Earnings call: HUGO BOSS maintains resilience amid market challenges

Amidst global economic headwinds, HUGO BOSS AG (ETR: BOSS) has reported a slight sales decline and a notable decrease in EBIT for the second quarter of 2024. CFO and COO Yves Müller, during the earnings call, emphasized the strength of the company’s CLAIM 5 strategy and its success in limiting the impact of a challenging luxury apparel market. Despite a 1% dip in sales and a 42% drop in EBIT, due to higher operating expenses, HUGO BOSS has outlined plans to continue investing in strategic business areas while implementing cost-saving initiatives to safeguard profitability. The company’s social media presence has grown significantly, and it remains focused on expanding its global member base. Regional performance varied, with sales in the Americas up by 5%, while EMEA and Asia-Pacific experienced declines. HUGO BOSS is set on achieving a gross margin above 62% for the full year and anticipates an EBIT of between €350 million and €430 million. Müller confirmed that there will be no price reductions, with the company instead focusing on cost control and operational efficiency.

Key Takeaways

• Sales decreased by 1%, with EBIT down 42% in Q2 of 2024.
• CLAIM 5 strategy enhanced brand relevance and growth.
• Investments will continue in strategic areas, with spending cuts in non-strategic areas.
• Social media presence expanded, with millions of new followers.
• Sales in the Americas increased by 5%, while EMEA and Asia-Pacific saw declines.
• Gross margin is expected to be above 62% for the full year.
• EBIT forecast for 2024 set between €350 million and €430 million.
• Cost-saving measures to be implemented without reducing prices.

Company Outlook

• Group sales expected to increase by 1% to 4% in 2024.
• Focus on gross margin improvements through sourcing efficiencies.
• Cost-saving initiatives in place to optimize staffing and reduce non-critical service costs.
• Investments prioritized in flagship stores.

Bearish Highlights

• Elevated operating expenses contributed to decrease in EBIT.
• Sales in EMEA and Asia-Pacific declined, with China’s slowdown impacting the latter.
• Global macro headwinds and consumer sentiment uncertainties expected to persist.

Bullish Highlights

• Sales outperformed the broader luxury apparel market.
• Strong social media growth and global member base expansion.
• Solid wholesale order book with mid to high-single digit growth expected.

Misses

• No improvement in promotional activity in the second half of the year.
• No pickup expected in brick-and-mortar retail sales for the second half.

Q&A Highlights

• Company confident in meeting 2024 guidance despite higher freight rates.
• Inventory to net sales ratio targeted to be below 20% in the next 18 months.
• Operating leverage achievable with a low single-digit increase in sales.
• CapEx for the next year estimated around €300 million.
• Continued reduction in airfreight and adjustment of freight modes to manage costs.

HUGO BOSS’s strategy during these turbulent times has been to bolster its brand while carefully navigating the luxury apparel market’s uncertainties. The company’s focus on strategic investments, coupled with its commitment to cost-saving measures, illustrates its determination to maintain a strong market position and ensure long-term growth. As HUGO BOSS continues to adapt its operations to the evolving economic landscape, it remains steadfast in its pursuit of efficiency and profitability.

InvestingPro Insights

As HUGO BOSS AG (ETR: BOSS) navigates through the economic challenges of 2024, the company’s financial metrics and market performance provide a deeper understanding of its current standing. With a market capitalization of $2.85 billion, the company’s valuation reflects its resilience in a tough market environment. The P/E ratio, which stands at 11.7, suggests that HUGO BOSS is potentially undervalued compared to industry peers, especially considering its impressive gross profit margin of 61.62% over the last twelve months as of Q2 2024. This high margin is indicative of the company’s strong pricing power and operational efficiency, aligning with its emphasis on cost control and operational efficiency mentioned in the CFO’s remarks.

InvestingPro Tips for HUGO BOSS highlight both the company’s strengths and areas of concern. The company has demonstrated a commitment to shareholder returns, raising its dividend for 3 consecutive years and maintaining dividend payments for 33 consecutive years. This consistent return to shareholders is a testament to HUGO BOSS’s financial stability and prudent capital management. On the other hand, two analysts have revised their earnings downwards for the upcoming period, signaling potential headwinds that may impact future profitability. Yet, the analysts predict the company will be profitable this year, underscoring HUGO BOSS’s ability to navigate through market fluctuations.

Investors seeking additional insights will find a wealth of information with InvestingPro, which currently lists several more InvestingPro Tips for HUGO BOSS at https://www.investing.com/pro/BOSS. These tips can provide a more comprehensive view of the company’s financial health and market prospects, aiding in informed investment decisions.

Full transcript – Hugo Boss AG (BOSSY) Q2 2024:

Christian Stöhr: Good morning, ladies and gentlemen. Welcome to our Second Quarter 2024 Financial Results presentation. Hosting our conference call today is Yves Müller, CFO and COO of HUGO BOSS. Before I hand over to Yves, allow me to remind you that all revenue-related growth rates will be discussed on a currency-adjusted basis, unless otherwise specified. Also and just like in the past, I would like to ask you to limit your questions during the Q&A session to a maximum of two. And with that, let’s get started, and over to you, Yves.

Yves Müller: Thank you, Christian, and a warm welcome from Metzingen, ladies and gentlemen. We are delighted that you are taking part in our conference call today. Over the next 30 minutes, I will present a detailed overview of our second quarter and half year performance, focusing on the most recent operational and financial developments. Just as importantly, I will also walk you through our updated top and bottom-line expectations for fiscal year 2024. As you are all aware of, and as the current reporting season has demonstrated, our industry is navigating through a period of persistent macroeconomic and geopolitical uncertainties. A period during which spending on luxury and premium apparel has been impacted by subdued consumer demand. And while this has resulted in a normalization of industry growth for several quarters in a row, the slowdown was particularly evident in the second quarter, as the global retail environment has seen a further pullback in many key markets around the globe. As a company with almost two-third direct-to-consumer business, we were ultimately not able to completely escape these industry developments. Following an overall solid start to the year, with sales up 6% in the first quarter, our top-line momentum has therefore decelerated somewhat. However, with a sales decline of 1% in the second quarter, we were able to limit the external impact on our business to quite some extent, thus continuing our relative outperformance of the market. This is testament to the continued brand momentum of BOSS and HUGO, which I will come to in a moment. The weak consumer backdrop inevitably also impacted our bottom-line performance, with EBIT down 42% to €70 million in the three-month-period. This development also reflects higher operating expenses, which more than offset an otherwise robust gross margin expansion in the second quarter. Now, before diving into the details of our top and bottom-line performance and our future approach to navigate the current market uncertainty, allow me to clarify a few things first. Despite the current macro context, we are witnessing no signs of a structural slowdown in brand momentum. Quite the contrary: following a period of successful and relentless strategy execution, we remain absolutely convinced of the strength of our two brands BOSS and HUGO. Three years ago, in August 2021, we presented CLAIM 5 for the very first time to all of you. A strategy that has always been geared towards putting our two iconic brands back into the spotlight, revitalizing BOSS and HUGO, and winning over a new, younger, and more diverse audience. By investing in our brands and products, digital capabilities, global touchpoints, and our operational and organizational backbone, we have successfully boosted brand relevance and accelerated top-line growth. In doing so, CLAIM 5 enable us to deliver a true kickstart and a strong comeback after the pandemic, driving above-trend and high-quality topline growth for our 12 consecutive quarters. This also holds true for the second quarter. Despite the aforementioned 1% sales decline, our top-line once more outperformed the broader industry development. This has proved positive that CLAIM 5 is and remains the right strategy for our company, even in times when the overall market conditions are deteriorating. By sticking to our game plan and consistently executing our strategic priorities, we are confident we can and will unleash the full potential of our brands. Over the past three years, CLAIM 5 has fueled significant growth for our company. Having achieved our initial sales target of €4 billion already last year and continuing to strongly exceed 2019 revenue levels by more than 50% are clear testaments to the power of CLAIM 5 and our successful strategy execution. It is precisely for this reason, why we will stick to our strategic actions, leveraging our numerous growth opportunities in the quarters to come. You may be wondering what this means for future investments, let me therefore be clear that we remain committed to investing in strategically relevant areas of our business. This first and foremost includes our brands and products, as well as never compromise on brand relevance and price-value proposition. At the same time, we will remove any spending in non-strategic areas of our business for the time being, to cope for the more challenging market environment, something I will talk about in more detail in just a few minutes. The increased relevance and improved visibility of our two brands is nowhere more evident on social media. Our comprehensive investments into star-studded brand campaigns, fashion events, and high-profile collaborations led to BOSS and HUGO dominating key platforms such as Instagram and TikTok. Since introducing CLAIM 5 we have added more than 10 million new followers on social, while recording an impressive 120 billion impressions and around 3 billion engagements. This demonstrates our ability in successfully turning Millennials and the Gen Z into true fans of BOSS and HUGO. Converting our growing fan base into loyal customers is as least as important. Year-over-year, we managed to grow our global member base by around 30% to almost 10 million registered customers. Retaining their loyalty to our brands in the long-term is of particular importance, which is why we are taking customer engagement to the next level. In this context, in Q2, we have successfully launched HUGO BOSS XP (NASDAQ:), our new membership program, centered around our well-established HUGO BOSS app. Over the coming quarters, we will roll out this program worldwide, as we are committed to further expanding our member base and binding even more customers to our brands and products. Thanks to the relentless execution of our strategic actions, today we are operating out of a position of strength. Our brands are significantly more desirable, our product offering reflects our 24/7 lifestyle image, our touchpoints are more appealing, and our customer base is bigger and more loyal than ever before. And while all of this may not free us from macroeconomic challenges, it makes our business model more resilient. As a result, we were able to increase our sales by 3% in the first half of the year, despite the overall external framework. Growth continued to be broad-based, with both our brands, as well as most regions and most channels contributing. This includes sales for BOSS menswear being up 2%, while BOSS womenswear improved 4%, HUGO even grew 6% in the first half of 2024, supported by the successful launch of HUGO BLUE. Looking at the second quarter in more detail, the overall sector slowdown weighed in particular on sentiment in some of our key retail markets. In EMEA, sales decreased 2% in Q2. While retail traffic in the UK remained weak, with no improvement as compared to the first quarter, sales in continental Europe experienced a slowdown during the three months period. This affected our performance in key markets such as Germany and France. At the same time, we were able to maintain our double-digit growth trajectory in the emerging markets. Also in the Americas, we continued our growth journey in the second quarter, with sales up 5%. This primarily reflects further sales improvements in the important U.S. market driven by our brand’s successful 24/7 lifestyle positioning, which drove momentum in the department store business. In Latin America, momentum remained equally resilient, with sales continuing their double-digit growth in the second quarter, while Canada remained on the prior-year level. To conclude on the regions, sales in Asia-Pacific decreased 4% in the second quarter, reflecting sales declines in China, as muted consumer confidence weighed on domestic retail consumption. At the same time, Southeast Asia & Pacific recorded another robust performance in the second quarter, with revenues up high-single digit, supported by a particularly strong performance in Japan. To finish off on our Q2 top line performance, let’s take a quick look at our distribution channels. With sales up 5%, I am pleased to report that our momentum in brick-and-mortar wholesale continued. This is even more remarkable considering the current market conditions, demonstrating that we keep gaining market shares also in this channel, as we continue to be a brand of choice for our global partners. In brick-and-mortar retail, however, sales remained 2% below the prior-year level, with traffic declines partly compensated by higher conversion rates. As already mentioned, this mainly reflects the challenging retail environment in the UK and China. When excluding these two markets, brick-and-mortar retail sales have been up 1% in the second quarter. Last but not least, our digital business was down 4% in Q2. Importantly, our digital flagship hugoboss.com continued its growth trajectory also in the second quarter, up 3% versus the prior year. This is proof positive that our many initiatives to accelerate the omni-channel experience are paying off. With the performance in the second quarter and first half year in mind, let’s now take a look at how we will take things from here on. And let me start by saying that we anticipate the global macro headwinds to remain present for the time being and uncertainties regarding consumer sentiment to remain elevated. And while we remain steadfast in our commitment to continue driving above-trend growth in the future, we are taking a rather conservative view on the consumer for the remainder of the year, irrespective of our long-term growth potential. Consequently, we now expect Group sales in 2024 to increase by 1% to 4% in Group currency, with a slight negative currency impact. This in turn means that we do not necessarily factor in an improvement in top line growth in the second half of 2024, although objectively speaking Group revenues and our brick-and-mortar retail business in particular should be benefitting from a more favorable comparison base in H2. Likewise, we should not ignore that our order intake for Winter 2024 and Spring 2025 looks encouraging, as do many of our upcoming brand and product initiatives we have in the pipeline for H2. The signing of our long-standing strategic partnership with David Beckham is one of these strategic investments that will further boost our BOSS Menswear business. Alongside recurring ambassadors Naomi Campbell and Gisele Bündchen, David will also star in our upcoming global 360-degree BOSS brand campaign, launching in just a few weeks from now. On top of that, BOSS will return to the stages of Milan Fashion Week in September, while we will also continue creating a buzz with high-profile collaborations including those with the NFL for BOSS, and Red Bull for HUGO. Last but not least, THE CHANGE, we have launched a new sneaker icon for BOSS only a few days ago, taking another stride forward in our footwear range. It is crafted with HeiQ AeoniQ, enabling us to gradually increase the share of this cellulosic filament yarn in our overall product range. This, ladies and gentlemen, concludes my remarks on our top line performance and expectations for the second half year. Let’s now move over to our bottom-line development. For several years, as part of CLAIM 5, we have been strengthening our operational and organizational platform. And you may remember that, already in March, we told you that we would begin leveraging this platform, focusing on driving effectiveness and efficiency across our organization. Going forward, this approach is meant to support our future gross margin development, while also improving the overall productivity within our cost base. By looking at our gross margin development, there is clear evidence that these measures have already started taking effect. We are successfully leveraging our operations platform to enhance the productivity of our global sourcing activities. This includes achieving greater economies of scale, optimizing vendor allocation and freight modes, and reducing the reliance on airfreight. Coupled with more favorable product costs, these efforts translated into robust gross margin improvements, up 50 basis points in the second quarter and up 30 basis points in the first half to a level of 62.1%. And let me be very explicit in saying that we anticipate our strong focus on leveraging sourcing efficiencies to provide even greater support for gross margins in the second half of the year. We therefore expect our gross margin development to accelerate further, forecasting a gross margin above 62% for the full year 2024, thus aligning with our mid-term range of 62% to 64%. This also reflects our confidence that we will be able to continue compensating for adverse channel-mix and currency effects, higher freight rates, as well as ongoing uncertainty related to the promotional environment. Moving over to operating expenses, which grew 7% in the first half of the year. This development primarily reflects higher brick-and-mortar retail expenses, up 12% in the second quarter and in the first half, driven by inflation and expansion-related cost increases. Marketing investments, on the other hand, grew only 1% in the first half year, including a timing shift from the first into the second quarter in light of major brand events. Importantly, at 7.8% of Group sales, marketing investments in H1 remained within our target range of 7% to 8% as outlined in CLAIM 5. And while administration expenses were up 8% in Q2, they only increased 3% in the first six months as first benefits from improving organizational efficiency, partly compensated for digital investments and overall cost inflation. Now taking into account that the macro environment is likely to remain challenging for the time being, we are accelerating our cost discipline from here on. In doing so, we will protect our bottom line development in 2024 and beyond. In particular, by removing spending in non-strategic areas of our business and further simplifying our organizational structure, we are committed to noticeably mitigate the cost increase going forward. The majority of our cost-saving initiatives will focus on sales, marketing and administration. In sales and distribution, we are optimizing staffing in our own stores and shops based on current traffic trends. At the same time, we are reducing all non-business-critical service costs while also driving CapEx efficiency by optimizing investments per square meters. This, in turn, means that when it comes to store renovations, we are now clearly prioritizing our best of halo stores while taking a much more conservative approach to renovating locations in Tier 2 cities. In marketing, we are enhancing effectiveness by investing in on a more targeted manner in prioritizing brand initiatives with maximum return. Finally, in our global admin functions, we have already adopted a much more restricted hiring approach in addition to strongly removing spending in areas such as travel, consultancies and hospitality. On top of this, we are pausing non-business-critical projects for the time being as we prioritize three strategic game changes such as the global rollout of HUGO BOSS XP or our important digital twin initiative. Overall, we expect these measures to notably mitigate the increase in our fixed cost base already in the second half of the year with operating expenses anticipated to increase between 1% and 3% in H2. Our measures will, therefore provide a considerable table to our bottom line development in 2024 and beyond. Given our confidence to further improve gross margins and our determination and implementing measures to swiftly improve operational and organizational efficiencies, our bottom line performance is expected to accelerate in the second half of this year. Consequently, we are now targeting a full year EBIT of between €350 million and €430 million, taking into account the overall market uncertainty. Before opening the floor to your questions, let’s also review our most important balance sheet items starting with inventories. Tight inventory management is and remains a key priority within CLAIM 5 as we remain committed to further optimizing inventory levels. On that, I’m pleased to report that in the second quarter, we were able to bring down inventories by 7% currency adjusted versus the prior year period, highlighting that inventory management is well under control. Consequently, as a percentage of group sales, inventories came in at 24.9% and thus below the prior level while also improving compared to the end of fiscal year 2023. Moving over to trade net working capital, for which we continue to expect the moving average of the last four quarters, approaching 20% of group sales by year-end down from 21.2% at year end of June. This projection reflects in particular, our ongoing progress in optimizing our inventory position. On capital expenditure, we now anticipate investments to come in at around €300 million and thus at the lower end of our initial guidance range, reflecting our increased focus on CapEx efficiency to support profitability in 2024 and beyond. Finally, we continue to expect free cash flow to accelerate strongly in 2024, having recorded meaningful progress in the first six months already, supported by our initiatives to further optimize inventories and to drive CapEx efficiency, this should enable us to generate a free cash flow of around €500 million in the fiscal year 2024. Ladies and gentlemen, let me conclude with some final remarks. There is no doubt that with CLAIM 5, we implemented the right strategy at the right time. Over the past three years and amidst an increasing challenging market environment, HUGO BOSS has consistently invested in high-return, value-creating opportunities across its brands, products and consumer touch points. Our strategic capital allocation prioritizing long-term growth over short-term margin gains underscores our unwavering commitment to maximizing shareholder value in the long run. Our investments have enabled us, reinforcing brand strength and achieving above trend top line growth. During a period marked by a significant slowdown in industry growth, both BOSS and HUGO have expanded market shares showcasing the resilience and appeal of our revitalized brands. While remaining vigilant in the current context, we approach the second half of the year with confidence and determination. Our updated full year guidance reflects our strong belief in our strategic direction and key initiatives, including our accelerated approach to enhancing efficiencies and safeguarding profitability. These measures, coupled with our ongoing strategic investments, position HUGO BOSS to much even stronger once the market conditions normalize. And with this, we are now very happy to take your questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Frederick Wild from Jefferies. Please go ahead.

Frederick Wild: Good morning, Christian and team. Thank you for taking my questions. My first question is on the cadence of trading through Q2 in your DTC business and how that has developed so far early in Q3, that will be super helpful. Thank you. My second question is you obviously cut 2024 guidance. Now how has your thoughts on delivering your 2025 guidance change?

Yves Müller: Thank you very much, Fred, for your questions. So regarding current trading or exit rate, if I got it right, just to be very simple on this. I think the overall current trends are more or less on the same level like in Q2. And regarding our guidance, I just want to make it very clear that I think you must have seen during my presentation that we clearly have a full determination to really focus now on 2024. I think you have seen that we are taking and accelerating our cost measurements starting. We have already started – in the beginning of the year, we see that these measurements are bearing fruit from a gross margin perspective due to sourcing efficiencies. You see that actually our cost increase rates have come down from 13% in 2023 to now 7%, and we will further decrease this in the second half of this year. So we are really focusing on and are determined to focus – our full management focus will be on 2024.

Frederick Wild: Thank you.

Operator: The next question comes from Dhar Manjari from RBC. Please go ahead.

Manjari Dhar: Good morning, Yves. Good morning, Christian. Thank you for taking my questions. I also had two, if I may. The first is on the sort of acceleration of the cost efficiency program. I was wondering if you could quantify maybe how much additional savings you’re expecting to generate from some of these measures in the second half versus what was originally in plan? And then secondly, I just had a question on your view of pricing in the premium segment. Obviously, the environment is very tough. Do you think there’s a need to reduce prices to sort of reengage the consumer and drive the top line? Thank you.

Yves Müller: So thank you very much for your both questions. So first of all, I think, Manjari, like every entrepreneur, I think we have to adjust our own measurements always according to current market development. And you have seen that there is a kind of slowdown. In net sales, we were growing plus 6% still in Q1 now, minus 1%. So you see the current development, I think it’s normal that every entrepreneur will react to these kind of measurements. So I think we have been very explicit to that we are very determined to get our costs under control. I think that this is what we can influence on our own. So we will be focusing on those things that we can control our own and these – especially these are the costs and especially measurements that we are taking from a sourcing perspective. So we are focusing on this. And the trajectory is, I mean, the fixed costs were growing in 2023 by 13%, plus 7%, and we will get it down now to a low single-digit increase. So this is what we are aiming for. And like I was highlighting, we are accelerating this accordingly due to the current market environment. And regarding pricing for the time being, I think our brand overall looks very strong. We see that we are gaining market share. We have – we are very much convinced that we have a very good price value proposition in terms of quality and the price that we are taking, and we are not considering any price reductions from here on.

Manjari Dhar: Very clear. Thank you.

Operator: The next question comes from Grace Smalley from Morgan Stanley. Please go ahead.

Grace Smalley: Hi, good morning. Thank you very much. It’s Grace Smalley from Morgan Stanley. My first one would just be on the promotional environment. Yves made a comment on current trading currently being similar to Q2. Could you just comment on what you’ve seen in terms of the promotional environment in July? And then also within your gross margin guidance for the year, what that embeds for promotional headwinds in the second half? And then my second question would just be on the 2024 guidance. Yves, it sounds like you have quite a lot of conviction on the gross margin on the OpEx control and the wholesale control, so – on the wholesale growth, sorry. So I imagine the kind of wide range in EBIT guidance for the full year is really coming from the uncertainty around brick-and-mortar retail sales. So if you could just help us what your guidance is embedding in terms of what brick-and-mortar retail sales does in the second half and in particular on the like-for-like growth, which I believe was negative in Q2? Thank you very much.

Yves Müller: Thank you very much, Grace, for your question. So I’ll start with the overall promotional environment. I think, first of all, we have to take in mind that the overall promotion activity was pretty elevated in the second half of the year in 2023. I think we have to keep this in mind. And for the further progress in 2024 for the second half of the year, we have included actually that there will be no tailwinds, so actually no improvement. So this means overall that we expect that the gross margin in terms of promotion activity will be elevated in the second half of the year, and this is somehow embedded in our own assumptions. On the other side, we see actually from a sourcing efficiency point of view that we are benefiting from it quarter-by-quarter that we see actually improvement from sourcing efficiency because you have to imagine that, as of today, we are sourcing 50% more volumes in comparison to pre-COVID. So this is really giving us a lot of economies on scale on that side and will help us from the gross margin as was already visible in Q2 that our gross margin was always already improving. And like I said during my presentation, we want to get the gross margin in our guidance between 62% and 64%. Regarding these – our assumptions for the bottom line in 2024, let me be pretty clear. So first of all, we take all the cost measurements. I think we laid it down for the fixed cost and I was very explicit in saying we want to reduce it to a low single-digit increase. So we have taken all the necessary measurements to take our cost increase further down. I think on the gross margin, I have been explicit by saying that we include in our assumptions this kind of elevated promotion environment. This actually includes higher freight rates as well, but the higher freight rates are more than compensated by our focus on having more ship freight instead of air freight. So we are reducing the air freight share dramatically and this somehow overcompensates the freight rates increase. And you’re right, in terms of our assumptions from here on regarding brick-and-mortar retail, we haven’t expected a pickup for the second half of the year. So we have taken a kind of prudent approach from here on for the second half of the year. On the other side, I’m pretty confident on the wholesale piece because we have a good order book, which is filled and is kind of a stabilizing factor for our business and our assumptions.

Grace Smalley: Okay. Thank you.

Operator: The next question comes from Michael Kuhn from Deutsche Bank. Please go ahead.

Michael Kuhn: Yes, good morning everyone. Hope you can hear me. Two questions for me as well. Firstly, on the wholesale versus retail performance. Is the performance gap just a function of, let’s say, different regional focus? Or if you would compare same region, same countries, would there also be an outperformance of wholesale versus retail? And then if so, what would be the reason? That’s the first question. The second one, on retail performance, if I look at the regional sales growth guidance, the deepest cut is in Asia and that being a function of China, yes, it’s been lagging behind in China for a little while. So is there an option or a scenario in which you would defocus from China and slow down your growth plans there? Or more broadly speaking, what do you think about China for now? And how do you see your development there from here?

Yves Müller: Yes, thank you very much, Michael, for your two questions. So first of all, I will relate to wholesale versus retail performance. I think there is a reason because, especially in a department store environment, in a multi-brand environment, you have higher footfall per se. And you see that actually our both brands, BOSS and HUGO, are actually outperforming the other brands. And this is why the wholesale performance is stronger than in retail. You can imagine the kind of freestanding store. You are in the shopping mall, there might be – the footfall might be lower, and we see that the footfall is more affected actually in the retail environment. So we are profiting from a multi-brand environment, and this is the major reason for the wholesale performance. And the wholesale partners see that we are investing into the brand. And they see, of course, that the sellouts are remaining on an elevated level. And I have to say that even the order books for the next three seasons, which we have sold, look quite promising on that side. So this will somehow remain regarding the wholesale environment. And by the way, we see this as well in the concession business. So on the shop-in-shop environment, we see as well a kind of outperformance versus our own freestanding stores. So this is a kind of, let’s say, proven pattern overall, where you are operating in a kind of multi-brand environment. Talking about in the region. So I mean in Asia, we were in Q1, we were plus 4% in Q1, and we were minus 4% in Q2. We see actually a tremendously good performance in the CPEC region. Japan shows a stellar performance, so to speak. So we’re really expanding our business in CPEC. On the other side, China remains – overall, the Greater China area remains muted. If you take us, I think we have to put this always into kind of strategic context, I think, overall, our position is on the one side, underpenetrated, and we see strategic opportunities. On the other side, we have to respect that the consumer sentiment for the time being, is really down in China, resulting in low footfall. So the Chinese consumer is really saving a lot of money. And there, the saving is between 20% and 40%. So they’re really saving money. And we are now in terms of group net sales we are – China is 6% of our group net sales. So you have to see what is really the effect. So long story short, I think you have to – the strategic opportunity mid and long-term is there in China, definitely. And you see our share is in comparison to the competition fairly low. On the other side, we have to clearly see that consumer sentiment for the time being is down. That answers your questions.

Operator: The next question comes from Jürgen Kolb from Kepler Cheuvreux. Please go ahead.

Jürgen Kolb: Thanks very much. Hi, everybody. Two questions. First, a little bit of in the detail, the brick-and-mortar wholesale business on a regional basis that you split out Europe in Q2 was down 1%. Is that also a factor from the department store issues that we have here in Germany also the Americas plus 20%, obviously, very strong. Could you maybe give us some indications if this is adding some Macy’s stores? Or did you add some additional doors at other department stores or enter even into a new department store that you haven’t had before? That’s the first part of the question. Secondly, on inventories, I certainly appreciate that it’s down year-on-year, but obviously, it is up €20 million versus Q1. And I was just wondering how the share of never out of stock products within the inventory line has developed, especially as compared to year end 2023. Where are we currently? And what do you expect or where do you see inventories at the end of this year? So these are the two question areas. Thank you.

Yves Müller: Thank you very much and good morning, Jürgen, thank you for the two questions. So clearly, you can see actually on the Macy’s expansion, you see two things. One is, actually, for the bulk spread, we are operating in the concession business. So this is more related to retail where we are growing. But overall, due to our 24/7 lifestyle image and the brand momentum that we have in the U.S., we are further gaining actually more doors with existing partners. This is true for Nordstrom (NYSE:). This is true for Dillards, and this is true for HUGO as well in Macy’s. So BOSS concession model, Google (NASDAQ:) and the wholesale model with Macy’s. So this is actually driving our wholesale performance, which has been fairly good in the Americas continent. And regarding the inventory position, I think overall, my first comment would be, clearly, there is a big focus on inventory management as a whole. We want to get the inventory to net sales ratio down strategically – the next 18 months to below 20%. So this is our clear target. But you always have to keep in mind that there is a kind of seasonality in our structure because we have now our winter merchandise in our books, which is more heavier in compares to summer. So this – it has a kind of seasonality effect at 30th of June. You always have, let’s say, in brackets, more valued items in comparison to year-end. So this is a kind of structural effect you see actually every year. So nothing major to call out. Everything is under control regarding inventories. NOS have decreased versus 2023 like we promised and the aging looks very healthy and it even has improved to prior year levels.

Jürgen Kolb: Okay. And with respect to the wholesale business, Germany, minus one, is there or has there been any impact from the department store issue that we had here?

Yves Müller: Department store issues, do you mean in terms of Galleria or…

Jürgen Kolb: Exactly, yes. Exactly.

Yves Müller: Yes, you see kind of effect there. But overall, you see that [indiscernible] and Galleria is somehow recovering from the lows. So I think this is the major reason for this.

Jürgen Kolb: Excellent. Got it, thanks guys.

Operator: The next question comes from Andreas Riemann from ODDO. Please go ahead.

Andreas Riemann: Yes, hello. Andreas here. Two questions around operating leverage. If – what is the sales growth that is needed to achieve operating leverage at present? And linked to that, when it comes to cost savings, is it mainly about taking out costs once? Or can you make the cost also more variable so that you lower the hurdle for operating leverage going forward. So as an example, thinking about maybe making costs for store personnel or full stores more variable. These would be my two questions. Thank you.

Yves Müller: Thank you very much and good morning, Andreas, for your two questions. So overall, kind of low single-digit increase overall is needed to generate the kind of operating leverage or even – this is even related to low even to a flat in this kind of scenario would generate a kind of operating leverage already due to the cost measurements that we are taking for the second half of the year. And of course, I mean, we are taking these kind of cost measurements, especially the sales environment in order to improve our pay-to-sales ratio. This is the ratio that we are looking at. But for the time being, we are really adjusting our sales staff to the reduced footfall that we experienced. You can imagine that in the retail environment, you have a fluctuation between 15% and 20% overall. This is actually industry standard that you’re seeing, and you can really use this kind of fluctuation to get your – to adjust your staffing accordingly. And of course, overall, we intend to do these kind of cost measurements to get the cost structure down, even in a kind of structural manner, so that we have bottom line improvements for the next years to come. So this will not only be related to 2024, but of course, we are always intended to optimize our structure itself so that these cost measurements that remains stable for the next years to come.

Andreas Riemann: Understood. Thanks.

Operator: Next question comes from Thomas Chauvet from Citi. Please go ahead.

Thomas Chauvet: Good morning, Yves, and Christian. Two questions, please. The first one on CapEx. The guidance was €300 million, €350 million. Initially, it’s not €300 million. Are you canceling or just postponing some projects? And if so, which ones? And for next year’s CapEx is €300 million also a good proxy. I think the CapEx guidance for the last couple of years of the CLAIM 5 plan was 6%, 7% of sales. So if we take consensus €4.5 billion upsells next year, that would be also €300 million CapEx. And secondly, on sourcing and the optimization of your sourcing platform, can you give us the share of freight between air, boats, road and anything else? And where do you currently see the biggest pressure on freight rates? You’ve called that earlier? Is it just air or is it all kind of transport mode? Thank you.

Yves Müller: Yes. Thank you very much, Thomas. Thank you very much for your two questions. So regarding CapEx, we originally guided between €300 million and €350 million, and we are now lowering it to €300 million. There are actually two major effects. One is clearly, what we call CapEx efficiency. So once we invest into our retail environment. We want to get the CapEx per square meters down by 15%. We have already started these kind of initiatives. So this will somehow reduce the CapEx spend by optimizing the CapEx per square meter spend. So this is one thing. And the second is that we will prioritize, like I said during my presentation, that we will focus on the best and halo stores. You have just seen that we opened a big flagship store in the Fashion City of Düsseldorf in Germany. So you see that we keep on investing, but that we will delay and reduce the investments in two tier cities, in smaller locations, what we call the good and better locations. So we’re going to reduce these kind of renovations because of the current market trends. For the time being, we are standing between 50% and 60% of the universe being remodeled. So we are making – overall, we are making progress and somehow investing into our distribution network overall. And in the outer years, like in 2026 and further following, you will see that the CapEx actually between 6% to 7% will decrease to 4% to 6% in this kind of range. So there is – CLAIM 5 has always been a kind of step-up of investments. We always call this out, and this will somehow normalize in the outer years to come. And then there was the question around the sourcing platform. Yes, I was actually – I was referring to the freight rates regarding ships. So they are, for the time being, elevated as everybody can see in the transportation index. So this is an effect, which is a headwind from the freight costs. But I said during the Q&A session, that they are more compensated by the fact that we are reducing the airfreight, so the overall ship mode reduce the air freight shares. So we were in the beginning of the 20s, and we are now in the low-teens. So we are reducing this kind of airfreight shares further and this is more than compensating these freight rates. And we are not yet done. We will be further reducing our air freight ship mode in the next quarters to come.

Thomas Chauvet: Thank you, Yves. So the remainder is what 80%, 90% is boat or…

Yves Müller: Yes, it’s – sometimes, for example, like Izmir, we have – of course, we have truck. So you can imagine because we source a lot of products are coming out of Europe. You know that 50% of the sourcing overall comes from Europe. And there, the majority out of Europe, I would say, 50% to 60% is truck and the rest is ship. And of course, from Asia, it’s more related to ship.

Thomas Chauvet: Very clear. Thank you. Thank you.

Operator: The next question comes from Martin Ben Rada from Goldman Sachs. Please go ahead.

Ben Rada Martin: Good morning, Yves and Christian. Thanks very much for the questions today. I just had two, please. First was just on wholesale. I was wondering if you can update us on how the order book is looking this after the second half of the year? I think back in May, you were speaking to a high single-digit growth rate. And then the second one is just on OpEx efficiencies into 2025. Is it right to think the level of growth in the second half, that 1% to 3% that you were talking to, is an all right baseline for how we should think about FY2025? Or do you expect some of the changes to have a bigger impact as we go through next year? Thank you.

Yves Müller: Thank you very much, Rada for your questions. So regarding wholesale, we were always speaking from a kind of very robust and solid order intake. So it’s in the range between mid to high-single digits that we are seeing for the next three order books, and this is why we are confident on the wholesale piece. And of course, I mean, all the cost measurements that we were taking will give us some tailwind for the next year. And of course, we are taking them to somehow improve our bottom line not only for the second half of the year, we want to make this a very successful year for – in 2024. But of course, we want to ensure that these measurements will be or have an effect over the next years to come as well.

Ben Rada Martin: Great. Thank you.

Christian Stöhr: Perfect. Thank you for your questions. And ladies and gentlemen, that completes our conference call for today. If you have any further questions, as always, please feel free to contact the Investor Relations team any time. Thank you for your participation. Have a great summer and speak soon. Thank you, and bye-bye.

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