Burberry Group plc (BRBY) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for Burberry's interim results presentation. In terms of our agenda today, I will start with a brief introduction before turning to a review of the past 6 months. After this, you will hear from Julie, who will cover our financial results and guidance. And we will end with an update on our strategic priorities and outlook, followed by Q&A. In the first half of fiscal '21, we navigated through a challenging period. As COVID-19 disrupted our momentum and impacted many areas of our business. Total revenue for the half was GBP 878 million, down 31%, and adjusted operating profit was GBP 51 million, a decline of 75%. As you will remember, we started the year with strong momentum, delivering 11% growth in the first 4 weeks of January. This was disrupted by COVID, resulting in a 45% decline in Q1 comp. However, comp sales have since recovered to minus 6% in Q2, accelerating to low single-digit declines in September and returning to growth in October. Throughout the period, regional performance has been highly polarized. And we have continually adapted our approach to capture opportunities as they arise, driving double-digit growth in Americas and Asia in Q2. Clearly, other regions continue to be challenged, including EMEIA, where second lockdowns have recently come into place in many areas, and some parts of Asia, impacted by a structural decline in tourism. COVID has created an unchartered situation with multiple store closures, health and safety considerations and a complete disruption to how we go to market. At the same time, it also challenged us as a business to respond and adapt quickly and fueled innovation across many areas of the company. As a result, despite the extremely challenging environment over the last 6 months, we continue to make good progress on our strategy. And I would like to call out 4 areas in particular. First, our product continued to resonate, driving outperformance of our full-price channels. Second, we have started to see good traction in leather goods, with momentum driven by our newly-established shapes. Third, digital sales are up high double digits with dotcom almost doubling, as we leveraged our strength in this area during the pandemic. And fourth, we continue to see strong brand traction, attracting a high share of new and younger customers over the period. Let me tell you a bit more about the progress we have made across some of our key strategic priorities. Starting with product. We have seen positive performance in our latest collections driven by new and young customers. In particular, the TB Summer Monogram trouser was highly successful in attracting younger customers to the brand, critical for both growth and influence. Our most recent collection, winter '20, launched in October and has been performing very well, particularly in our key strategic category, outerwear, which is delivering good growth in the first 4 weeks since launch. We have also started to see good progress in leather goods, which grew single-digit in the second quarter and outperformed total retail. The bags family architecture we established, Lola, TB, Pocket and Title, which you can see on the right-hand side of the slide, now account for the majority of full-price sales in women's bags. In addition, we're seeing strong initial momentum for the Olympia bag, which we launched as part of Autumn/Winter '20. As a result, we have seen a significant increase in the weight of full-price channel sales, which is up double digits. This is a testament to the excellent customer response we have seen to our product as well as a deliberate shift away from markdown activities, which we will continue to control in the coming months. These results have been supported by the multiple brand activations we have launched throughout COVID. For instance, for our recent Summer Monogram capsule, we leveraged our digital expertise to create our first computer-generated campaign during lockdown. The capsule features self-portraits captured at home by Kendall Jenner and was complemented by creative collaborations. We also highlighted the playful summer print with unexpected activations such as hot air balloons in Inner Mongolia and our monogram inscription in Dubai desert, which you can see here. We extended this period of innovation to our September show, which we made available for all to experience digitally on Twitch. By doing so, we became the first luxury brand to partner with the live-streaming video platform. To date, with 118 million views, our September show has become our most-viewed show on record. As markets rebounded, we have been quick to drive recovery by localizing plants and shifting resources. This has resulted in high exit rates and strong performance in Americas and Asia. In Americas, we delivered comparable store sales growth of 21% in Q2 and stronger performance in the U.S. driven by momentum with new younger customers and full-price sales. Similarly, in Asia, we delivered comparable store sales growth of 10%. Our localized plants in China and Korea supported strong growth in these regions and mitigated the performance of other Asian markets, including Japan. In China, luxury demand has rebounded quickly driven by a robust domestic economy and the repatriation of spend. Here, we have delivered double-digit growth every month since June with a focus on 3 areas: first, dedicated content, the most recent example of which was our local trench campaign. This launched in September, featuring brand ambassadors, Zhou Dongyu and Song Weilong and drove our highest interaction rate ever on WeChat. Second, we engage customers through new physical activations, including the launch of our social retail store and multiple pop-ups. And finally, we placed an increased focus on digital, for example, through our first Super Brand Day with Tmall, which drove the highest single-day sales to date and connected us with new customers in Tier 2 and 3 cities. Applying the learnings from China, we extended the localized model to Korea. Here, our strategy was to tap into regional consumer passion points by collaborating with local tastemakers such as Korean singer, YeRi, and native editorials such as GQ Korea to support key calendar moments. We also drove engagement with consumers offline, through pop-ups and elevated in-store installations. In Americas, we have seen an increase in overall luxury demand, supported by a strong economic environment and a shift in luxury spend from experiences to goods. In this context, we have seen double-digit growth in Q2, accelerated by traction with young customers. We drove this by generating brand heat and visibility through the delivery of locally relevant content, including styling key cultural influencers, such as Beyoncé and Billie Eilish. We also collaborated with local content creators such as American artist and musician, Eliza Douglas, for our September show to appeal to young fashion-forward consumers. Given the importance of digital in today's environment, we have also leveraged our strength in this area during the pandemic, driving strong double-digit increase in digital sales. In particular, dotcom sales have almost doubled in Q2, indicating high customer intent to engage directly with our brand. Performance has been supported by a series of digital activations. First, we amplified our collections and capsules through immersive works on dotcom, a good example of which was our interactive online Surf world, which drove high engagement from young consumers. Second, we supported key categories through new formats such as digital pop-ups on dotcom. Finally, we boosted overall digital performance through exceptional visibility activations with third-party platforms to connect with new consumers. In this environment, success continues to depend on bridging online and offline worlds. Burberry has been a pioneer in this space. And in China, we recently opened our first social retail store in Shenzhen Bay, in an exclusive partnership with Tencent. Since its launch in August, the store has outperformed our expectations, creating considerable brand heat and attracted a high share of new and young customers to the brand. Importantly, the stores cements our partnership with Tencent and demonstrates our commitment to Chinese consumers more broadly. In the spirit of Shenzhen, we have also used digital to mitigate the impact of reduced traffic and tourist spend on our wider store network. In this environment, we have been amplifying our appointment strategy, launching new formats such as at-home and virtual appointments that deliver a luxury shopping experience and make our clients feel safe. This strategy has already proven to be a commercial success and has driven double-digit growth in sales from appointments in Q2. Our recovery has been underpinned by strong cost and cash discipline, and we have taken swift mitigating actions to contain costs and protect our financial position. In terms of liquidity, we diversified our borrowings into longer-term financing with the issuance of our first GBP 300 million sustainability bond in September. The liquidity provided by the bond has been supported by cost savings, and we are on track to deliver GBP 23 million of OpEx reductions this year, ahead of our original guidance of GBP 15 million. We are also on track to achieve the annualized GBP 55 million from the rationalization program announced at Q1 and plan to reinvest some of these into consumer-facing activities. Finally, we continue to place a strong focus on our people and responsibility agendas, making good progress on our commitments. Our retail operations in Mainland China, Hong Kong SAR, Macau SAR, Malaysia, Singapore and Thailand are now carbon-neutral, in addition to our EMEIA retail stores and the Americas region. We further supported the decarbonization of our supply chain, helping our Italian suppliers in their transition to renewable energy. As part of our commitment to fostering a strong culture of inclusion and belonging, we introduced a global diversity and inclusion policy. And we also strengthen our community support. This included becoming the first luxury company to join the Stonewall Diversity Champions program for the LGBTQ plus community. We expanded our creative arts scholarships and Burberry Inspire, the Burberry Foundation in-school arts and cultural program. And for the festive season, we have partnered with England footballer and youth advocate, Marcus Rashford, and organizations, including the International Youth Foundation to support the young people in the U.K. and around the world. Before handing to Julie, who will cover financial results and guidance, I would like to share with you a short video, highlighting some of the examples from the half that I've just mentioned. [Presentation]

Over to you, Julie.

Thank you, Marco, and good morning, ladies and gentlemen. As Marco outlined, half 1 was impacted by store closures due to the COVID pandemic. We started the financial year with 60% of our stores closed, with the majority reopening by June, and this caused a significant recovery through the second quarter. Looking at the results for the half and referring to year-on-year changes at constant exchange rates. Total revenue was GBP 878 million, down 30%. Adjusted operating profit was GBP 51 million, a decline of 71%, impacted by significant operational gearing, but partially offset by the actions we took to manage the cost base. Adjusted diluted earnings per share fell by 85% and was impacted by an elevated tax charge on depressed half 1 profits. We expect a tax rate on adjusted profit of around 30% for the full year. Free cash flow in the half was minus GBP 45 million. And as previously announced, no interim dividend has been declared, and we will review this at the full year results in May. The next slide shows the progression between the quarters of the retail operations by region. As previously reported, Q1 comp fell 45%, but this recovered to minus 6% in Q2. The progression has continued with September being down low single digits driven by a full-price channel mix, with October returning to positive growth. We covered Q1 at the time of the results, so I will focus on Q2, taking each region in turn. Asia Pac grew by 10% with a mixed performance in the region. Mainland China accelerated during the period, ahead of the June exit rate and enhanced by strong full-price channel performance. Korea also showed a marked improvement. But this was partially offset by Japan and the rest of Asia Pac that were impacted by a reduction in tourist spend. EMEIA fell by minus 39% in Q2, also impacted by a significant reduction in traveling consumers, although our domestic business showed positive trends. Continental Europe fell broadly in line with the regional average, but domestic spend increased in the mid-20% range in the period. The Middle East fell mid-single digits with domestics up strongly. The U.K. was impacted with the absence of tourists having a major impact on London, although local spend grew. The Americas saw a 21% growth, benefiting from a stronger performance in the U.S. with September seeing further acceleration. This was driven by strong growth from new younger consumers. Overall, as Marco mentioned, digital showed strength throughout with strong double-digit growth globally and Americas with triple-digit growth. In terms of guidance, our Q2 retail comp of minus 6% was ahead of expectations, largely due to the outperformance in Americas. Turning now to our total half 1 revenue performance, where group revenue fell 30% at CER and 31% reported. In retail, half 1 comparable store sales fell 25%. Space was a 4% headwind that led to total retail sales falling 29%. This reflected the closure of 6 stores related to our rationalization program, together with the timing of closures for refurbishment. We expect space to turn positive in half 2, with the full year being close to neutral. Wholesale declined minus 38% as we reduced inventory in the system to actively limit excess stock with third parties. All regions saw double-digit sales declines, particularly Asia, due to the impact of duty-free. Wholesale came in at the better end of our guidance range. Finally, licensing fell 24% due to the COVID-19 outbreak. Turning to product and looking at the retail wholesale performance overall, with all growth rates quoted at CER. I'll talk to the trend in Q2 as Q1 was seriously impacted due to store closures. In apparel, women's had a more difficult period, falling 16%, largely due to outwear demand being subdued, whilst people are working from home. The rest of women's ready-to-wear came in line with the group average comp of Q2 year-on-year, with dresses and knitwear performing well. Men saw positive 2% growth in Q2 driven by jackets, jersey wear and trousers. Children's and other had a strong quarter, rising 27%. Turning to accessories. Q2 declined 5%, largely due to scarf sales, partially offset by the strength in leather goods that increased by a low single-digit percentage this quarter. We're now seeing the first year where the new collections have been the majority of the available range. As Marco said, it is a long-term objective to increase our focus on leather goods, and we are pleased with the progress made to date with the new shapes gaining traction. The Pocket Bag is now our best-selling design with the TB bag and Lola also performing well. The new shapes account for over 60% of our women's bag range. We introduced the Olympia into store last month to complement the collection. We've also seen a strong performance in shoes, especially casual and active ranges. We've been selling the new product now for 18 months. And we're starting to see a high-level carry forward into the following seasons, building longevity within our product range. Turning to the income statement. There are a number of key areas to highlight. Gross margin increased by 60 basis points in half 1, 90 basis points at CER. This was due to a number of factors that included improve regional and channel mix due to the higher proportion of Asian and full-price channel revenues, together with reduced charges for inventory provisioning. Overall, adjusted operating profit fell 71% at CER and 75% at reported levels, and I will come on to bridge this shortly. We saw a net credit from adjusting items of GBP 37 million, with the major cash item being GBP 26 million related to rent rebates in half 1. Other items within adjusted items were restructuring charges and favorable movements on stock provisions and store impairments. The adjusted profit tax rate was 51%, caused by a geographical mix and prior year adjustments on the depressed half 1 profits. Adjusted earnings per share fell 88% with reported EPS declining 66%. Coming on to the adjusted operating profit bridge from the GBP 203 million last year to the GBP 51 million achieved this year. Half 1 saw a GBP 263 million decline due to trading, partially offset by the small gross margin improvement and operating savings of over GBP 100 million. This delivered a cost base 17% below last year. The OpEx reductions came from 2 main areas. People costs fell GBP 41 million and incorporated cost-reduction programs we achieved as well as variable OpEx from commissions. Property cost savings include store closures and lower depreciation following last year's impairments, and the nonrepetition of the Hong Kong impairments taken last year. In addition to this, we delivered a further GBP 26 million of rent reductions in half 1 that is shown below the line as an adjusting item, as mentioned. This led to adjusted operating profit of GBP 59 million at CER. To summarize the headlines, we are on track to deliver the cost-saving and store-rationalization programs. The original cost-saving program has now delivered GBP 136 million of cumulative benefits with GBP 148 million planned by the end of the year, ahead of previous guidance of GBP 140 million. The program announced in July focused on office-based activities is also delivering to plan with savings to be reinvested in customer-facing activities. As Marco mentioned, we are focused on investing in the business, with business cases in China, Korea and digital delivering strong returns already in Q2, and this bodes well for our efforts to redirect savings towards consumer-facing areas of the business. Turning to cash. We generated a free cash outflow of GBP 45 million in the half due to the tight control of cash to cushion the impact from trading. Within this, total depreciation and amortization fell by GBP 31 million with GBP 24 million from the lower right-of-use asset charge following last year's impairment. Working capital saw its usual seasonal outflow of GBP 90 million. And this is broadly in line with the last 2 years that averaged over GBP 100 million. Within working capital, gross inventories rose by just 4% at the half. And we now expect inventory at the full year to be lower than the level in March 2020, demonstrating strong management of inventory through the pandemic. In terms of cash, after cash outflow in April, when the majority of our stores were closed, we saw cash flow stabilize in May, and we were cash-positive from August onwards. Turning now to cash and capital allocation. Capital expenditure at GBP 46 million reflects prioritization of digital and store investments focused on Asia, including 9 major projects in China. In terms of dividend, as announced, we did not pay a final dividend in respect to full year 2020 due to the uncertainty arising from the pandemic, and we will review the dividend position at the full year, as guided. Overall, our cash, net of overdrafts and borrowings fell just GBP 45 million in the first 6 months, and I am pleased to note that by October, it was in line with end of March levels. Importantly, we took a number of measures to restructure our financing facilities. We repaid the revolving credit facility in June 2020 and secured a covenant waiver, together with an extension to November 2022. For short-term security, we borrowed GBP 0.3 billion under the government-backed CCFF scheme. And we obtained a public credit rating and issued GBP 0.3 billion sustainability bond, which I will refer to later. As a result, we have GBP 1.1 billion of cash at the end of half 1, comprising GBP 0.5 billion of our own funds and a further GBP 0.6 billion from borrowings with a further option of GBP 0.3 billion under the revolver, if required. Since 2017, our financial policy has been to maintain a strong balance sheet with solid investment-grade credit rating metrics. We benchmarked our target leverage range and built-in a further degree of conservatism and targeted the lower part of that range. And this has placed us in a strong position throughout the pandemic. Our target remains at a net debt to adjusted EBITDA ratio of 0.5 to 1x. And as at September 2020, we have leverage of 0.9x on a rolling 12-month basis. Which brings us on to the bond that we issued in September to establish medium-term financing and to support our commitment to sustainability. We secured an investment-grade Baa2 stable outlook credit rating from Moody's, a significant achievement during the pandemic and with an uncertain macroeconomic backdrop. This establishes an important foundation, providing Burberry with the option of raising finance in the public debt markets. We chose to issue a sustainability bond to demonstrate and strengthen our ESG credentials, and we're proud to be the first soft luxury company to do so. We have published our sustainability framework on the website as well as the second-party opinion from Sustainalytics. Our commitment is to use the proceeds from the bond to invest in 3 areas: green buildings with specific environmental certifications; procurement of certified BCI cotton, raw materials and finished product; and sustainable packaging. We will report our progress on the use of these proceeds in the annual report at the full year. As we approach the end of the Brexit transition period, I wanted to bring you up-to-date on the plans we have developed to mitigate the impact. We show the main areas in this slide. Our international supply chain includes many product journeys across the U.K.-EU border. Post-transition brings operational challenges and potentially incremental duty costs, absent a 0 tariff under a free trade agreement. We have already put a number of mitigating steps in place, secured authorized economic operator status in February 2020 to facilitate efficient cross-border flows. And we've implemented a new trade-compliance IT system to optimize product movement. Additionally, we have prepared for the border with the tactical relocation of inventory prior to the end of the year, processes and documentation prepared for the product journeys across the border, identification of backup carriers and alternative transportation routes and established a new process for returns from digital customers in the EU. And finally, we seek to maintain our access to skilled workers critical to our business from outside the U.K. Now turning to the financial outlook for the full year. The current lockdowns across Europe have resulted in over 10% of our stores being closed and will impact trading for the duration. I will return to this shortly. With the brand resonating and attracting new and younger consumers, we've taken the decision to defer and reduce markdowns. And this will be a revenue headwind in half 2, mainly falling in Q3, but will be in the long-term interest of the brand. We expect contribution from space to be broadly flat for the full year, as guided. We expect the tax rate on adjusted profits to be around 30% this year. And turning to currency. We now expect a benefit to full year operating profit of GBP 5 million using the 30th of October sports due to the weakening of sterling. What I would like to highlight is the impact store closures made on the business this year. This chart shows the monthly progression of store closures and comparable sales growth. There is a close correlation. So while we're confident of a good recovery in the underlying performance in open markets, we expect the recently announced EMEIA lockdown to impact trading in Q3. Given our progress to date, we remain confident in our recovery from Q4. To conclude, we have strengthened our liquidity to ensure we are well-financed for any further disruption caused by the virus. We have focused CapEx on digital and rebounding economies, particularly Asia. Further efficiencies have been extracted from the initial cost-reduction program that has increased to GBP 148 million cumulatively from GBP 140 million. We have used this opportunity to further simplify our operations, reduce spend in office-based areas and create a more agile business, reinvesting savings into consumer-facing initiatives and believe we are well positioned to drive growth into the long-term as we emerge from the disruption caused by COVID-19. I shall pass back to Marco, where he will take you through our longer-term plans.

Thank you, Julie. Turning to outlook. The past few months have reinforced our strategy to anchor Burberry firmly in luxury as we have seen the industry polarize even further during the pandemic. Despite COVID, we have made strong strategic progress and will continue to strengthen our foundations in the next 12, 18 months with 2 considerations. First, as COVID has changed the macro and luxury industry, we will constantly adapt our business, investing in markets as they recover and focusing on local customers. Second, we will need to sustain the good momentum we have built in our brand and product. I believe we can successfully navigate this next intermediate phase and will be in a very strong position to accelerate and grow once luxury demand returns. As I outlined in May, in the COVID environment, we have focused on 6 themes that will be key to driving growth over the next 12, 18 months. In the next few pages, I will say more about each of these and the plans we have around them. The first key theme is around brand, which has become particularly important in the COVID environment, where consumers are seeking emotional connections with brands. Here, we will continue to sharpen our luxury brand message by focusing on content and storytelling that is grounded in our authentic brand story. A good example of this is the recent brand campaign we launched earlier this week. Deviating from a traditional holiday campaign, it focuses on the power not only of giving but giving back and building a Burberry community tied to the philosophy of the brand and the altruism of our founder, Thomas Burberry. The second key theme we set out back in May is to continue accelerating growth in China. We will do this by driving local relevance through locally originated content and campaigns, boosting product performance with high visibility pop-ups and collaborations and also focusing on repatriated customers, leaning on strong partnerships we have built in China. Across regions, with travel restrictions still in place, we will continue to focus on actively recruiting local consumers. In terms of product, we will continue to grow our strategic categories, leather goods and outerwear. For leather goods, having built our women's architecture, we will continue to deliver newness and relevance through activations, while we establish key shapes within the men's architecture. For outerwear, we will build desire through fabric innovation as well as capsules and collaborations. Of course, COVID-19 will continue to impact in-store traffic. And we will keep scaling new omnichannel consumer journeys, innovating around new formats to reach consumers at home, like the virtual styling event in Americas you can see here. Finally, we know digital will remain very important for luxury customers, and we're focusing on 2 elements going forward. To drive traffic, we will supercharge inspiration online by making dotcom the first release point for bespoke exclusive and localized content and by building digital communities. In terms of product, we will increasingly personalize customer journeys on dotcom, curating online experiences to local preferences. These themes would be underpinned by focus on local execution as recovery time lines and domestic policies vary by market, rigorous management of cash and cost as well as organizational agility and operational efficiency. And we will continue to make progress against our social and environmental agendas as part of our commitment to having a positive impact on people and the planet. To conclude, I want to reiterate 2 messages. First, despite COVID, we have made very good strategic progress, driving outperformance in our full-price channels, good traction in leather goods, strong digital performance and a high share of new and younger customers. This has driven rapid recovery and gives us a strong platform on which to build. Second, while we expect the trading environment to remain highly uncertain for some time, especially in key regions such as EMEIA and some parts of South Asia Pacific, we have clear plans in place over the next 12, 18 months to drive performance and deliver inspiring product to keep exciting our customers. In light of these foundations and the continued progress we have made on our strategic priorities, I believe we will be in an excellent position to accelerate our growth once we exit the COVID environment and luxury demand returns in full. Before turning to Q&A, for those of you who have not seen it yet, I wanted to share with you our new brand video, which celebrates the pioneering and fearless spirit of young people overcoming adversity today. [Presentation]

I'll open the floor to Q&A.

I have 3 questions, please. The first one on local demand, you've managed to mitigate the traveling consumer disruption, thanks to those efforts on local clientele. What more do you need to do to build that steady local base into market? Is it also adapting the store footprint, the merchandising mix, maybe different Asia from developed markets and local pricing strategy? Secondly, on your decision to reduce markdown to elevate the brand. You have a much greater ready-to-wear business than some of your direct peers that have done similar strategy like Gucci or Prada. How does it work in practice with regards to your apparel business, so particularly with outlets? And Julie, maybe on that point, how do you think this effort in H2 will support gross margin? And just finally on LFL, could you give some color on the swing from September, down low single-digit to October, positive? Which markets have contributed? I guess maybe China during Golden Week and probably Japan on the easy comp. Any other geographies or categories you want to highlight in October?

Okay. I think I will start. Thomas, thanks for your questions. And maybe I will start from your question around local demand. Local demand has been the focus, working on local customers since the onset of COVID-19. This is where the focus of our teams has been. We've been able to leverage our digital platform, and we have been able to really reach out to them and provide them, I think, a very good service in terms of styling, in terms of showing the offer, in terms of connecting and also in terms of transacting with them, and that has been a big advantage, I think. I think in terms of more to do, of course, I think there is more to do. There are economies, as we know, probably in EMEIA that will be impacted for a while in terms of lack of tourism. And therefore, we have been working there on preparing the teams, on really training the teams to build our database of clients. We have a good database, and we have good programs for them in-store to leverage on. We provided them tools, as I said, to outreach, and we have developed within those tools, we also have developed a lot of new formats and experiences for our customers to use. If -- in terms of store footprint, I don't think -- I think it's too early to look at any major change in store footprints. And in terms of merchandising, clearly, we are adapting and localizing the merchandising more and more in light of COVID, knowing obviously that customers are traveling much less. So this has always been a focus of ours, but it's particularly important now. It's very important now to have the right assortment and depth of assortment in those markets, and they're rebounding very strongly, like China, like Korea, like the U.S. And so that has been also quite an agile work that the team has done there. In terms of markdown and the deliberate decision to reduce markdown. First of all, it comes from the fact that I think we've managed fairly well the inventory and I think we also have good plans for the next 6 months, so we feel that we're in a very good position. But it's clearly a strategic objective of ours. Yes, we do have more ready-to-wear than our competitors. However, I think we have, on one hand, our outlet chain that we can leverage, and on the other hand, we feel now that we are building up our carryforward and our evergreens or replenishment items. And therefore, we have more of a product range that is continuative, and therefore, not subject to seasonality or to shorter shelf life. Maybe, Julie, you want to say a word about margin in terms of the markdown?

Yes, sure. So just in terms of the markdown, first of all, and then the second half gross margin, which is the third part of your question, Thomas. In terms of the markdown impact, what we're doing is we're shortening the markdown period. We're having a shallower markdown in terms of volume, and we're also doing it later, which will particularly impact the U.S. market. So we would normally go into a markdown in the U.S. ahead of Thanksgiving. But this year, we've decided to delay it considerably into -- towards the end of December. So we would expect an impact on our comparable store sales growth in the third quarter, which across the U.S. and Asia and some countries also in EMEIA that are going to be impacted, we'd expect to around a high single-digit percentage impact negatively on our third quarter comp. Just coming back to the question about the gross margin in the second half. Clearly, we've got a number of moving parts, including the product mix, channel and geography. So we believe regional mix was expected to be favorable due to China, largely due to China and the growth in Asia. The full price changes that we're making in terms of full-price channel will also benefit the gross margin in the second half. And then the key uncertainty really is just around the overall revenue shape and the impact of the second wave and the lockdowns as we enter the winter months. And that's the big sort of uncertainty at the moment because clearly, revenues do determine efficiencies and fixed-cost absorption as we go into the gross margin. But overall, once we're through this period, and hopefully, the vaccine that was announced by Pfizer on Tuesday will also take good effect next year, overall, we're positive about the gross margin and the benefits of the foundational work that we've done over a number of years now.

And I'll just pick up on your third question, which was around the trend from September into October regionally. And yes, definitely, I think Chinese New Year was an important factor for the Chinese trend. But we have seen solid improving trends across other geographies. We have seen Korea performing well. We have seen America still doing very well in October. So I think it's -- and in terms of product as well. I think we have seen in October, strong performance again from outerwear, from leather goods. So I think it's been a confirmation of the trend fundamentally.

Your next question comes from the line of Louise Singlehurst with Goldman Sachs.

Firstly, Marco, I wondered if you could just -- it looks very interesting about the markdown activity and the reductions. Can you just talk about the timing of that? Is it a stronger underlying brand momentum that's giving you the confidence to accelerate that markdown activity reduction, which is obviously positive for the longer term? And associated with that, are you thinking differently about converting a little bit more to retail longer-term from the current 80%? Obviously, a lot of progress has been done on that over the last 10 years. And then my last question, just for Julie. I just wondered if you could talk about a bit more on the cost-saving that we've seen coming through. There's always a little bit more that comes through. So obviously, very hard work from yourself and the team. But how much more is there to come? And where does that additional kind of GBP 8 million come from that you've announced this morning?

Thank you for the questions. I think in timing, I think we had already started to reduce the volume and the timing of markdown over the past couple of seasons. And I think now we're taking a further step. We certainly see that the traction of the brand is stronger at this moment. We are seeing our product ranges performing well. And I think as we always said, I think this is a decision on markdown that is very important for the long-term equity and interest of the brand. So in this COVID environment, even though we know there is going to be a bit of a headwind in Q3, but I think it's the right thing to do for us long term. In terms of converting more to retail, I think we are already pretty much a retail organization. I think we are over 80% of our -- is retail in terms of the brick-and-mortar. I think in terms of digital, also, we are moving -- we're progressing towards more of a concession model, therefore, somehow which is a form of direct retail for us. Therefore, I think the direction is quite obvious for us. Retail, it's clearly the business model for the company, so I think you will just see us more and more continuing in that direction. At the same time, we will keep a part of wholesale. We believe that there is a very important function of wholesale. I've already explained it a number of times, so I won't go again into it. But we think it's very healthy for the brand to be out there and to be in the right location, mixed with the right brands and attracting perhaps different customers. So we will continue with a small portion of wholesale. Julie, maybe over to you for the cost savings.

Yes. Thanks, Marco. Thanks, Louise, for the question. So in terms of the cost-saving, as you know, we're always looking for opportunities to save in areas that are really relating to office-based activities, and also procurement activities so that we can buy more efficiently to support the business further and reinvest in commercial areas. So we're pleased with where we've reached. We've upgraded the normal -- the large program to GBP 148 million from what was GBP 140 million. And the benefits have come through. GBP 11 million has come through in the first half. We're expecting and have plans to deliver GBP 12 million now in the second half, so it would be GBP 23 million coming through this year. In terms of the program that we announced in the light of COVID, which was very much targeted towards office-based functions, that is running on track. As you've seen from the people cost savings that are coming through in the business already from the bridge I shared, we're basically going to deliver GBP 35 million this year and that GBP 155 million annualized, no change to those numbers. But obviously, we're focused in terms of that program, on reinvesting it into the commercial frontline, in particular, inspiring our consumers is where that money will go. And we've already been doing that, Marco and I and the executive team, in the first half of this year and directed some of that spend towards digital, towards China and towards Korea, and we've already started to see a return. So a very positive outlook on generating cost savings and reinvesting them.

[Operator Instructions] The next question comes from Thierry Cota with Societe Generale.

First, on the balance sheet. You mentioned focused CapEx this year. Given the drop we've seen in H1, can you give us an idea of the kind of decline we should expect for the full year? First. And secondly, on working capital, I was wondering whether we could expect an inflow of working cap for the full year cash flow statement. Secondly, on sales, could you give some comments on price and mix, the trends in -- of the 1H trend, separating the 2, if possible? And I was wondering whether any price action was excluded for the near future, as we've seen some before the summer across the sector. And lastly, Julie, you mentioned Brexit. Can you confirm that after offsets, a Brexit no-deal situation would lead to a few tens of millions of hit at the -- millions of pounds, of course, hit at the EBIT level?

Thank you very much, Thierry. So if I take the balance sheet and then hand over to Marco on sales price/mix and then I can come back on Brexit. So just in terms of the CapEx, we've been very focused at the beginning of the year when we hit the COVID pandemic, we sat down as an executive team and decided where we wanted to focus in terms of priorities of CapEx. And we laid things out in terms of priority 1, 2, depending on the business situation. So just in terms of the areas of focus have been very much on digital, and we've continued with store refurbishments and new openings, primarily in Asia. In terms of the first half and the second half, we decided not to provide specific guidance this time just because of the uncertainty of going into the winter months, but we'd expect CapEx to step up in the second half. It is expected to be lower than last year, but it will be definitely picking up in the second half because we have plans for store refurbishments going through. In terms of working capital, I think we've had really good control, I think, over the working capital, in particular, I just referred to the inventory because the debtors and creditors are well controlled in terms of days sales outstanding and days payables. So in terms of the inventory, which is usually the big swing factor, going into this half year, we've managed the inventory well. We have, if you look at the growth inventory level, we've just delivered an increase of 4% in the gross inventories by the first half, which I think is a good performance in view of the pandemic. And we're expecting the inventory by the end of the year to be lower than it was at the end of March last year. So I think a good overall performance, largely on the basis of managing the inflows coming into the inventory, but also the strong sell-through results that we're getting. So I think that was it for working capital. I'll just touch on Brexit and then maybe hand to Marco, if he wants to cover the price/mix equation. So in terms of Brexit, we're obviously still hoping that we get a free trade agreement with a 0 tariff. And that is our strong hope with the contract with the government. If we don't get that, we would be dealing with a low tens of millions impact on a no-deal or on a normal trade tariff, which for our business is around about the 12% mark, 10% to 12% mark. So we'd be dealing with low tens of millions. But clearly, that's an annualized number. So there's much less impact on our final quarter. And we would look to take mitigating actions as far as we possibly could against that in the business. So maybe I'll hand over to Marco just if he wants to cover the price. I can take if we haven't got Marco just there. So...

Sorry, I was on mute. Sorry, sorry.

Sorry. Okay.

I was on mute. I think in terms of the sales mix, I think we have seen a comp -- bit of volume and price increase and AUR increase. I think clearly, the strength of leather goods has driven an AUR increase. So I think it's a qualitative elevation of our product mix. In terms of going forward and price increases, as you know, as I said in the past, I think that there are categories like, for example, leather goods, where it's part of our strategy to offer a very good price/quality ratio to the customers, give them a very strong perception of value in the product that we are launching. And I think we want to stick to that for a little while more. At the same time, I think that we are looking at price opportunities where they are. And so we keep it under control. We keep it under watch. So -- but for the moment, I think it has been mostly linked to the volume of the key categories that have driven the price.

The next question comes from the line of Ashley Wallace with BAM.

So 3 questions from me, please. First of all, just on the potential impact of the lockdown. I guess it's a bit more of a theoretical question on the industry, as I understand visibility is low. But considering calendar Q4 and your Q3 is heavily reliant on holiday and gifting and Christmas is not canceled, would you expect that some of the November demand to shift into December, such as the net impact is maybe not as meaningful as in the prior lockdown? And can you maybe talk a little bit about how you've adjusted your holiday campaigns to reflect this new situation? My second question is just a follow-up on Thomas' question around the gross margin. Clearly, a very strong half 1 result with some tailwinds and some headwinds. However, as we move into the second half, I can see a number of tailwinds on that gross margin, including the fact that you've got 110 basis points easier comparison base, you should have higher fixed-cost absorption as revenue improves. You guided, clearly, to lower markdown activity. You continue to have higher weight of Asia in retail. And then finally, you should have a lower drag from the annualization of the Riccardo product investment made last year. So I completely understand there's a lot of uncertainty and moving parts in gross margin. But what are the incremental headwinds in half 2 versus half 1? Because -- to me, I'm struggling to identify any. And then my last question is really just on Riccardo, who's a very important part of the brand turnaround story. Can you maybe talk about the commitment Riccardo has on seeing the turnaround play out, as I guess the press, over the summer, was speculating about a potential departure? Can you maybe give us your view on that speculation or that the commitment of Riccardo over the full recovery coming through?

Okay. Thank you, Ashley. Julie, maybe I'll take the first and the third, and then I'll pass over to you. So in terms of the lockdown, clearly, we all hope obviously that the lockdown in a number of countries in Europe will be limited to the month of November and that we will be able to reopen our physical stores as of the beginning of December. But at the same time, we have started 2 things. First of all, we had already, I think, shifted a little bit the timing of the launch of holiday because the whole calendar had shifted a little bit this year starting with -- in the reason of the first lockdown. So everything has been shifted a bit. But now we are actually leveraging very much our remote selling, although we've already started in the lockdown to start the season strongly. We have launched our holiday campaign now. And I think we're very, very pleased with that campaign. It's a broad campaign, it really taps into our brand authenticity and is very much focused on digital and digital activations and communication on digital and advertising. So I think from the point of view, I think, we want to compensate as much as we can in the lockdown that is over the next few weeks. Julie has already spoken about markdowns and therefore, the shift of markdown from Q3 and Q4. Taking it to Riccardo, I can answer it. Riccardo is very committed, is very happy. Riccardo is staying with the brand. I think in my experience, there are always been rumors about designers moving from one brand to the other. They usually come up when on the press, we have other brands that are clearly looking for designers. And so I'm not surprised that there have been rumors. And I won't be surprised if there were more. Talent is concentrated and focused on a number of great designers. And so I think it's quite normal. But at the same time, I have to be clear, Riccardo is happy and staying and committed. So Julie, over to you.

Thank you, Marco. Yes. So in terms of the gross margin, I think, Ashley, you summarized the positives relating to the margin very well. We are expecting a regional favorable mix, largely due to China and Asia. And the focus on full-price will also benefit the gross margin. As you mentioned, compared with the prior year, there could be movement on fixed-cost absorption as we navigate the second wave. But as Marco explained, we're doing everything we possibly can to offset the impact on the stores being closed in Europe through use of the digital channel and reaching out to customers. In terms of the headwind that is likely to occur, is clearly, we've still got some older lines of inventory prior seasons that we're holding in the outlets. And clearly, one of our objectives would be to finish with a clean inventory position. So in some ways, there could be a negative mix effect coming through the outlets. And that's the main one, I think, to draw to your attention. We obviously do get fluctuations also caused by the product mix. It was relatively neutral in the first half of the year. So it may be neutral in the second half of the year, but obviously we'll see how that develops. Leather does operate on a slightly lower margin. So as the leather grows, it could have a depressive effect on the second half of the margin.

Okay. Perfect. And maybe if you don't mind me asking a follow-up on a line, just on the product. As you mentioned, the product does have a different margin, the trench coat, I think, and I understand it's the highest-margin product you have. And you flagged weakness in women's outerwear over the Q3 period or a period that was still relatively warm. This is actually a consistent message we heard from Moncler, is the lack of tourists in Europe meant that you didn't get demand for outerwear products, which is technically out of season with the locals, which you normally get from the tourists. So as you go into winter, do you expect to see a decent sequential improvement in this product category now that it's a more relevant product for local demand as it matches the season in which we currently are in?

Yes, yes, we would. It's definitely, I think, as Moncler have reported, it's definitely been an impact with the loss of the tourists in the summer that normally come over from Asia and buy the iconic Burberry trench coats, so that has been somewhat depressed during the quarter. So yes, we would generally expect it to be a positive trend in outerwear going into the winter months, as you say, because of the domestics. So I think the only thing with the product mix is really around leather and whether that has an impact.

But I guess leather was already outperforming in half 1 as well.

Yes, it was. Absolutely. But obviously, we've got ambitions...

[indiscernible]

Yes, exactly. Yes, yes.

The next question comes from the line of Charmaine Yap with Redburn.

I have 3 questions too, please. In terms of leather goods and bags, the Pocket Bag is clearly performing very well, as you've mentioned, but they are more broadly in the lower-priced brackets, probably GBP 900 to GBP 1,200. Do you still expect to enhance your offer in the upper price points? Or would you focus more in the lower price point, where the brand has done really well over the years? That's the first question. The second one in terms of digital, dotcom, you mentioned, almost double, I think, which implies third-party concessions probably grew less. Were there any specific changes made on the dotcom to drive this? Do you expect the shift from maybe on the -- maybe it was a case of a base, but do you expect this function to continue, to go ahead in the upcoming quarters? And the last question is -- I'm sorry, coming back to markdowns. Would you expect this impact to annualize by the second half? Or would you think that depending on how sales happen next year, there could be a little bit more to do in terms of reduction of markdown levels?