Hugo Boss AG (BOSSY) Q1 2023 Earnings Call Transcript

Hugo Boss AG (OTCPK:BOSSY) Q1 2023 Earnings Conference Call May 4, 2023 5:00 AM ET

Company Participants

Christian Stoehr – Vice President of Investor Relations

Yves Mueller – Chief Financial Officer and Chief Operating Officer

Conference Call Participants

Grace Smalley – Morgan Stanley

Juergen Kolb – Kepler Cheuvreux

Manjari Dhar – RBC

Chiara Battistini – J.P. Morgan

Thomas Chauvet – Citi

Andreas Riemann – ODDO BHF

Michael Kuhn – Deutsche Bank

Rogerio Fujimori – Stifel

Antoine Belge – BNP Paribas Exane

Louise Singlehurst – Goldman Sachs

Thierry Cota – Societe Generale

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Hugo Boss First Quarter 2023 Results Call. On our customers’ request, this conference is being recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone lines.

I now hand you over to Christian Stoehr, Vice President of Investor Relations, who will lead you through this conference. Please go ahead.

Christian Stoehr

Good morning, everyone, and welcome to our first quarter 2023 financial results presentation. Today’s conference call will be hosted by Yves Mueller, 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. And I would also like to remind you that during the Q&A session, we kindly ask you to limit your questions to a maximum of two.

So without any further ado, let’s get started, and over to you, Yves.

Yves Mueller

Thank you, Christian, and also from my side, a warm welcome to all of you. Thanks for joining our call today, and thank you for your interest.

As you have taken notice from our press release this morning, at Hugo Boss, we look back on and an excellent start to the year. Building on last year’s remarkable momentum, we continued our strong financial and operational performance in the first quarter of 2023, posting significant top- and bottom-line improvements during the three-month period. Our powerful start to the year was once more driven by the continued rigorous execution of our CLAIM 5 strategy, which continue to provide substantial tailwinds for our brands.

With momentum further accelerating, revenues increased is strong 25% year-over-year to €968 million, making the three months period a record first quarter for Hugo Boss. Importantly, growth was once again broad-based in nature with double-digit sales increases across both brands as well as all regions and consumer touch points.

But also from a bottom-line perspective, we are very pleased with the development in the first quarter, driven by our superior top-line performance and despite further investments into our business, EBIT increased a strong 63% year-over-year, mounting up to €65 million. This, in turn, enabled us to improve our first quarter EBIT margin by 160 basis points to a level of 6.7%.

Equally, if not more importantly, our strong start to the year puts us in a position to raise our guidance for the full year 2023 already today, and thus at a comparable early stage. This reflects not only our stellar top- and bottom-line performance in the first quarter, but also the continued momentum of our brands, BOSS and HUGO as well as our confidence when it comes to the remainder of the year.

In this context, I’m particularly pleased that we aim to achieve our mid-term sales target of €4 billion as early as this year, and thus, two years faster than originally anticipated. This impressively demonstrates the power of CLAIM 5 and especially that of our brands. I will elaborate on all details of our lifted outlook towards the end of my presentation, but first, let’s take a closer look at our top-line performance in the first quarter.

With revenues up 25%, this translates into a strong growth of 44% when compared to pre-pandemic levels, representing yet another meaningful acceleration quarter-over-quarter. This is clear evidence that, despite certain market trends, we have not seen any signs of a broader slowdown in global consumer demand during the first quarter. Instead, this is yet another testament to the strength and resilience of our brands and the considerable progress achieved so far when it comes to executing our winning formula CLAIM 5.

Above all, and no different from last year, it is the relentless execution of our numerous brand, product and sales initiatives that continue to spur momentum for BOSS and HUGO, thereby boosting brand perception and relevance worldwide. So let’s dive a little deeper into the world of our brands.

Back in January, BOSS and HUGO launched the most recent spring summer collections, building on the tremendous success of our comprehensive branding refresh implemented exactly one year earlier. The global collection loans was once again accompanied by two star-studded brand campaigns, featuring yet another high-profile and diverse all-star cast, including superstars such as Naomi Campbell, Gigi Hadid, Maluma, and Bella Poarch. This, in turn, enabled both our brands to continue to drive brand heat on social media and thus win over younger generations.

Supported by our highly successful brand campaigns, our spring/summer collections were well received by consumers and wholesale partners alike. Similarly, they once again formed the basis for sustained strong and high-quality sell-through in the first quarter.

In addition to our global brand campaigns, numerous market and product initiatives continue to fuel brand heat in Q1 with the undisputed highlight being the BOSS See Now, Buy Now event in Miami. Top-patch celebrities, including Naomi Campbell, Pamela Anderson, Khaby Lame and DJ Khaled walked the runway with major influences ensured impactful digital traction with a particular emphasis on Instagram and TikTok.

Overall, the show was streamed by around 10 million BOSS fans around the globe, and — on hugoboss.com customers from more than 60 markets worldwide were able to instantly shop selected items from the fashion event.

Following these achievements, both our brands continued their double-digit growth trajectory also in the first quarter. Supported by robust double-digit increases across all wearing occasions. Sales were up 23% for BOSS Menswear, up 28% for BOSS wear and up 31% for HUGO.

Let’s now move over to our channels where growth in Q1 was once again broad-based in nature with double-digit sales improvements across all consumer touch points.

Starting with our digital business, which successfully continued its double-digit growth trajectory, with sales up 22%, reflecting broad-based momentum across all online touch points. Our digital business continued to resist rather restrained market trends. In particular, revenues generated via our digital flagship hugoboss.com expanded noticeably, up 34% versus last year, supported by the successful relaunch of our HUGO BOSS app in February.

Moving over to our brick-and-mortar business, which also looks back at an excellent start to the year. This is reflected by a very robust year-on-year growth of 26% in both physical retail and physical wholesale, each representing a further acceleration on a four-year stack basis. Across all regions, our brick-and-mortar retail business recorded double-digit revenue improvements year-over-year. This performance continued to be driven by the strength of our brands, leading to a strong uptick in traffic, as well as further improvements in store productivity.

In physical wholesale, on the other hand, we continue to enjoy strong demand from partners all around the globe, leading to broad-based growth across regions. That also includes important wholesale markets such as Germany and the U.S., where we continue to enjoy healthy demand from our partners.

Speaking about the U.S., and thus moving on to our regions, we are all the more encouraged that the overall momentum in the Americas further accelerated in the first quarter, supported by significant double-digit sales increases across markets, revenues in the Americas were up 38% year-over-year. This translated into a four-year stack growth of 60%, reflecting a strong uptick of 15 percentage points as compared to the final quarter of 2022.

In the U.S. market, sales expanded by 31% year-over-year, supported by double-digit revenue improvements across all channels. Most importantly, and in contrast to some other industry players and certain macroeconomic indicators, we were able to maintain our underlying momentum throughout the entire first quarter, as we have not witnessed any signs of regional slowdown in consumer demand. And while trends were similar in Canada, we also continued our outstanding momentum in Latin America as reflected by high double-digit sales growth.

Moving over to EMEA, where sales increased by 21% year-over-year, driven by ongoing robust demand across all consumer touch points. Also here, four-year stack growth accelerated quarter-over-quarter, albeit to a little extent. Momentum remained very robust in key markets such as Germany and France recording revenue growth of 28% and 17%, respectively. At the same time, sales in the U.K. came in at the prior-year level, being up against a particularly strong comparison base from the prior-year period. Importantly, when compared to pre-pandemic levels, revenues in the U.K. were up 33% and thus even slightly outperformed in Germany and France. To finish on EMEA, also in the Middle East, we continued to enjoy exceptionally strong momentum throughout Q1 as reflected by significant double-digit growth year-over-year.

And finally, on Asia Pacific, where we successfully returned to double-digit growth. Sales came in 31% above the prior-year level, driven by both sustained double-digit improvements in Southeast Asia and Pacific, including an outstanding performance in Japan as well as a significant uptick in consumer sentiment in China following the lifting of COVID-19 related restrictions. As a result, sales in Greater China expanded 25% year-over-year and also returned to double-digit growth when it compared to pre-pandemic levels with strong support coming from both Hong Kong and Macau.

With this, let’s now move on to the remaining P&L items.

Starting with our gross margin, which totaled 61.4% in Q1, representing a slight decline of 30 basis points compared to the first quarter 2022. This development is largely attributable to some negative ForEx effect in light of the strengthening of the U.S. dollar versus the euro year-over-year. At the same time, in Q1, we succeeded in broadly compensating for ongoing elevated sourcing costs, thanks to our pricing initiative, which we had implemented in the second half of last year.

Speaking about the gross margin, let me also reiterate that the underlying momentum in our full-price business remained strong throughout the first quarter as we were able to successfully continue our high-quality top-line growth. In particular, thanks to our regained brand power, our business has not been impacted by any signs of elevated promotional activity in Q1.

Moving over to operating expenses, which increased 21%, largely reflecting ongoing investments into the business as part of CLAIM 5. As a percentage of sales, however, total operating expenses decreased 180 basis points to a level of 54.6%.

Selling and marketing expenses increased 20%, mainly due to an increase in variable rental, payroll and fulfillment expenses. Besides that, we also stepped up our marketing investments up 12% year-over-year, driven by our comprehensive brand campaigns and our successful Miami event in mid-March. Consequently, at 9.3% of group sales, marketing spending in Q1 came in somewhat above our run rate for the full year, which we continue to participate being broadly in line with last year’s level of just under 8%. And while selling expenses in brick-and-mortar retail increased by 16% in Q1, as a percentage of sales, they improved further to a level of 20.1%, supporting by our ongoing initiatives to optimize our store network.

To conclude on the operating expenses, administration expenses increased 24%, largely attributable to higher payroll and digital investments. Altogether, and spurred by the strong top-line performance in the first quarter, we recorded a significant increase in EBIT, up 63% to a level of €65 million, thereby more than compensating for the slight decline in gross margin as well as the aforementioned investments into our business. This translates into an EBIT margin expansion of 160 basis points to a level of 6.7%.

And last but not least, also net income attributable to shareholders increased noticeably up 44% to €35 million.

Let’s now turn to the balance sheet, starting with inventories, which increased 66% currency adjusters. In this context, let me clearly emphasize once again that we continue to feel comfortable with our inventory position.

First of all, in light of our excellent start off to the year in 2023 and our confidence for the remainder of the year, our inventory position lays an important foundation to continue our strong top-line momentum across channels. This also includes serving robust wholesale order books for the second half of the year.

Secondly, we remain pleased with the overall composition and quality of our inventories as the aging structure has improved year-over-year. As already flagged back in March, the vast majority of our inventories either related to core merchandise that can be sold over several future seasons or fresh merchandise for current or upcoming collections.

And thirdly, and in the light of most recent easing of global supply chain disruptions as well as our measures to reduce core merchandise buy-in for the remainder of the year, we will bring down inventories as a percentage of sales as the year progresses.

Consequently, we continue to anticipate a gradual normalization of inventories by the end of fiscal year 2023.

This brings me to trade net working capital with the moving average of the last four quarters, summing up to 16.4% of group sales, thus moderately above the prior year level. In this context, the higher inventory position and increase in trade payables were partly offset by higher trade payables, reflecting the ongoing strong reception of our supplier financing program. Also for the full year, we continue to expect our trade net working capital ratio to modestly increase to a level of around 17%, fully in line with our midterm range — target range of between 16% and 19% as laid out in CLAIM 5.

Moving on to capital expenditure, which more than doubled as compared to last year, totaling €42 million. In line with our outlook for the full year, we have accelerated investments in our global store network and in digital to support the successful execution of CLAIM 5 also going [Technical Difficulty].

Operator

Please remain on the line, the conference will resume shortly.

Yves Mueller

Consequently, regarding our top-line, we now forecast group revenues in fiscal year 2023 to increase by around 10% in reported terms. This means nothing less than making 2023 yet another record-breaking year for our company as we are anticipating achieving €4 billion in revenues already this year. Importantly, and fully in line with CLAIM 5 growth will once again be broad-based in nature with both brands, all regions and all channels set to contribute.

Based on the anticipated top-line growth, we are now forecasting EBIT to increase with a range of 10% and 20% to a level of between €370 million and €400 million in fiscal year 2023. Ongoing investments in our products, brands and digital expertise are set to be more than offset by an at least stable gross margin development as well as further efficiency gains, in particular when it comes to our brick-and-mortar retail store network.

Ladies and gentlemen, following our strong start to the year, we remain all the more confident in the continued momentum of our CLAIM 5 growth strategy. In particular, we will continue to do our utmost in delivering sustainable revenue growth and operating leverage to support our top- and bottom-line ambitions also going forward.

On June 14 and 15, we will therefore present an update on CLAIM 5 and our mid-term financial ambition as part of this year’s Investor Day. We are already very much looking forward to welcoming many of you in person at our headquarters here in Metzingen, as our Investor Day will also include the guided tour of our newly refurbished BOSS and HUGO showrooms.

Ladies and gentlemen, this concludes my remarks for today. We are now very happy to take your questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] Our first question comes from the line of Grace Smalley from Morgan Stanley. Your line is open. Please ask your question.

Grace Smalley

Hi, good morning. Thank you for taking my questions. The first one would just be on order books. So given your increased revenue guidance for the year, are you able to quantify the trends you’re seeing in your order book? I think you called out robust trends, but if you’re able to quantify it, that would be very helpful. And any forward-looking indicators that are giving you the confidence in the 10% revenue growth for this year?

And then secondly, on inventories, given the elevated inventory growth in Q1, are you able to be more specific on what you expect in terms of that gradual normalization in inventories as we go forward. So what should we expect from inventory growth in Q2? And also what should this be by the time we exit the year? And then beyond your own inventories, could you also comment on the state of inventories in the trade at your wholesale partners as well, please? Thank you.

Yves Mueller

Good morning, Grace. Thank you very much for your questions. So first of all, regarding the order book wholesale, for the time being, we are now actually in these days, taking our last collection or sell-in. So it’s very early to call this out. But if you take the collections that have been concluded, we really saw very, very strong demand.

We are very happy with our wholesale partners, and we continue to enjoy very good growth. We see more partners increasing their orders. And this gives me actually a very good indication that the sell-out at the current wholesale partners are extremely well. This actually goes to your third question already. So the sales are very good. We are clearly gaining market shares versus our competition, and we are very happy with our order book performance.

Regarding inventories, I think we laid it out pretty explicitly already back in March, we said that in the first half of the year that the inventories will still increase. We have seen now that the supply chain disruption has normalized, and we will see that the inventory level will decrease starting actually in Q3 of this year. And we want to exit the year, this year slightly below the levels of 2022.

Grace Smalley

Great. Thank you.

Operator

Thank you very much. The next question comes from the line of Juergen Kolb from Kepler Cheuvreux. Your line is open. Please ask your question.

Juergen Kolb

Good morning, guys. Thanks very much. Two of those. First one, about your new guidance, how much of the guidance increase on the EBIT line is due to the sales growth — the higher sales growth that you’re now forecasting, or and how much comes from maybe further transparency in terms of logistics costs or raw material prices where you have a little bit better transparency until the rest of the year?

And the second one is maybe a little bit about current trading. Obviously, you’re sounding very optimistic and positive about the momentum. Just wondering if you could maybe provide us with some additional observations that you have by the individual markets whole April or so the first trading in Q2 has developed? Thank you very much.

Yves Mueller

Good morning, Juergen. Thank you very much for your questions, and congratulations to your final in Berlin. I start with the second question, current trading. So, we are very happy with the current performance, how we started into the second half of this year. We see no slowdown in consumer demand and no change actually in consumer behavior. So we are very confident in how we started into Q2. I think we have a very strong performance in the Asia Pacific region because of the reopening of China. We must not ignore that. Of course, the comparison base last year was a little bit low because there were lockdowns in China, especially in Shanghai, as you might recall. So the growth rates are very high. But even from an absolute point of view, China is really back, and we enjoy fully the reopening stories. And for the other regions, we continue the strong demand that we have seen.

Regarding our new guidance in terms of profitability, I think what is quite visible is that we will do another price increase now for the pre-fall collection that will be executed starting in May somehow to compensate the increased sourcing costs. This is one point, but we actually — we are pretty optimistic for the second half of the year when it comes to gross margin improvement. And I think this will drive the profitability as well. And we — as we have experienced already in Q1, we have seen operating leverage, especially in retail brick-and-mortar business, where we always intended to go down. And I think this is materializing. And with this operating leverage and gross margin improvements, we are very much committed to improve our profitability this year. As you might recall, we improved our EBIT margin last year by 100 basis points to 9.2%. And as we laid out in our guidance this year, we are clearly committed to increase our operating margin this year as well.

Juergen Kolb

Very good. Awesome. Thank you so much guys.

Yves Mueller

Thank you.

Operator

Thank you. The next question comes from Manjari Dhar from RBC. Your line is open. Please ask your question.

Manjari Dhar

Hey, guys. Thanks for taking my question. I was just wondering, could you perhaps quantify the — some of the major moving parts for gross margin across Q1?

And secondly, I was wondering if you could give a little bit more color on the FX impact to financial expenses and which major currencies that was? Thank you.

Yves Mueller

Yes. So, on the gross margin, we tried to simplify this because we were saying actually that if you take all the things into account, the slight decline of the 30 basis points was mainly related to ForEx due to the stronger dollar versus euro. But this will convert actually with the beginning of Q2 when it comes to ForEx. So this will help us. Plus, actually, from a freight cost perspective, this will help us starting in the second half of this year. So in all other things, I mean, we have the price increases that covers more or less the sourcing cost increases because of inflation. So this was more or less neutralized if you come off with these, let’s say, moving parts.

And your second question was related to the financial expenses. Yes, first of all, you have to keep in mind that in our financial expenses, the interest is increasing because of the increased interest rates overall because of the discounting of our contingent liabilities of the lease agreement. This is one part. And the other currency that influences the major factors coming from the ruble. So it should be more — this is on the financial income. So what you should expect going forward is that the interest piece will remain on elevated levels like we have seen already in Q1 because the interest rates are high or even increasing.

Manjari Dhar

Great. Thank you very much.

Operator

Thank you. The next question comes from the line of Chiara Battistini from J.P. Morgan. Your line is open. Please ask your question.

Chiara Battistini

Hi. Thank you for taking my question. The first one is on pricing versus volumes. If you could remind us on — in Q1, how to think — what the contribution was basically from pricing versus mix versus volume, or any indication that could help us in that direction? And how to think about that for the full year as well?

And the second question is on your full year guidance for sales growth and notably what assumptions you have embedded for the American market for the year, please, given the step change in growth that you saw in Q1? Thank you.

Yves Mueller

So regarding prices in Q1, as a reminder, so we increased our prices back in summer 2022 at a mid-single-digit rate for the full price collection. And we will do another price increase now for the pre-fall collection of ’23, which is the sales for actually in May. So if I take these things into account, I would assume that the price effect in Q1 has a kind of low single-digit effect. It will be mid-single digit starting actually from the, let’s say, simplified from the second half of this year. So these are the effects that we are seeing.

And regarding the Americas, we expect — actually, Christian, should we say it?

Christian Stoehr

You can give some indications, obviously, as you normally would.

Yves Mueller

So, we are saying that we are increasing our performance in the Americas at high-teens to low — to high-single digit to low-teens growth.

Chiara Battistini

Sorry. So the new assumption is low-teens growth for Americas?

Yves Mueller

We talk about the Americas as a whole, there, we are seeing high-single digit, low-teens.

Chiara Battistini

Okay, perfect. Thank you.

Yves Mueller

High-single digit to low-teens, Chiara, yeah, so…

Chiara Battistini

Very clear. Thank you very much.

Operator

Thank you. The next question comes from the line of Thomas Chauvet from Citi. Your line is open. Please ask your question.

Thomas Chauvet

Good morning, Yves and Christian. Firstly, just confirming what you said on the April trends, are you saying that at group level, this is in line with the strong double-digit growth you’ve seen in Q1? And if so, the 10% guidance for the year implies a mid- to high-single digit year-on-year growth in Q2, Q3, Q4, and also a sharp slowdown in the four-year stack. So is your scenario that effectively BOSS Wear start to like many other brands in the broader space to start to suffer in some geographies from macro headwind? Because that 10% guidance otherwise looks pretty low unless you really expect that sharp slowdown on your 2% [indiscernible] Q2, Q3, Q4 year-on-year.

And secondly, on your retail productivity, I suppose, you had a nice improvement in store productivity this quarter as you had also a bit last year. Can you talk about the store optimization program? And whether you still see 400 stores at the end of ’25 as the right number, so 70, 80 stores below current levels, which would imply a bit of a faster pace of closure, I suppose? Thank you.

Yves Mueller

So, regarding the net sales assumptions, so first of all, I would like to confirm what I said is that the current trading really looks very strong. We are very happy with the current performance. This is point one. And point two is we are factoring in still all these macroeconomic uncertainties that we see and geopolitical tensions. So this is factored in, in our guidance as well. If they materialize, then we are on the safe side, if not, it’s good. And on the other side, you have to see that, of course, the comparison base is increasing as well. So we had a very, very strong performance last year. So I think it’s — that the growth rates will somehow normalize in the outer quarters.

When it comes to the store optimization, I mean, we are standing now at 472 freestanding stores. We are continuing our store optimization program. And actually, it’s visible in our P&L that we clearly made progress quarter-over-quarter in our brick-and-mortar retail cost in percentage of groups. So we are very happy actually with the progress that we are making. But overall, strategically, in terms of the number of freestanding stores, we will give you an update on our Capital Market Day on the 40s and 50s of [indiscernible] growth we have seen, actually, as you can imagine, a very, very strong store productivity improvements last year and now in the first quarter with 18%. We are now standing at a euro per square meter of 12,200. So that’s a very strong performance, better than we originally expected. And of course, this has some effect of our store network from our mid-term view as well. But we will give you a very diligent update on the Capital Markets Day.

Thomas Chauvet

Thank you.

Yves Mueller

Thank you.

Operator

Thank you. The next question comes from the line of Andreas Riemann from ODDO BHF. Your line is open. Please ask your question.

Andreas Riemann

Yes, good morning. Andreas Riemann here. A question on Camel. So, how was actually the new Camel line doing? And then how many regions are you selling Camel? And what is the plan going forward when it comes to future launches?

And then on the full price business, of course, the full price business supported the gross margin 22% and also in Q1, I guess. So where are you in this journey? Are you at a certain limit now, which is hard to exceed or are you halfway through? So any insight here would be appreciated.

Yves Mueller

Yes. So regarding BOSS Camel, to put everybody on the same page, we started with this collection fall/winter 2022. So actually, we start with BOSS Camel, three collections ago. And actually, we are continuously improving this collection. It sells extremely well in the Asian markets, but we are also selling it in EMEA and in Americas. So BOSS Camel is a perfect bridge to affordable luxury with the — and the collection resonates really well. We are improving collection by collection, and we are gaining more traction on BOSS Camel.

And regarding full price, we were — we improved our full price sales through last year. We were at Q1, we were more or less on par to last year’s level. So we are very happy with our sell-through so far. But on the other side, you can always improve your ratio of full price sell-throughs. And I think there are some opportunities for us to further improve in the next quarters or in the next years to come.

Andreas Riemann

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Michael Kuhn from Deutsche Bank. Your line is open. Please ask your question.

Michael Kuhn

Yeah, good morning, everyone. Also two from my side. Firstly, on Asia and specifically China, 25% growth on relatively low comps, so improvement, but still, I would say, not great. Do you see further improving momentum in that region? And would you say that the brand relaunch in China is as successful as in other regions?

And then secondly, on free cash flow, obviously, quite negative in the first quarter, including working capital burden here. With the improvement later in the year, what level of free cash flow should we expect you to generate in 2023? Thank you.

Yves Mueller

So, Michael, good morning. Thank you very much for your questions. Actually, I disagree with your finding that our performance in China is relatively bad. I think 25% is a very strong performance because in Q1, we still had — the stores were still open. The lockdowns actually started in Q2. So if you even compare this to pre-pandemic levels or with the best year in China, which was ’21…

Christian Stoehr

Hello, Michael, can you hear us? Operator, can you — are we still in the line? Can you hear us?

Operator

Yes, you are still connected.

Christian Stoehr

Okay. Well, I think — yes, sorry, maybe we continue to answer Michael’s question. We realized Michael got kicked out of the conference call, but we will answer the question for the audience, and we will ensure that afterwards, I will get back to Michael, and I will repeat the same answer. So over to you, Yves, again. And sorry for Michael, but we’ll follow up with him.

Yves Mueller

So overall, we are actually very happy with our performance at Greater China. We were growing 25% in Greater China. This is it compared to the best year, which was in 21% growth — double-digit growth on an actually similar basis. There’s also no space growth. So we actually, we are very happy and how we started in Q2, we see tremendous progress. And even now in the first days of this May holidays, we see very, very strong results in China for our BOSS brand.

And regarding free cash flow, I think the free cash flow generation will be coming, especially in the second half of the year where we are well aware of our trade net working capital will develop. We’re going to invest €200 million to €250 million in terms of capital expenses, and we are well aware of the fact that we will achieve what we have originally guided for our free cash flow.

Operator

Okay. We’ll move on to the next question, which comes from the line of Rogerio Fujimori from Stifel. Your line is open. Please ask your question.

Rogerio Fujimori

Hi, good morning. It’s Rogerio here from Stifel. I have two questions. The first one, I think you flagged that the promotional activity levels, I think, were down year-on-year in Q1, given the strong momentum of the brand. Was there any change in April? And any change on how you are budgeting for the balance of the year, given what you see around your competition? Or does your EBIT guidance still has a buffer for higher promotional activity in H2?

And then I was just wondering about if you could comment about your 34% growth in retail in brick-and-mortar in Americas, which is obviously well ahead of anything that everything that we see across the sector. So if you could talk a little bit about the drivers, it would be great. Thank you.

Yves Mueller

So first I’ll start with the second question, U.S. So, we are actually very, very happy about our performance in the U.S. I think we still have to see that we have tremendous opportunity and potential in the U.S. As you might recall, our net sales in the last years, we are almost on the same level like in comparison to U.K. So if you take the population times six, you can see that there is much more room, much more opportunity in the U.S. I think the measurements that we did in order to show to the consumer that we have much more to offer. So what I’m saying is our 24/7 lifestyle brand image, which is actually more visible or which was more visible internationally, it’s a much more bigger step-up for the U.S., where we were perceived as a formal or suit brand.

And I think with the introduction of sportswear products I think we have improved the perception of our brand. We were underlying this with a lot of collaborations, collaboration with NBA. We are now doing the collaboration with NFL, which has just recently been announced, which is actually the biggest sport in the United States. This is really helping us to gain traction, especially with the younger consumer. So we are getting younger consumers into our CRM database. We are retargeted them. And actually, our customer base is nicely growing in the U.S. And don’t underestimate the celebrities that we are taking. We took the deliberate decision to go to Miami, which is very vibrant for the time being in the U.S. So these are clear symbols as well to the American consumer that we want to invest in the United States and that we still see a lot of growth potential.

And regarding promotional activity, so far, like I said, in Q1, it was on par on the level compared to 2022. We really enjoy nice brand momentum. We don’t see for the time being in April or May, the promotional activities is increasing. So for the time being, we are overall happy with the current developments.

Rogerio Fujimori

And just to confirm that your gross margin guidance includes a buffer for higher promotion activity in H2?

Yves Mueller

I think we don’t comment this, Rogerio.

Rogerio Fujimori

Okay, understood. Thank you.

Operator

Thank you. Our next question comes from the line of Antoine Belge from BNP Paribas Exane. Your line is open. Please ask your question.

Antoine Belge

Yes, hi, good morning to all of you. Two questions. First of all, is it possible to have a bit of a granularity on the different key markets in — within Europe?

And my second question relates to the relationship between the margins on the top-line. So I mean I’m going to run the number here, €4 billion in sales and €400 million in EBIT at 10% margin. So, in theory, you should average 12% with €4 billion. So is it all due to supply chain costs and freight inflation, et cetera? Or is it more that you’re thinking about the relationship between the margins on the top-line has changed and you thought that it was worse since the top-line was coming up, of course, well above your expectation that it was more investing worth investing a bit more?

And just a technical question at the Capital Market Day. Are you going just to update 2025 targets? Or since we are in 2023, are you going to go give target of ’27 or ’28? Thank you.

Yves Mueller

So perhaps starting with the Capital Markets Day, I think I won’t comment this. Actually, Antoine, I hope you’re not angry about this, but please stay tuned. It’s stake here is what we’re going to do for the Capital Markets Day.

Then going back to your first question regarding EMEA performance for more like a lower level, I think if you have discussed this. We had a very strong performance in Germany, which was growing 28%, very strong performance in France, plus 17%, and excellent performance actually in the Middle East being up high double-digit numbers. So these were the extremely strong countries that we have seen. I’ve noted during my presentation that U.K. was on par. But actually, it was due to the high comparison base last year. If I compare this actually pre-pandemic, the U.K. was growing 33% even above the level of Germany and France. So I would really say that in Europe that the performance is really overall broad-based with different comparison basis.

And regarding €4 billion and 10%, I think you gave already one half of the answer, which is clearly the freight cost increased sourcing and the pricing that was driving this more or less. And the other issue is clearly that the optimization of the store network, of course, takes some time. You know that we cannot touch all the freestanding stores at one time. It will take some time because we can only touch 100 to 120 stores each year. So there is a certain plan behind this. One, the rental contracts are expiring. One, actually, the optimization kicks in. And this is, let’s say, now the €4 billion are two years earlier, but we are still on the way to improve our operating margin going forward, especially when it comes to retail.

Antoine Belge

Thank you very much.

Yves Mueller

Thank you, Antoine.

Operator

Thank you. Our next question comes from the line of Louise Singlehurst from Goldman Sachs. Your line is open. Please ask your question.

Louise Singlehurst

Hi, good morning, Yves and Christian. Thank you for taking my questions. I wondered if we could just go back to the overall environment. You’ve obviously had a cracking start to the year. I’m just trying to make sure we’re not missing anything or any color that you can give us thinking about traffic conversion rates, how that might differ across the regions, very clear messaging that you haven’t seen any change on broader trends. But I’m just wondering if there’s anything in there to call out between traffic and conversion across the regions?

And then my second question, as you look across retail and wholesale, obviously, we’ve seen growth rates very comparable, up 26% in the both for Q1. Is there anything in the wholesale number? I know Yves, you were talking about the huge opportunity that you have in the U.S., but can you help us understand the opportunity for new doors in the U.S. for the wholesale channel as well? And was there much of an impact of new space in Q1? Thank you.

Yves Mueller

So regarding — if you take the retail environment and if you want to somehow divide them, our growth of 26% overall in retail, as I talked about the store productivity, which was on 80%. And clearly, the majority was clearly driven by higher traffic over the different regions. And I think a good driver is also the average price and the net sales per transaction is actually going up because we present us as a 24/7 lifestyle brand, and it’s not only the price, but more units that we are selling and from — because we want — we are selling a look from head to toe, and this is actually improving our ticket as well that we are selling. So the average ticket that we are selling now on a global basis sits at €260. So I think it’s a big ticket overall in premium — upper premium sector. And this is really driving as well our growth rate.

Regarding U.S. market and regarding the possibility for further doors, you have to be aware that we do a very good business actually with Macy’s and the concession model. So it’s sitting in the retail environment. We are gaining 20 doors collection over collection. They are very happy with our performance. And there, we are getting more doors. You know perhaps that Macy’s has 600 doors. We won’t be — we don’t go in every door. As you know, we are now at 80. So — but we are still expanding to, I would say, between Tier 1 and Tier 2 cities where we can explore further growth. And the same is actually true for big partners like Nordstrom as well where we still can expand in our doors coming up with more business lines, for example, BOSS Camel or expanding with BOSS Women’s Wear, this gives us the opportunity to grow the business in wholesale in the U.S. as well.

Louise Singlehurst

Thank you very much.

Operator

Thank you. Our next question comes from the line of Thierry Cota from Societe Generale. Your line is open. Please ask your question.

Thierry Cota

Yes, thank you. Good morning, Yves and Christian. Two follow-up questions for me. First on the balance sheet, just to make sure I fully understood. So you expect inventories to be down in absolute number at year-end, with working capping up 2 percentage points as a percentage of sales. Well inventories should be down as a percentage of sales in that situation. Is it correct to assume that all the rise will come from less favorable payables and receivable situation?

And secondly, back on revenues and on the stores, could you give us the percentage of stores which were refurbished as of the end of Q1? And now that supposedly started over a year ago now, do you have a measure of increased sales per store sales densities, upper refurbishment versus before or versus neighboring stores that would not be refurbished at this point? Thank you.

Yves Mueller

So first of all, I’ll take your first question, Thierry. First of all, you are right that we expect that the inventory level in terms — in absolute terms will be lower than on the December 31, 2022. This is point one. But on the second side of your assumptions, you are wrong because for the trade networking capital to net sales, which we are guiding at around 17%, when you take the quarter — the average quarter of the last — if you take the average of the last four quarters and divide despite the net sales, so you have to include also the trade net working capital sitting at the end of the quarter, Q1, Q2 and Q3. So — and since they are elevated, this will drive somehow the average.

And regarding the retail renovations, you could say that by the end of Q1, we have now around one-third of our universe is now being new or renovated. And I would rather give a kind of qualitative statement because we will be more explicit on the Capital Markets Day there, but we are actually very happy once we remodel the store, we see actually a decent increase in productivity after the renovation.

Thierry Cota

Is it in line with your expectation? Or is it above? Or is it below? Any comment on that?

Yves Mueller

It’s above our expectation.

Thierry Cota

It’s above. Okay.

Yves Mueller

It’s above our expectation, which is very good.

Thierry Cota

Great. Thank you.

Yves Mueller

Thank you.

Operator

Thank you very much. We have no further questions at this time. Please continue.

Christian Stoehr

Yes. Thank you very much, ladies and gentlemen. Thank you for your interest. And I do apologize also on Yves behalf for the technical difficulties we experienced today. Sorry, Michael, and that you got kicked out. And we also understand that you were missing like 40 seconds of our speech, which we will provide to you right after this call, so you will not miss any comments that we made — on any last comments we made on CapEx, which was basically more on the outlook, which we reconfirmed on CapEx, a bit of free cash flow comments that you missed and obviously, our introductionary outlook comments for the year, but you know what the outlook looks like. But in any case, you would get our speech, the full speech right after this call, so you can read into it, and you’ll have all the content available.

So once again, sorry for the technical difficulties. It’s not going to happen again. I can promise you, and we look forward to staying in touch with you. Any questions, please reach out to the IR team, and we’re very happy to assist you during the course of this afternoon. Thank you very much, and goodbye.