December 1, 2021

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Edited Transcript of BRBY.L earnings conference call or presentation 22-May-20 8:30am GMT

London May 22, 2020 (Thomson StreetEvents) — Edited Transcript of Burberry Group PLC earnings conference call or presentation Friday, May 22, 2020 at 8:30:00am GMT

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

Sanford C. Bernstein & Co., LLC., Research Division – Research Analyst

Good morning, everyone. And thank you for joining us for Burberry’s Preliminary Full Year Results Presentation.

Before we start, I want to acknowledge the extraordinary circumstances we have all been living in for the past several weeks and express my sympathy to anyone affected by COVID-19. On behalf of everyone here at Burberry, we hope that you and your loved ones remain safe and healthy as we navigate these extraordinary times.

In terms of our agenda today, I will start with a brief introduction to remind us where we are in our transformation before turning to the impact COVID-19 has had on the business, the immediate steps we have taken to address it and our resulting financial performance for the year. You will then hear from Julie, who will cover the financials in more detail. And we will end with an update on our strategic priorities and outlook before turning to Q&A.

As you can see, we’ll cover a lot of ground today. But ultimately, I have 4 key messages I want to emphasize. First, we have made excellent progress with our strategy, successfully completing the first phase. Before COVID, we were delivering strong momentum across brand, product and sales, ahead of our expectations.

Second, although COVID-19 has had a materially negative impact on our industry and our business, we responded rapidly to the outbreak, safeguarding our teams, customers and communities. Throughout the crisis, our brand heat has remained strong.

Third, we have taken swift mitigating actions to contain costs and protect our financial position. As a result, we have a strong balance sheet and liquidity position to see us through this next phase, also leaving space for investment as markets recover.

Finally, we have a strong plan in place to navigate the next 12 months. Our overall strategy to anchor in luxury fashion remains the same and is reinforced by these events.

As mentioned, the end of this financial year marked the close of the first phase of Burberry strategic transformation. Over the past 2 years, we have successfully built the foundation for our strategy. In this next phase, we will strengthen these foundations, adapting to the new environment and position the brand for acceleration and growth in the long term.

You’ll recall, we have 6 strategic pillars and have made great progress across each. In the last year, we continue to strengthen our brand, building heat through our campaigns and experiences and signaling luxury. In terms of product, we have now transitioned around 85% of the offer to Riccardo’s product, and our new leather goods styles have been performing well.

We have made very good headway in transforming our distribution channels by aligning our mainline stores to the new creative vision and completing the transition of our U.S. wholesale to luxury fashion. In digital, we sustained our leadership position through innovations, such as games and social draws, which drove consumer engagement.

And finally, throughout our business, we have improved our agility and efficiency and strengthened the Burberry team. As a result, before the outbreak, we were starting to see strong momentum across many of our key indicators.

First, we’re seeing strong evidence of brand momentum across both Western and Asian markets. Engagement rate on the 2 key social media platforms have grown double-digit during the year, and this has continued throughout the crisis. Our most recent fashion show in February, Memories, also saw double-digit growth in the number of press mentions compared to last year’s show.

We were also seeing strong consumer response to our new products. Before the COVID-19 outbreak, each new collection delivered double-digit growth compared to the prior year, with menswear performing particularly well and leather goods gaining traction. And this contributed to the mid-single-digit quarterly growth performance we delivered in the first 3 quarters despite the challenges in Hong Kong.

In the first 4 weeks of January, before the outbreak of COVID-19, we also saw strong comp growth, even adjusting for the Lunar New Year effect which fell earlier in the quarter. The progress I’ve outlined has been critical to strengthening our foundations and increasing our resilience and agility ahead of these unprecedented times.

However, the outbreak of COVID-19 has inevitably disrupted some of this momentum. In this section, I want to outline the impact the outbreak has had on our business and the immediate steps we have taken to manage it in the last fiscal year.

In line with government guidelines, we have implemented global store closures, starting in China where, as of early February, 40% of our stores were closed. As the emergency moved West, closures accelerated in Europe and Americas, with all stores closed in those regions at the end of March. Even in stores that remained open, many operators have reduced hours and with significantly reduced footfall.

The outbreak also led to some disruptions on the supply side. In EMEIA, the major impacts occurred in March, including closure of our leather goods center, Burberry Manifattura, and reduced operations at our trench coat factory in Castleford, which in April was repurposed to support the NHS. While these closures were overall manageable and did not limit our capacity, they resulted in a much higher operating complexity. For example, in shift in inventory between markets, fulfillment and product development.

Across the organization, we have taken steps to address the current challenges. First and foremost, we prioritized the safety and well-being on our employees, partners and consumers. In addition to following local government guidelines, we continue to ensure that all of our employees have access to masks and disinfectant gels. And our office-based teams, particularly in the U.S. and EMEIA, worked from home.

Second, we implemented actions to protect liquidity and limit discretionary costs. Julie will say more about this shortly.

Third, we have focused our product offer to respond to demand and improved our agility to develop and buy future products. In terms of inventory, we took actions to align our stock with revised demand. In the meantime, we have been introducing initiatives to optimize revenue, including leveraging our leadership in digital and e-commerce and investing appropriately in rebounding markets.

At Burberry, we always have in mind our founder’s legacy of protecting others and supporting communities, a central part of our company’s purpose. In response to the crisis, we have launched several initiatives to support the relief efforts globally.

I would like to give special mention to our team of volunteers at Castleford, Keighley and Blyth who are enabling us to manufacture nonsurgical gowns for the NHS, our teams who have sourced surgical masks through our global supply chain for frontline medical and care workers. Thanks to their skill and dedication, to date, we have donated more than 150,000 pieces of personal protective equipment and rising.

We have funded research into emergency vaccine development at the University of Oxford that went into human trials last month. And we have donated to charities tackling food poverty across the U.K. We have also set up an appeal through the Burberry Foundation to provide much-needed support to vulnerable communities globally.

The work that we have done over the past 2 years allowed us to respond quickly to these challenges, adapting our business and diverting resources as needed. Our enhanced brand and product offering as well as digital strength have also made the business more resilient in these times.

However, the impact of COVID on our Q4 has inevitably affected our financial performance for the year. Our full year ’20 group revenue declined by 3% versus last year, and adjusted operating profit fell by 8%. Reported operating profit declined by 63%, impacted by one-off items relating to the COVID-19 pandemic.

I’ll hand it over to Julie, who will take you through the details of these numbers.

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

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Thank you, Marco, and good morning, everyone. As Marco mentioned, these are clearly unprecedented times, and I’m sorry not to be in a position to see you personally for our year-end results. During this presentation, I’ll cover revenues, profit and our cash position. And then following Marco’s review, I’ll come back to review the actions we’re taking in light of COVID.

Before I turn to the results, I’d like to say that when I refer to comparable store sales growth, no adjustments have been made for closures relating to COVID or Hong Kong.

So looking at our comparable store sales progression through the year. As you heard Marco saying, we started the year strongly with a comp of plus 5% in our year-to-date to the 25th of January despite significant headwinds from disruptions in Hong Kong. We benefited from the build of new product to around 85% of our mainline collection, with all major collections delivering double-digit growth. The first 4 weeks of January were also strong with a comp of 11% prior to the COVID outbreak. And as the quarter progressed, store closures increased, and this reduced our Q4 comp to minus 27% and the full year to minus 3%.

Turning to the regions. These charts show the performance pre and post the impact of COVID. EMEIA had an improving trend in the first 10 months of the year, accelerating to double digits in January. But trends deteriorated in the final 2 months with significant numbers of stores closed, resulting in EMEIA being stable for the year.

Americas also accelerated in January to a mid-single-digit percentage. However, similar to EMEIA, by the end of the year, all stores in Americas were closed, resulting in a low single-digit decline for the full year.

I’ve shown China separately on this slide due to its significance. China showed strong double-digit growth consistently for the first 10 months, an exceptional growth for the first 4 weeks of January of almost 30%. China was the first region to be impacted by the virus with sales down double digits in Q4. For the year as a whole, China was reduced to a low single-digit sales growth.

Asia Pac, including China, grew by a mid-single-digit percentage for the first 9 months of the year with the trend impacted by disruptions from Hong Kong. Growth accelerated in January with Asia Pac growing low teens. However, store closures across the region pulled the performance in the fourth quarter down double digits and to a mid-single-digit decline for the full year.

To summarize, this slide shows revenue by channel. For the year, retail sales declined 4% with comparable store sales of minus 3% and space of minus 1%. Wholesale was adversely impacted in the year. For the first 10 months, wholesale grew 2%, with the growth in luxury wholesale partially offsetting closures in non-luxury doors. However, COVID significantly impacted February and March as we worked with wholesale partners to recalibrate orders, bringing the annual wholesale decline to minus 3%.

At the group level, if we adjust for the impact of COVID on full year performance, revenues would have grown 3% ahead of our original guidance. However, the impact of COVID in the final 2 months resulted in revenues of GBP 2.6 billion, down 4% at constant exchange rates.

Turning to products and looking at retail and wholesale performance combined. First of all, I’d like to share the 9-month data, shown on the left-hand side of this chart, as this is more indicative of product trends before the impact of COVID. Our apparel business delivered good growth in men’s up 9% and women’s up 2%. The growth was underpinned by a strong consumer response to new product, partly offset by a weaker performance in replenishment lines.

Accessories declined 3% in the period with a progressively improving performance over the 10 months as we rebuilt our leather goods range with new styles, which resonated strongly with consumers. Whilst all product categories were negatively impacted by COVID from February, we saw a more resilient performance from accessories during the lockdown period.

Turning to the income statement. Please note that I will concentrate on the central section of this slide as it includes pro forma like-for-like comparison of full year ’19 and ’20. The right side of the slide includes full year ’20 under the new accounting standard, IFRS 16.

As discussed, sales declined minus 4%. Gross margin fell 100 bps due to investments in product design and quality, partially offset by an improved sell-through and tighter discount policies. Operating expenses fell 4%, demonstrating delivery of the cost-saving program and COVID mitigation. Pro forma adjusted operating profit fell 8%, and margin declined 70 bps at constant and 80 bps at reported rates of exchange, reflecting the strong management of the COVID situation in the latter 2 months of the year.

We had an adjusted operating item of GBP 244 million predominantly reflecting impairments resulting from the COVID pandemic, and I’ll return to this shortly. Finally, adjusted EPS fell 5%, benefiting from an improved tax rate and share buybacks.

Taking a more detailed look at adjusting operating profit and starting with our profit in full year ’19 of GBP 438 million. During the year, our underlying business was strong. However, we faced significant macro headwinds, firstly, from the disruption in Hong Kong and, more recently, the COVID pandemic. As you can see, this put significant pressure on our operating profit in the order of GBP 160 million combined before cost savings.

However, we acted quickly, taking rapid cost action such as renegotiating rents, restricting recruitment, travel and other discretionary expenditure. This reduced OpEx by GBP 27 million and, in addition, savings [earned] from performance-related pay. The significant sales drop-off started with only 9 weeks to run to our year-end, so to have delivered reductions of this order is testament to our rapid response and forensic review of the noncommitted cost base. It’s also down to the changes we’ve made in the business over the last 2 years, which have increased efficiency and agility.

We also delivered an incremental GBP 20 million from our original cost program, which I’ll return to you subsequently. For the full year, profit closed at GBP 404 million having absorbed considerable losses in the order of GBP 50 million from the disruptions in Hong Kong. We were on track to deliver profits in line with guidance at the end of January until the COVID outbreak took our full year adjusted operating profit down to minus 8% for the full year.

This slide shows our cost-saving program. We delivered an incremental GBP 20 million savings from the program, taking the cumulative to date to GBP 125 million. We’ve accelerated this program by a year to deliver the full GBP 140 million of benefits in full year ’21. More than half the savings are coming from the operating model and process simplification, with around an additional 1/3 coming from procurement. This is GBP 20 million ahead of the original guidance we gave in 2017, with the cost of change being GBP 105 million, i.e., GBP 5 million better than original guidance.

In addition, we continue to deliver the store rationalization program, which will improve the efficiency of our network. Over 60% of the stores have now been closed, with the majority to close by the end of the year.

Now I want to spend some time explaining the adjusted items, which amounted to GBP 245 million in the year. In total, the significant COVID-related charges are predominantly due to retail store impairments of GBP 157 million and GBP 68 million of inventory provisions. As part of our year-end work as usual, we assessed the assets held on our balance sheet for impairment, which is done using projections of future revenues and cash flows over the life of the lease. Obviously, in the current situation, this is challenging and depends on the longevity of the impact of the virus, the macroeconomic outturn and consumer confidence.

As I will explain later, our approach has been to develop a range of planning assumptions based on external economic incentive projections and our own judgment as to how these might apply to our industry. Our assumptions underpinning these provisions are not worst case, but we believe they are prudent and do allow for a protracted period of recovery.

Now moving to cash. We generated free cash flow in the period of GBP 66 million, below the prior year level due to the impact of COVID. Within this, the working capital outflow was significant, largely due to excess inventory resulting from COVID and the phasing of payables. Further increases in cash outflows this year resulted from CapEx in stores and the acceleration of tax payments under the new HMRC rules.

On this slide, I’ll discuss our current net cash position. We started the year with GBP 0.8 billion of net cash and lease debt of GBP 1.2 billion, giving lease-adjusted net debt-to-EBITDA of 0.5x. During the year, we generated free cash flow of GBP 0.2 billion, invested GBP 0.15 billion into CapEx and returned GBP 0.3 billion to our shareholders via dividends and buybacks, both of which were completed before the COVID outbreak.

At the end of the year, including GBP 0.3 billion from the revolving credit facility, we had a cash balance of GBP 0.9 billion. Our lease liabilities were GBP 1.1 billion, giving a net debt-to-EBITDA ratio of 0.7x, well within our capital allocation guidelines.

I’ll hand to Marco now and return later to talk about liquidity management going forward.

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

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Thank you, Julie. Turning to outlook. Clearly, these are very unprecedented times. The health emergency, public restrictions and economic recession are likely to persist for months to come, and their ultimate impact on demand for luxury is difficult to assess.

What we do know is that in this environment, consumers tend to focus on strong brands and polarize further between luxury and mass. Diminished demand is likely to increase competition and reinforce the importance of investing in brand and inspiration. This makes our strategy to secure our position in luxury fashion even more critical at this time.

COVID-19 will also have many temporary and even some permanent effects on the luxury industry. What will not change is the importance of supporting our people and communities. However, there are 4 areas I believe will be key to brand success going forward.

First, as I have said, strong luxury positioning will be paramount to win during this period of reduced demand. Second, as economic outlook and consumer sentiment varies by region, brands will need to adopt a highly localized approach, and taking into account a substantial reduction in travel place increased focus on local consumers. In light of this, accelerating Asia is key given the region’s recovery timeline is ahead of other key markets.

Third, with wholesale facing significant challenges, this crisis has demonstrated the importance of direct-to-consumer at scale, DTC, particularly digital, which will be transformational going forward. Fourth, in terms of product, we also expect to see consumers looking for quality, leather goods and casual wear. However, with the industry facing widespread store and factory closures, optimizing inventory levels and supply chain will be a challenge for the year ahead.

Last but not least, everything we do will need to be underpinned by the rigorous management of cost and cash over the next 12 months. We have strong plans in place here and have secured funding to see us through a protracted period of store closures.

With this in mind, I would like to tell you how Burberry is adapting to this new reality. Starting with brand. In the current environment, we are reinventing the way we communicate at Burberry. At times like this, consumers want to connect emotionally with our brand, and we are enhancing our focus on content and storytelling that is grounded in our authentic brand story.

We will continue to amplify our voice through partnerships and collaborations while offering our brand as a platform to nurture communities, another critical element at this time. Importantly, we’re also working in varied new ways to create content within physical limitations to remain flexible, allocating resources quickly between markets and channels, and working with reducing budgets to ensure our activation cut through to the consumer.

Looking at the plans we have for the coming months, I am confident we have a strong set of initiatives in place to drive excitement and inspiration with consumers and maintain our brand momentum.

Second, as the recovery time lines and domestic policies will vary by country, we are building these top plans for each market, rapidly reallocating resources towards rebounding economies. With reduced travel, we have also increased our focus on local customers in all regions, fostering clienteling and one-on-one outreach programs that are sympathetic to the local environment and sentiment.

Since China announced its lockdown, we have created new ways to connect with our customers. Focusing on engaging Chinese customers at home or who can no longer travel to our stores abroad, we launched live streaming in our new channel on the social platform, Little Red Book, to inspire them with content. We also continue to launch campaigns, some exclusively in China, and enhancing them with local collaborations such as the one you see here with Mr. Bags.

Finally, we’re continuing to support innovation in the market. As I mentioned before, we’re excited about launching our new social retail store with Chinese tech leader, Tencent, later this year. With COVID-19 accelerating the connection between online and off-line, we believe this is a fundamental testing ground for the new way in which consumers will experience our stores.

Another marketing recovery is Korea where we have strong plans in place to capture the market opportunity through amplifying key local gifting moments, such as Children’s Day and Parents’ Day; as well as native collaborations such as our recent feature on Dazed Korea, which you can see here; and partnerships with local third parties and department stores to engage new consumers and drive sales across all channels.

These localized plans in China and Korea have driven solid rebound. In these markets, growth has already surpassed last year’s levels, supported by our strong brand positioning and also benefiting from the repatriation of spend from consumers who used to shop abroad.

We have also seen a strong performance in our online business in China and Korea, growing double-digit versus last year, and a significant traction in handbags and small leather goods across a range of styles. Sales trends in both markets continue to improve, with China, in particular, up double digits in recent weeks.

We do not expect the recovery trajectory to be the same across markets, especially in the West, where this possible recovery may be slower. But we’ll continue to monitor markets as they open up and ensure we react at speed.

Third, this crisis has shown us how important direct-to-consumer will be in the coming months. Today, we are predominantly a DTC brand, with strong retail presence across digital and off-line. During the crisis, we quickly adapted our stores, innovating new ways of reaching our customers, for example, through virtual appointments, remote selling and bringing products to client when they can’t come to the stores.

We have also increased our focus on health and safety, adapting the in-store experience to include strict hygiene and social distancing guidelines. These new ways of working will remain critically important over the next few months as lockdowns gradually ease and consumers slowly regain their confidence.

In terms of digital, we have always had a strong online business, and this has shown resilience during this crisis. As you can see from this chart, our global digital demand to date has been strong with double-digit increase compared to last year despite lockdowns in EMEIA and Americas. We have also seen a similar performance on third-party platforms where we have always had very strong relationships, with global sales growing double-digit year-to-date versus last year.

In the months ahead, we will continue to focus on digital, driving performance through large-scale, immersive activations, such as the exclusive digital leather goods pop-up you can see here, which we’re launching later this summer; and continued digital innovation, including gaming and through partnerships such as WeChat Work, part of our collaboration with Tencent.

Turning to product. We will continue to present a compelling luxury offer to our customers, injecting energy and newness through our coming capsules, shining a light on outerwear, one of our Hero products. And building on the good trajectory we have established, leather will become an even more important part of our offering.

This year, we will have a dedicated leather goods campaign, which you may have seen just launched in China. This will be complemented by a program of exciting pop-ups dedicated to showcasing our new leather goods architecture, starting in China and moving to EMEIA and Americas later this year.

Finally, inventory management will be a priority this year as we face store closures in many regions. To respond to this challenge, we are closely managing our stock position by reviewing the timing of our seasons, reducing the production of upcoming collections, proactively reallocating current stock across channels and regions to meet demand, and strategically leveraging our clearance channels. We’re also supporting our wholesale partners, where necessary, through order reductions and extended payment terms. And we’ll continue to partner proactively as trading restarts and as we enter into the markdown period.

In terms of supply chain, we’re securing capacity, adapting our sourcing and continuing our focus on safety, agility and flexibility. Last, but not least, all of our efforts next year will be underpinned by rigorous management of cash and costs.

I’ll hand over to Julie, who will take you through our plans in this area.

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Julie Brown, Burberry Group plc – CFO, COO & Director [4]

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Thank you, Marco. Turning to guidance. Given current uncertainty, we’re not in a position to provide annual guidance, but we have shared a diagram that depicts our modeling and the way we plan to manage the business.

First, we have developed a range of scenarios based on scientific, epidemiological and economic forecasts. The pace and trajectory of recovery will largely depend on countries balancing social distancing requirements and virus control with reopening their economies and the pace at which consumers regain confidence.

Second, we have built a range luxury demand scenarios and apply this to Burberry. Sense-checking forecast from luxury demand specialists such as BCG and McKinsey, who are anticipating sector demand to decline between 27% and 45% in 2020. We have then used various considerations, including a regress analysis to determine the best approach for each major area of our business.

You’ve already heard Marco talk about consumer-facing initiatives, and now I want to focus on the mitigating actions we’re taking to protect our financial position. In headline terms, we are managing inventory tightly, but also allowing headroom for markets to recover.

In cost terms, we’ve developed a comprehensive mitigation program, but at the same time, we’ve ensured agility is built into our plans. For liquidity, we’re aiming to ensure that the company has sufficient headroom to cope with a protracted period of store closures, a gradual recovery in demand and a possible second wave.

To summarize, our goal is to secure the long-term value of our brand, enable efficient and flexible management of the business and ensure we have the financial headroom to fuel growth when the market opportunity returns.

Taking a look at the cost-mitigating actions. First, we will benefit from variable savings, such as variable rents and commissions. Second, we’ve identified discretionary savings, which are more situational in nature. And these include savings in marketing, visual merchandising and client events influenced by store closures and specific market conditions.

Regarding reward, the Board and senior leaders have decided to take a 20% pay reduction for 3 months to support COVID charities and Burberry through this difficult period. We’ve also decided to pause recruitment, reduce G&A and suspend merit awards.

Third, property savings and government support for business rates are also being pursued. Importantly, as mentioned, embedded within our plans is the flexibility to invest in consumer-facing activities to fuel growth when the market returns.

Finally, I wanted to summarize our approach to liquidity. Through this uncertain period, we are aiming to ensure that the company maintains sufficient funding headroom even over a protracted period of store closures. This diagram shows our levers for achieving this.

First, as Marco said, we’re managing inventories tightly. We’ve also worked with wholesale partners to cancel current seasonal orders, where appropriate, to ensure that we protect our brand and wholesalers can benefit from potential top-up opportunities in the second half.

Secondly, as mentioned, we’ve developed a cost program designed to deal with a number of outcomes. Third, we’ve reviewed all planned capital projects. And as a baseline, we’re only committing to those of the highest priority. This includes projects in digital, cybersecurity and our store network, including social retail store in Shenzhen.

Fourth, we are bolstering our cash position and securing additional liquidity and undertaking rigorous cash forecasting. At the end of March, we had GBP 0.6 billion of our own cash reserves and have drawn down on the GBP 0.3 billion revolving credit facility. Since year-end, we’ve also secured a further GBP 0.3 billion under the U.K. government-sponsored COVID Corporate Financing Facility. In total, we currently have access to GBP 1.2 billion of liquidity, and we will keep our medium-term funding plans under review as the situation develops.

In terms of shareholder distributions, we continue to prioritize investment in the business, and we understand the importance of our progressive dividend policy. We face, however, unprecedented times, and to protect long-term shareholder interests, we have taken the difficult decision not to declare a dividend. Future dividend payments will be reviewed by the Board at the end of our next financial year with the intention to return to our progressive policy at the earliest opportunity.

In terms of near-term guidance, we have seen promising early signs in China and Korea. However, we currently have 50% of our store network closed, and we expect our first quarter to June 2020 to be severely impacted, with closures likely to be at or near their peak. We also expect the traveling consumer to take longer to return, impacting tourist destinations.

To summarize, while we expect it will take some time for the luxury market to recover and for consumer confidence to return to precrisis levels, we are confident in our brand, our strategy and our response to these challenging market conditions.

And with that, I’d like to thank you and hand back to Marco.

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

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Thank you, Julie. In conclusion, I want to reiterate the key messages we started with today.

First, we have made excellent progress with our strategy, successfully completing the first phase. Before COVID, we were delivering strong momentum across brand, product and sales ahead of our expectations.

Second, although COVID-19 has had a materially negative impact on our industry and our business, we responded rapidly to the outbreak, safeguarding our teams, customers and communities. Throughout the crisis, our brand heat has remained strong.

Third, we have taken swift mitigating actions to contain costs and protect our financial position. As a result, we have a strong balance sheet and liquidity position, also leading the space for investment as markets recover.

Finally, as Julie and I have just spoken about, we are well positioned and have a strong plan in place to navigate the next 12 months.

Before I close, I would like to thank our teams worldwide for their commitment and leadership during this time. This global health emergency has had a devastating impact on the lives of many people around the world and a materially negative effect on luxury demand. I am very proud of the way we have responded, both at Burberry and beyond. It will take time for the world to heal from this pandemic, but now more than ever, our strategy to anchor the brand in luxury fashion is key, and we’re excited about this next phase in Burberry’s journey.

I’d like to leave you with a short video.

(presentation)

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

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I’ll open the floor to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first telephone question today is from the line of Zuzanna Pusz from UBS.

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Zuzanna Pusz, UBS Investment Bank, Research Division – Head of European Luxury Equity Research [2]

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I hope you can hear me. I have 2 questions. So first question is on the momentum you saw in January, basically calendar year-to-date. Maybe if you could give us an idea of what was the growth from the beginning of January until the COVID-19 outbreak? And specifically, if you could just also specify what was the growth by nationality given that likely that period will have benefited from the earlier Chinese New Year. So basically, if I could just please ask for growth January until 21st of January? And what was the Chinese consumer versus other nationalities?

Second question is on the one-offs. So they’re quite big, basically over 50% of your EBIT. So I just wanted to get an idea of how we should think of those impairments. Is there a chance that actually, in the future, you’ll revise them if actually revenue turns out to be better than what you had initially assumed? And if that happens, would it be below the line like this time or not?

And also, just also a clarification, because it happens you were the last company to report this earnings season. And no — none of the companies basically has taken any impairments to — of that extent, especially for stores. So maybe just to get an idea because, clearly, you probably had a little bit more kind of flexibility in terms of whether to do it or not, and why would it differ versus peers.

And actually, it’s not a question, it’s just a follow-up, because you mentioned in the presentation that the Americas region was up mid-single digit in January. But actually, the press release, it says it was stable. So just to — if I could clarify where that difference comes from.

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Julie Brown, Burberry Group plc – CFO, COO & Director [3]

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Okay. Thank you, Zuzanna. Thank you for the question. Marco, I can take them, if you like, since they’re related to the figures.

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [4]

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Sure. Sure.

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

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Okay. Zuzanna, so just in terms of the first one related to the momentum calendar to date. So we saw a strong performance in January. So to the 25th of January, we had 11% growth. We actually saw it across the majority of our nationalities. I’ll come to your second question about Americas later. But we also saw it across Americas, and we had double-digit growth in EMEIA. So I think a very positive trend globally.

As far as Lunar New Year is concerned, we did have the benefit this year of a couple of weeks in the timing between this year and last year. But we’ve actually done a comparison of last year for the same Chinese New Year period, last year and this year, and the trend is very similar. So there may be some element of offset, but we have actually reviewed that ourselves to make sure it was a reasonable data point to provide you. So we’re very encouraged by 11% to the 25th of Jan just before COVID struck us.

In terms of the impairment point, so as you know, this is caused by simply the fact that we’re in the unfortunate position of having our accounting year-end when there’s a high degree of rigor associated with impairments linked with, at the time when we closed our books at the end of March, we had 60% of the stores closed. All the stores in the West were closed. So that triggers a significant impairment because you’ve got to compare the cash flows from the store portfolio by store, actually with the lease obligation of that — of those stores.

Now we did a review of this, actually, in January before we knew COVID was going to strike and there were very few impairments in the second half. I mean it was like GBP 1 million. So when we did it again post-COVID, it’s all been caused by effectively the trough in the revenue projection and the earnings projection relative to that lease obligation. So of course, as a result, we treat it as an exceptional item.

And then when you mentioned about the reversals going above or below the line. Clearly, if there is any change to this assumption, and we all appreciate we’re living in an uncertain world and these assumptions may change, then the reversal of any impairment we’ve taken would also go below the line. It’s also the same with the stock provisions, we make every adjustment below the line. And you’ve seen us do that before with the Beauty deal, for instance, where we talk distributor provisions. They have also reversed below the line if they’re found — been found to be needed to be adjusted or trued up.

In terms of benefits above the line, there is a small benefit associated with the depreciation charge. If you reduce the value of a store on the balance sheet under IFRS 16, then you get a small benefit in terms of depreciation.

The final part of your question related to the impairment charge relative to other companies. The first thing is, as I mentioned, we’ve been very unlucky that our accounting year-end has coincided with the coronavirus potentially being at its peak. We’ve based the charges based on a series of scenarios, as I outlined on that diagram, which we’re using scenarios to manage the business to ensure that we’re flexible and agile, but also to reach the accounting charges.

In terms of peers, those peers that have not got a financial year-end at this point, obviously, won’t have this obligation. And in terms of American peers, the rules are different. I won’t go into the technicalities, but we can pick it up later. But it’s all about discounted or undiscounted cash flows. We have to use discounted cash flows under IFRS 16.

And then the final part of your question related to Americas. So we did see Americas up mid-single digits through the 25th of January. So it was a very positive trend that was occurring. But clearly, in the latter part of it, it was negative due to the markdown period. So we had a significant headwind in the last week of January in Americas due to that. But it is correct, that it was mid-single digits through the 25th.

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Zuzanna Pusz, UBS Investment Bank, Research Division – Head of European Luxury Equity Research [6]

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Perfect. And sorry, just to follow up on the first question, clarification. So you mentioned it was up — 11% up until 25th of January. But — and you mentioned EMEIA was double digit, but I presume EMEIA would have benefited from tourism. So can we just confirm if other nationalities, excluding the Chinese consumer, were also up double digit up until 25th of January? Or what was the trend Chinese consumer versus other nationalities, just low mid-single digit, double digit, just to get an idea?

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Julie Brown, Burberry Group plc – CFO, COO & Director [7]

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Yes. We won’t give the split by nationality in terms of the actual growth rates, but it was across all nationalities. Because in EMEIA, for example, we didn’t have the benefit of if the coronavirus struck just as we’re coming to the end. So it was before the Chinese would have started to travel. So we were seeing an improvement in all nationalities.

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Operator [8]

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

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

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It’s Antoine Belge of HSBC. Can you hear me?

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [10]

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Yes, we can hear you, Antoine.

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

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Yes.

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Antoine Belge, HSBC, Research Division – Global of Consumer and Retail Research [12]

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Yes. Two questions. First of all, I think you mentioned in your presentation that there’s been some Hero outerwear performance. Could you maybe elaborate a bit on that? If it’s around the work that Riccardo has done around the trench coat? And also, you mentioned accessories are performing in the lockdown period. So can you also comment a bit like leather goods in small levels, et cetera?

My second question relates to the outlook for the gross margin in fiscal year ’21. Not asking for guidance, but is it fair to say that with the GBP 68 million inventory provision, which include I think a lot of provision on the current merchandise, that the risk of gross margin pressure is thus reduced?

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [13]

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Okay. Julie, maybe I’ll take the first question, you take the second?

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Julie Brown, Burberry Group plc – CFO, COO & Director [14]

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Yes. Sure. Thanks, Marco.

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [15]

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Yes. So Antoine, in terms of your — the first part of your question on outerwear, I think we have seen — in general, we have seen a good performance of ready-to-wear, particularly with menswear, but also with womenswear. And in the outerwear category, I think particularly with the men’s — with the down jackets and the quilts, which were the object of a focus for us both from a product point of view and from a communication point of view, we had very strong results at the end of the year on Festive and as we were trading in January — and accelerating in January.

For the second part, in terms of accessories, look, I think that up until the COVID outbreak, I think we were really seeing a very positive trajectory. And we spent time last time discussing how we rebuilt the architecture of the handbag collection and the leather goods collection in general throughout last year. And I think that we were really starting to see the fruits of all that work that we have done. We are seeing now, which is the most encouraging thing, as markets reopen now, we are also seeing a strong pickup of the leather goods category. It is accelerating quite strongly. And the important thing is also that it’s not just one item, but there are several items in the handbags and in the small leather goods category that are really driving this growth.

I think that what we’re seeing is the work is paying off. The sales are all made by new product. I think at the end of — right until pre-COVID, our sales were, I think, 98% made of new items. So we have transitioned. And I think now, I think we have a very strong platform that we can build on. It’s of course, as I said, as I always say, this is a midterm journey. It’s not something you solve in 2, 3 seasons. But I think we have a much, much stronger platform now to base the growth of the category. Julie, all to you.

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Julie Brown, Burberry Group plc – CFO, COO & Director [16]

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Yes. Okay. Okay, thank you very much. In terms of the gross margin, yes, the inventory risk has been reduced by the provision. Again, it’s very similar to the impairment, though. If we find that we had over-provided for the inventory, clearly, the reversal would also go below the line in the exceptionals.

In terms of what we’re seeing, normally, we’ve got a very clear inventory policy that we apply every year, and it’s usually the older seasons that get a provision attached to them. However, this year, and very unusually, we’ve got the provision also attached to the current season and the season prior to that simply because of having 60% of our stores closed and the network unable to sell through that inventory to the same degree. So we’ve made a provision based on the scenarios I mentioned.

There will be puts and takes on this, pluses and minuses. We true it up inevitably as we sell the product lines through. But as I said, in the statutory accounts, we’ll see a benefit to gross margin from this. But in the management accounts, the adjustment goes below the line. And it will really depend on the virus, how it pans out and the ability to reopen the stores with social distancing in place.

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

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Maybe just a clarification on a previous question. So the impairment test, is it fair to say that it’s really an IFRS 16 obligation, i.e., if — without IFRS 16, you wouldn’t have had to book those impairment tests on leases?

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

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It’s changed — IFRS 16 has changed the basis on which we would do this. Under the previous standards, we would have taken what’s called onerous lease obligations. So again, if the lease was in excess of the potential value of the future cash flows, you’d still take what’s called an onerous lease obligation. But now under IFRS 16, you effectively capitalize those lease obligations onto the balance sheet as assets and then you’re reviewing the value of those assets.

I mean we can go into this in a bit more depth, if you like, separately. But the rules are different now as a result of IFRS 16, which does require you to take an overhead allocation, for instance, which makes a difference. But no, there would have been a provision under the old basis, but it wouldn’t have been formulated in the same way.

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Operator [19]

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The next question comes from Luca Solca from Bernstein.

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Luca Giuseppe Solca, Sanford C. Bernstein & Co., LLC., Research Division – Research Analyst [20]

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I have a question on your announcement that more capsules will come to the market. Are you planning to internally develop those 100%? Or do you plan to engage other brands to magnify the potential draw and traffic impact on stores and digital?

And the second question on digital, speaking of which, and its relationship to wholesale, what swap do you expect in these 2 channels going forward? Is it fair to anticipate that wholesale will significantly further reduce given what is going on, for example, with the U.S. department stores and their bankruptcies? And at the same time, where do you see the most important opportunity for you in digital monobrand, so burberry.com or platforms?

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

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Okay. So Luca, in terms of capsules, I think we are planning to do both. I think we’re planning to do internal development, but at the same time we don’t exclude collaborations. I think we have had a number of successful capsules in this past year. And I think we have great plans for new capsules that are going to come up during the year. So we’re quite excited about that.

I think we — those capsules are also all supported by excellent, very engaging content that has been prepared. We have seen the launch now in China just now, we launched our handbag campaign. It’s the first time that we do an exclusive campaign on handbags. And that will support also some local capsules because we have some product that is exclusive in China. And later on, we’ll roll out that also to other markets later in the year as markets will ease out of lockdowns. In terms — in this I’m speaking about handbags, but there will be other capsules actually that will come out. And in fact, there is one that will come out in July that I won’t disclose now, but I think is also extremely exciting.

In terms of the digital and wholesale, well, clearly, we think that this crisis is having an impact in wholesale — on wholesale, in particular in America. I think from our point of view, I think we had completed our reorganization of wholesale, and we are already focused on our key partners in the key locations. So I think the crisis fortunately arrives when this work has been completed. So we’re standing on a pretty solid platform. Nevertheless, we are monitoring what is happening in America. We’re partnering with our customers, with our retail partners. And clearly, we support them when it’s necessary, and they are really supportive of the brand as well.

So we think that this crisis is going to accelerate what we call DTC, so direct-to-consumer. And digital is clearly a very important element of that. So we are, honestly, quite pleased with the way that our digital has performed, particularly — and both before the crisis and during the crisis, and now it’s performing now in markets that are coming out of the crisis where we see strong growth.

And as we announced last time, if you remember, Luca, we are opening our first social retail store in Shenzhen. The plan is going ahead. And we will open it within the year, hopefully during the summer. And I think we’re very excited about that. It’s a partnership with Tencent. There is a lot of innovation that is in the store. Any response, I think, very well to probably some of the changes that this crisis will bring about in terms of the customer really using physical and online in the same trajectory, in the same journey, of inspiration and shopping in the stores. So I think we are well positioned for the trends that we think will come out of the crisis.

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Operator [22]

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The next question comes from the line of Elena Mariani from Morgan Stanley.

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Elena Mariani, Morgan Stanley, Research Division – Executive Director of Luxury Goods and Brands [23]

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My first one is going back to the way you’re going to manage inventory. Perhaps could you be a little bit more precise in terms of what you plan to do given that you’re now not destroying any products. Also, if I understand correctly, you’re not buying back from your retailers. So how do you intend to reconcile dealing with this excess inventory with your long-term journey of brand elevation given that you’re literally in the middle of it and probably control over discounting activity is very much key?

And then my second question is about your cost control. Clearly, you’ve shown great control and you found a way to anticipate some of your savings from fiscal year ’20 to fiscal year ’21. Could you remind us of where exactly those savings are coming from? And also perhaps, what has been the trend in advertising as a percentage of sales? I know that you don’t disclose the precise number, but has that been stable in the last part of fiscal year ’20? Do you plan to keep it stable even in fiscal year ’21 or define some area of savings also there? I’m just trying to understand your balance between cost control versus brand building and investing.

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Julie Brown, Burberry Group plc – CFO, COO & Director [24]

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Okay. Marco, do you want me to take the cost one and you’d like take the inventory?

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [25]

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Sure. Sure. Shall I start or…

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Julie Brown, Burberry Group plc – CFO, COO & Director [26]

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Okay. Yes, you go ahead.

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [27]

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Sure. Well, clearly, as Julie has already explained, we’re managing inventory very closely. I think we’ve taken a number of actions in order to manage our inventory. We have adjusted our orders for Autumn, reacting very quickly as soon as we saw the first signs of COVID. We are also somehow shifting a little bit our calendar. So we’re trying to somehow use some of the time now that is in terms of the recovery that we’re seeing in certain markets. And if other markets also are easing out of lockdowns, we will extend our Spring/Summer selling and probably shift Autumn deliveries.

We have done a lot of work on product assortment going forward in terms of the collections that will come out in — very, very soon now, and they will deliver in November. So that we are really developing collections for what is going to be — for clients to buy at that time, at the time they come out. So there is, I think, a calendar adjustment that will be one of the changes that will happen as a consequence of the crisis.

We’re also moving products around the globe very quickly and, obviously, focusing on the markets that are rebounding more strongly. In terms of the excess inventory, clearly, we are committed to our no-destruction policy. So we will — after having optimized our sales channels in terms of markdown and outlet, we have put in place and we have already experimented activities in terms of recycling, up-cycling, donations, staff sales. So we’re going through — we have a number of actions that we take to manage our inventory. Julie, you want to speak about cost?

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Julie Brown, Burberry Group plc – CFO, COO & Director [28]

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Yes. The second part on cost, yes. Yes. So thanks very much for the question. In terms of the cost saving, talk about sort of 3 levels. The first one is we — as you know, we had an original cost-saving program that we’ve accelerated and delivered a GBP 20 million benefit this year. That’s relating to efficiency, operating model, process simplification and procurement changes. And as you’ve seen from that, we’re now accelerating that to deliver cumulative GBP 140 million by full year ’21.

And this has put us in a good position in terms of process excellence, agility and efficiency in the business, and also very, very clear transparency of cost base and ownership to allow us to respond to a situation that we then found ourselves in with coronavirus. So when we hit the coronavirus issue at the end of January, I think we were an organization that was well prepared for this sort of situation, as Marco has described, commercially, but I think also financially.

So in terms of the savings this year, to give you a bit more flavor, there are 3 major areas. I would say that the one major area relates to variable cost savings and savings that needed to be made based on the new environment that we found ourselves in. So this was the cancellation of some of them, because clearly we had closures occurring in the West. And we had planned, for instance, for a China fashion show which then we had to stop. So it relates to very much situational changes that we made to the cost base.

The second area also related to performance-related pay changes. So we decided to make the decision to freeze the merit increase this year. We also took pay reductions, 20% pay reductions for 3 months at the Board level and also at the senior management level. So all these things were sort of put in place and will now benefit full year ’21 as well as the residual part of full year ’20. So we think it was a very dynamic and proactive approach.

Turning to the following year. Clearly, the basis on which we’ve planned this is to be entirely flexible depending on how the scenarios pan out. And as I’ve mentioned, we’ve got cost mitigation in place, but we’ve also built in considerable agility to respond when markets rebound. And already, because we’ve seen such very promising signs in China and in Korea, for example, Marco has mentioned the leather goods campaign that’s already going live in China. So we’ve been very flexible about the marketing spend, in particular, that you raised and getting the right balance between brand building and cost mitigation.

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [29]

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Yes. If I may add on this. In fact, as Julie said, flexibility is — and agility in this context is clearly the key. We will dial up the spend in the markets where we see that the customers have returned to a positive behavior of spending as we are — as we are doing now in China, we’ll do the same in the other markets as they ease out of lockdowns.

But the important thing is also that — I refer to what I said in the presentation is about localization. Now the content, we have, I think, fantastic content that is coming out over the next 6 months. And we had already started on the direction of localizing content. So we will see also more and more of this following the COVID outbreak. I think, as we said, with less customers traveling, we will localize and focus even more tailor-made campaigns for different markets depending on the phase of recovery they will be in.

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

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Just one small follow-up on the inventory management. So given you’re rebuilding your replenishment products, and I remember that back in December you were saying that you’re basically now almost 100% fashion, given that the old styles were declining, where are you in the process right now? And is there reliable — is there a reliable split between fashion and evergreen that you can give us based on where you are?

And again, a small follow-up. In terms of outlet usage, do you intend to use outlets more, increase the number of products there, the breadth of discounting? How do you think about that channel just in the context of protecting your brand equity?

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [31]

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Okay. So I may take those, Julie.

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Julie Brown, Burberry Group plc – CFO, COO & Director [32]

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Yes.

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [33]

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So in terms of the product, I think as you saw in the presentation, I think we are now close to 100% of new products. So we have had — and as I mentioned before even in outerwear, we have had a lot of work that has been done on outerwear in terms of quilts, in terms of down jackets, in terms of the fashion part and seasonal part of heritage.

So we are building — even in categories like outerwear, we are building what we call the new icons for the future. But it’s too early at this stage to separate and to get clear indication from those items because they are, basically, have been just coming to market or will be coming to market. Therefore, we need to give them the physiological time, the cycle, the life cycle of product, to see them over a period of 2, 3 seasons before we can have indications that are reliable in terms of their performance.

The same thing is for accessories, even more. As I said, virtually, today, I think 100% of our sales are coming from new items. And so as we build those items out, as we create also those seasonal variations of this, we’ll be able to assess the strength of the item, of the body and the capacity it has to last over time. So I think this next year is probably what we need as to establish a platform and a base for analysis in that respect.

In terms of outlets, I think that we’re not planning to dial up outlets. We’re planning to use outlets practically in this situation in order to perform their reason to exist, the physiological reason to exist of an outlet, which is the end-of-life of the product. And so we’re not planning to dial up, we’re just learning to use them. I think we are — it’s good to have them in this situation and in this crisis because as there is some excess inventory, they can be one of the channels that will help us to liquidate through that and without also disturbing too much our full-price customers, which tend to be polarized in full-price stores. So there is very little overlap between the 2 channels.

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Operator [34]

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In the interest of time, we have to stop the Q&A session, and I will now hand back to Julie Brown.

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Julie Brown, Burberry Group plc – CFO, COO & Director [35]

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Okay. Thank you very much. Thank you, everybody, for joining the call. I appreciate we still have a number of calls on the line. But in the interest of time, we’re more than happy to take the questions later today. And we wish everybody a really good weekend, and we hope everybody stays safe. Thank you very much.

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Marco Gobbetti, Burberry Group plc – CEO & Executive Director [36]

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Yes. And I’d like to share the thanks from Julie. Thank you very much for this call. We hope all be well and be safe. Thank you.

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Operator [37]

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Ladies and gentlemen, this concludes today’s conference. Thank you.

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