christopher obviously over to Riccardo.

And as you've seen, we've managed the business dynamically this year, and we'll continue to do so in the second year of our transition because we feel the most important thing is to allow Burberry to be able to grow at the headroom for the new product to come in and be able to grow by turning that product over to the new range, and that's the most important thing. And in the process, we're also very focused on the brand equity during this period.

Just in terms of the leather goods and the margins, obviously, you wouldn't expect us to disclose the margins in an open forum like this. What we're finding is that it depends on the category. So you mentioned the trench coat. The trench coat, where we've got relatively high volumes of the product that is in great demand and we've got very well-established production processes, obviously, it's made in-house in Castleford, that's when you get the benefit of the volume. And particularly, if the line is also being reordered as it's selling through, you get the benefit also through the inventory.

So because we're earlier in our stage in terms of developing the leather goods strategy in terms of the leather, the solid leather styles. As Marco was mentioning, the leather range previously or the handbag previously had included other fabrications other than leather. So the move towards leather means that, over time, what we will do is we will be able to get production and scale efficiencies through the leather goods range. But at the moment, yes, the margins on the leather goods range are slightly lower with some of the new shapes, not all of them but some of the new shapes.

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Annabel Gleeson, Burberry Group plc - Director of IR [19]

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Rogerio?

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Rogerio Fujimori, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Marco, Julie, Annabel, 3 questions, please. Could you talk a little bit about how the trench coat, your core trench coat business is performing? And should we expect through increasing brand heat for the heritage trench coat business to pick up? The second is do you think that the luxury environment is requiring more reinvestment? And what type of increase in marketing is baked into your fiscal '20 guidance? Is it double-digit increase or kind of any qualitative indication would be helpful. And the third question is with regards to the strategy of increasing fashion content. In fiscal '20, what kind of implication should we expect versus fiscal '19 with regards to AUR, gross margin and SKU productivity from this higher kind of fashion content move?

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [21]

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Okay. Well, trench coat -- or the trench coat, the whole rainwear category, remains for us the pillar of the brand. And so as we have seen in the past, we are dedicating a lot of attention both in terms of the continuous development of the product, the improvement in quality, the continuous tweaking in terms of also making sure that the fit is adopted to the times. So that work is continuously ongoing.

And that category has been really reinforced now by the new vision that has taken this category and developed in a lot of fashion extensions of it, which we have seen on the runway. So overall, this is a category and a business where we continue to invest. Clearly, over the past year, the focus has been on launching the new aesthetic and the new creative vision. But our attention and our focus on the rainwear category remains extremely, extremely important.

In terms of marketing, I think what we have seen, what we are operating is we're operating a broad shift in our marketing strategy. We -- really, what we are doing now is, first and foremost, we are concentrated on product and concentrated on creating content particularly for social media where we feel that we have an opportunity through fresh, new, continuous content and continuous engagement to really track in terms of customer engagement. We are also focusing our investments in key moments and in key launches of the products and the brands.

So there has been quite a shift. Digital, obviously in all forms, is continuing to increase its share of our investments. So we have really made a major shift in there. At the same time, clearly, we are investing in marketing within our financial objectives because we have clearly stated that we want to achieve certain objectives in terms of profit in particular. So we are moving along with the transformation of the company, but what we see underneath is a radical transformation of how we go to market.

And in terms of the fashion component going forward, well, I think that we have seen already -- in the first 2 collections, we have seen the foundations of the fashion offer being laid. So now I think that from here, we will continue the journey in fashion but we also have the opportunity to create the new icons and the new continuity and replenishment programs, particularly in ready-to-wear where we are more advanced in a certain way. I think in -- as I said in accessories, it would take -- in leather goods, it would take a bit more time. So I think that we're probably at the peak of now the fashion offer. And probably going forward, I think starting probably in like 6 months and starting in H2, we will start to have an opportunity to now really focus on what we think are going to be key items for the future and develop around those categories.

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Annabel Gleeson, Burberry Group plc - Director of IR [22]

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We've got time for one more. Okay, Flavio.

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Flavio Cereda-Parini, Jefferies LLC, Research Division - Equity Analyst [23]

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So 3 questions from me as well. Firstly, are you comfortable with the selling space dedicated to your outlets at this moment in time? Meaning, I understand it's a channel that you need especially because of the transition phase, but is this something that you're likely to be addressing in the medium term in terms of potentially reviewing that?

And then 2 questions on the ready-to-wear. Firstly, are you comfortable for the new products, of the newness, with your current supply chain? I'm quite surprised there's still a lot of product that comes from China, so I was wondering whether that's something that you're likely to be looking at.

And thirdly, and we've seen it in the numbers with menswear, which is performing -- outperforming womenswear. If you go into your scores, if I go into the stores that I visited, there's a noticeable difference in terms of buzz between menswear and womenswear, and I was wondering if that is something that you're looking or if it's something that bothers you in any way at this moment.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [24]

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Shall I take the...

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Julie Brown, Burberry Group plc - CFO, COO & Director [25]

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Yes. Yes.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [26]

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In terms of the outlets, I think that our plan in terms of outlets is clear. I think that what we have identified last year is an opportunity to increase the mainline, the full price, let's say, share of our business and to control the outlet part of our business. And that will be done through a number of levers, including closing some of the outlets and also remerchandising outlets. Now in this particular moment, I think that outlets are playing a very strategic role and a very -- because at this stage, where we want to transition from one basically inventory to new product coming in, outlets are very useful for this. And so frankly speaking, we are really using outlet today with that objective in mind.

Now going forward, outlets, I think they also play a very the physiological, I also call it a physiological role for a brand that has a high component of ready-to-wear business, okay, and for a brand that has committed to not destroying products at the end of their cycles. So we need to reduce -- we need to exit ready-to-wear collections. These are obviously positions that were taking on a number of products and trends and capsules, and we need to exit them in a controlled way at the end of their cycles and we need to minimize the leftover.

So outlets for us is a question of balance, but our -- the strategic importance of outlets, over time, is not going to change. It's just going to be different from a tactical point of view. Today, we are in one phase. In the future, we will be in a different phase. I believe your questions were -- the second question was about the sourcing of some of the product?

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Julie Brown, Burberry Group plc - CFO, COO & Director [27]

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Comfort in the supply chain. Comfort in the supply chain and the use of Asia, China.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [28]

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Yes. The comfort -- yes. I think that, in general, our supply chain has reacted extremely well to a radical change in our go to market in terms of delivery and in terms of construction of collection and then in terms of aesthetic and product attributes that have completely changed since last year.

So I think we have proven being able to deliver B Series in September, to deliver Vivienne Westwood capsule in December. Riccardo came onboard in March. So basically, by the time that he looked around and started working was in April. So being able to deliver that, together with a fundamental first fashion show, I think is pretty remarkable and speaks to the agility of the change. In all of that, we also have to adopt vendors to the new aesthetic and the new product categories.

We have -- the majority of our production is obviously in Europe, but I think that we have some very strong sourcing and manufacturing also from outside of Europe. It's a minority -- it's a minor part of our activity but that we are very comfortable with because the quality that we get is exceptional there.

And in terms of the difference between menswear and womenswear, I think that we're seeing actually good traction across both. Now the menswear, if you look at the menswear, you can perhaps say that the younger line, if you want, of the menswear has been very developed in this early beginning of Riccardo's design. And this has attracted, in fact, a lot of new young customers to the brand. So I think this creates perhaps the fact that you noticed that.

In womenswear, I think we have been tracking very well also with an elevated offer. So the type of quality and somehow profile of customers that you see in the store perhaps are different and that may create somehow the impression that there is a difference. But in reality, they've been -- they both have been tracking well over the past few weeks. The only few weeks we [have left] of test.

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Julie Brown, Burberry Group plc - CFO, COO & Director [29]

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Yes. Yes.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [30]

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I think we are...

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Annabel Gleeson, Burberry Group plc - Director of IR [31]

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Yes. So thank you very much for coming.

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Marco Gobbetti, Burberry Group plc - CEO & Executive Director [32]

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Thank you very much.

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Julie Brown, Burberry Group plc - CFO, COO & Director [33]

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Thank you.