Mark Langer - Chairman and CEO

Zuzanna Pusz - Berenberg Thomas Chauvet - Citi Elena Mariani - Morgan Stanley John Guy - MainFirst Piral Dadhania - RBC Capital Markets Jurgen Kolb - Kepler Cheuvreux Andreas Inderst - Macquarie

Thank you very much, and good afternoon, ladies and gentlemen. Welcome to our Third Quarter Earnings Conference Call.

I'll focus my presentation on our most recent financial performance. However, before that, let me tie in with our Investor Day in August and discuss the number of initiatives meant to bring life to the changes to our brand strategy.

In the last few months, we highlighted the new BOSS and HUGO collections in a number of high-profile events and campaigns in order to build awareness and customer understanding for the refined positioning of the two brands. Starting with our BOSS Menswear business, we followed up on the statement we made with our presentation at the New York Fashion Week in July, with a global social media campaign.

Under the headline of Own Your Journey Formula One world champion, Lewis Hamilton; and actor, James Marsden, presented their favorite pieces from the current collection. BOSS Womenswear was one of the hot spotlights at the Berlin Fashion Week, where we unveiled our new gallery collection at the Berliner Mode Salon In cooperation with Christiane Arp, editor-in-chief of BOSS Germany, we curated a spectacular presentation in the former St.

Agnes Church which received a lot of media attention. Finally, HUGO built on the momentum it had created with its June fashion show in Florence, with a visit to Berlin, where the visitors of the Bread & Butter by Zalando event, had the opportunity to experience a new HUGO firsthand.

Following the idea of see now buy now, consumers were able to purchase online all-stars presented during the fashion show immediately after the event. In terms of financial performance, we made good progress in the last three months too.

Sales momentum improved further, in particular, on retail. The regions, Europe and China recorded healthy increases but also, our U.S.

on retail business returned to same-store sales growth in the quarter. As a result, third quarter group sales increased by 3%, excluding currency effects.

Impacted by the appreciation of the euro against almost all major currencies, revenues were up just 1% in reported terms. By region, Europe build on the progress made in the second quarter.

Third quarter sales were up 4% in euro terms and 5% on a currency-adjusted basis, with similar growth across on retail and wholesale. In on retail, performance in the region improved sequentially compared to the second quarter levels.

Supported by more favorable industry conditions in August and September, trends in the central and southern markets picked up compared to earlier in the year and also the UK continued to do very well. UK sales were up 9% in currency-adjusted terms, highlighting the strength of our local business as well as good demand from tourists.

The latter, however, weakened towards the end of the quarter. Sales in Germany and the Benelux markets grew by 5% and 4%, respectively.

France recovered from the decline in the second quarter and was up slightly despite ongoing challenges in wholesale. In the Americas, business was down 8% in euro terms and 4% on a currency-adjusted basis.

Good growth in Latin America and Canada only partly compensated for lower sales in the U.S. In the U.S., our business declined 9% on a currency-adjusted basis because of double-digit decreases in the wholesale segment.

The sales decline in wholesale continues to reflect the strategic reduction of off-price business as the difficult market environment as well as the shift of demand for cold weather product into the fourth quarter. Nonetheless, we continue to be on track for our guidance of a high single-digit sales decline in the U.S.

wholesale in 2017, so we expect performance to be better again already in the fourth quarter. The U.S.

on retail, the positive trends from previous quarters continued. Comp store sales growth was driven by strong double-digit increases in online as well as higher revenues in freestanding stores, which outperformed outlets in the quarter.

Improvement in retail management and the expansion of casualwear and athleisure in our own stores even before the launch of our new collection for Spring/Summer 2018 played a key role in this respect. Sales in Asia were down 2% in euro terms, but 4% above prior year levels in local currencies.

China remains the region's growth engine despite the slight moderation of trends against an increasingly difficult prior year comparison base. Sales in this market were 5% above prior year levels, driven by good growth in Mainland China, partially offset by weaker performance in Hong Kong and Macau.

Looking at the other major markets of the region, sales in Japan increased at a double-digit rate in currency-adjusted terms, supported by strong tourist demand in the outlet channel, in particular. Australia was flat, impacted by traffic declines in on retail and a weak wholesale business.

Group wise, on retail sales increased 3% in euro terms and 6% in local currencies in the third quarter. On a comp store basis, the on retail channel was up almost 5%, a further improvement compared to the second quarter levels despite a slightly more difficult comparison base.

As mentioned in my regional comments, Europe and the Americas made good progress compared to earlier in the year and recorded mid-single-digit comp store sales increases in the quarter. The growth rate in Asia was slightly below the other two regions.

In other regions, better conversion rates and higher volume drove growth. Average spending prices declined slightly.

This pattern is very much in line with the expectations, underlying the changes in brand strategy. We are convinced that a stronger focus on casualwear and athleisure and a better balance offer, ranging from upper premium to luxury price points, will drive volume growth and more than offset lower average selling prices following the mix changes I just highlighted.

Our retail performance, directly operated stores were the best-performing channel on a comp store basis. Growth rates in online and the outlet channel were slightly lower.

The online business was up 6% in the third quarter, further benefiting from the improvement measures we had started applying earlier in the year. The offers better gear to the specific needs of our online customers now, and we have made good progress in search engine optimization.

In addition, enhanced CRM capabilities allow us to reach out to consumers in increasingly targeted way. Looking ahead, we are working on further improvements of the hugoboss.com site that will go live in the first quarter of next year.

While the overall look and feel is not going to change much, we'll adjust navigation and site structure to improve usability and to create two separate brand worlds for BOSS and HUGO. Over the next few weeks, we will also implement a simplified checkout process as well as launch an Android version of our mobile app, complimenting the existing iOS offer.

Beyond growing our e-com business, we have also progressed with the integration of omnichannel elements in physical stores, a key consideration in the development of our new store concepts. We have now started renovating the first few stores, with a design we presented to you during the Investor Day in August.

Over the course of the last few weeks, we reopened our stores in Geneva and Birmingham, both now outfitted with a new store concept. Next on the list will be Dubai and where we will complete the refurbishment of the former franchise stores in Dubai's Mall shortly.

Based on a detailed analysis of the performance of these remodeled stores, we will deploy the new concept in all openings and refurbishments planned in 2018. In the third quarter, we opened three new freestanding stores, all located in Asia.

Year-to-date, however, the number of our freestanding stores declined by a net 7 to 435 at the end of September. Most of the closures were decided when we reviewed our network in Summer 2016.

By the end of this year, we'll have discontinued operations in 15 of the 20 stores, we had designated for closures in total. For the remaining five stores, we successfully negotiated more attractive rent terms and decided on far-reaching changes to the operating model.

In two flagship stores in Greater China, for example, we reduced our floor space by more than half by giving up an entire selling floor. Contrary to what we had originally planned, we hence decided to continue operation in these locations.

Initial results confirm that profitability of these stores has improved visibly compared to prior levels. Turning to the wholesale channel.

Third quarter sales were down 3% in euro terms and 1% currency adjusted. Lastly, due to the aforementioned declines in the U.S., where as the European wholesale business was up at a mid-single-digit rate.

Unavoidable differences in the timing of deliveries compared to the prior year were negative in the Americas and a positive in Europe this quarter, but the net effect was small. Looking out into next year, we have just started the order season for our Pre-Fall 2018 collection.

It's the second collection designed under the new brand strategy. Given that we are only halfway through the process and in light of the relatively small size of this collection, I ask for your understanding that we will not disclose any quantity -- quantitative feedbacks today.

Similar to what we reported in August, the feedback of our partners on the changes in our collections and brand strategy continues to be clearly positive. However, they also remain very cautious when it comes to the overall industry outlook, irrespective of some better data reported for Germany and other European markets over the summer.

Based on our conversation, the majority of the department store representative expect challenging market conditions to continue, so we forecast buying budgets to remain tight also heading into 2018. On a brighter note, the license business continues to grow from strength to strength and had a stellar performance again in the third quarter.

Sales were up 24% due to a strong double-digit growth in the fragrance business, in particular. Similar to previous quarters, strength was broad based across the product portfolio, including BOSS and HUGO as well as our men's and women's wear -- women's fragrances.

Sales in the total BOSS business increased 3%, excluding currency effects in the third quarter. Performance was particularly strong in athleisure, with still retails under the name of BOSS Green in 2017.

Year sales grew at a strong double-digit rates. Business wear and casual wear revenues were up too, all that at a more moderate level.

HUGO sales grew 4%. Good growth in Europe was partly offset by declines in the U.S., where we have started to change our distribution in wholesale.

In the process, BOSS is taking over spaces from HUGO in the wholesale channel, where the BOSS brand proposition is a better fit with the current target customer. Expect this affect also to weigh on HUGO sales in 2018, as we consistently align the brand's distribution with its fashion-forward contemporary proposition.

By general, the 4% growth of our menswear business was driven by improvement in the collection as well as a shift of marketing expenditures and to a lesser extent, retail floor space. The latter came at the expense of our women's wear business, where sales declined 1%.

Rest assured, we'll -- that we'll not stand still to also grow this part of our business as part of our commitment to bring HUGO BOSS back to profitable and sustainable growth. Turning below the top line.

Gross margin was up slightly in the third quarter. This was largely due to channel mix that means the outperformance of the on retail business over wholesale.

However, the positive effect was largely affected by currency translation effects related to the strong euro, which we generally do not hatch. While other factors were broadly margin neutral, this includes rebate management, where gains in Asia were balanced by a slightly higher markdowns in Europe and the Americas.

Operating expense growth was moderate also in the third quarter. Nonetheless, increases exceeded reported sales growth.

On retail, only played a minor role in this respect, given the benefits from rent renegotiations, the closure of unprofitable stores and limited expansion. Instead, marketing investments in the context of the brand repositioning and the expansion of digital teams and systems are exerting structural cost pressures.

This mitigation will remain an ongoing challenge also in 2018. As a result, third quarter EBITDA before special items declined 1% compared to the prior year quarter, amounting to €143 million.

Currency effects had a more severe negative impact on operating profit in the third quarter compared to earlier in the year, as a result of the euro appreciation versus major currencies over the last 6 months. While the D&A charge and the financial results remained largely unchanged, we released €5 million of provisions made in connection with the store closure program initiated in 2016.

The release was recorded as income in the special items line. The one hand, we negotiated lower-than-expected early termination payment in some locations as we exited.

On the other hand, and as I had outlined earlier, we decided against closing a handful of stores, where the operational and financial outlook has improved materially since summer last year. Offsetting these positive factors, we booked a higher tax rate this quarter in anticipation of a higher charge also in the full year.

We now expect the group's tax rate to reach around 26% in 2017 compared to 24% in 2016. This outlook reflects changes in German tax laws that came into effect this year and will lead to a higher taxation of the group's license income in 2017 and beyond.

Net of these two effects, group profit remained virtually unchanged compared to prior year levels and amounted to €80 million in the third quarter. From a regional perspective, profitability in Europe benefited from the good sales performance in both distribution channels and disciplined cost management.

In the Americas, margin performance suffered from the sharp sales decline in wholesale. And in Asia, segment profitability was affected by negative currency effect and rising, selling and distribution expenses.

These factors more than offset gross margin benefits from a reduction of rebates and on retail. Ladies and gentlemen, I'll focus my comments on the third quarter in order to give you a good understanding of the most recent trends.

Let me also summarize, where we stand after the first nine months of the year. Group sales were up 2% in euro terms and on a currency-adjusted basis.

Europe performed broadly in line. Sales in the Americas declined 3%.

Sales in Asia Pacific were 5% ahead of the prior year, both in currency-adjusted terms. EBITDA before special items was up 1%, slightly below sales growth.

A better gross margin was offset by higher operating expenses in relation to sales so that operating margin declined by 20 basis points to 17.4%. Net profit was up 43% following the nonrecurring and even partial reversal of prior year onetime expenses.

Let me also give you some more color on key balance sheet items and cash flow performance. At the end of September, inventories continue to be well controlled.

Group inventories were down 3% in euro terms and stable in local currencies, with a similar performance across the three regions. Despite strict inventory management, overall trade net working capital grew 5% on a currency-adjusted basis.

This was due to an increase of trade receivables solely related to a different timing in the collection of cash from some large partners. At the time of our reporting, the receivables position has almost normalized again, so we do not expect this effect to recur going forward.

Irrespectively of it, the rolling 12-month average of trade working capital over sales declined to 19.3%, 40 basis points below the prior year level. Investment decreased 29% in the first nine months.

The decline was primarily due to on retail, reflecting fewer new store openings but also pacing effects related to the renovation of existing stores. As we have communicated in August, we shifted a number of renovation projects to 2018 to allow incorporating the learnings from the first rollout of the new BOSS store concept.

Primarily because of better earnings and lower CapEx, free cash flow increased 29%, even including cash outflows of around €25 million related to store closures. As a result, net debt declined strongly compared to the prior year period.

Based on a better than expected year-to-date sales performance in on retail, we are upgrading our top line outlook today. We upped the outlook for all three regions.

Sales in Europe should increase at the low single-digit rate, while the Americas should deliver a broadly stable performance. Asian revenues are projected to grow at a low to mid-single-digit rate, all on a currency-adjusted basis.

We now expect the on retail business to grow at a mid-single-digit rate on a currency-adjusted basis. On a comp store basis, sales should increase at a low single-digit rate, in line with the year-to-date performance.

Unchanged to early in the year, also revenues are forecasted to decline at the low to mid-single-digit rate. License sales will be up double digits.

In sum, this will result in a low single-digit increase of group sales on a currency-adjusted basis. Previously, we had anticipated a stable performance.

The group's gross margin should increase slightly year-over-year. A positive channel mix effect and the nonrecurrence of prior year inventory write-downs will compensate for negative currency effects.

We now expect EBITDA before special items to remain stable year-over-year, reflecting the midpoint of the previous guidance of a performance between minus 3% and plus 3%. This guidance includes a negative impact on exchange rate movements, which will have a great effect on earnings than we had originally forecasted.

Net income is expected to increase at a double-digit percentage rate, or the growth will be slightly lower in the full year compared to the first 9 months. Last but not least, our balance sheet and cash flow outlook remains unchanged.

Capital expenditures will amount to between €130 million and €150 million. Free cash flow will exceed prior year levels and reach around €250 million.

Ladies and gentlemen, our financial results and outlook demonstrate that we are on track to achieve the goals we set ourselves or in some parts to even exceed them. I'm pleased with the momentum we have built in on retail, in particular, but I also acknowledge that some market-related tailwinds contributed positively to performance in the last three months.

We will not be able to influence overall markets trends. Instead, we focus on what is in our own hands.

With a view to the next few months, and this is about all building further momentum around our brands. The first deliveries of our Spring/Summer collections will become available in our stores at the end of this month.

This collection is the first one fully reflecting the refined positioning of BOSS and HUGO as well as the quality investments we are making to upgrade their value proposition. We are also busy preparing for the opening of the first HUGO stores in key European cities, such as Amsterdam, London, Paris and Berlin from Spring 2018 onwards.

In addition, and as discussed, enhancing our digital presence is a key priority. Beyond the optimization of hugoboss.com, digital transformation also includes a further rollout of omnichannel services, which is in full swing as well as utilizing digital capabilities for key operational processes.

See the digital HUGO showroom from which we are taking order for the first time right now. Finally, we innovate the way we operate, with a number of initiatives meant to drive customer simplicity and organizational agility.

With so many activities requiring the full attention of management, I'm pleased to be able to pass on my CFO responsibilities shortly. As of the beginning of December, the current team consisting of Bernd Hake, our Chief Sales Officer, Ingo Wilts, our Chief Brand Officer and myself as the CEO, we'll be complemented by Yves Müller, as our new CFO.

As announced a few months ago, Yves will join us from Tchibo, the German coffee and nonfood retailing company, where he has held the CFO position for the last 11 years. I look forward to having him onboard.

Yves is going to play a key role in our financial communication going forward, of course. In the meantime, however, let me answer your questions on today's set of results.

I have three questions. So first of all, on the gross margin, I mean, it has improved slightly year-on-year but with such impressive like-for-like growth, I think one would have perhaps expected a slightly more positive impact from channel mix.

So I was just wondering whether you'd be able to walk us through any negative factors in the gross margin that would explain that, but also the positives. And secondly, on China, so the plus 5% growth, that seems may be slightly weaker given the numbers reported by some other companies in the sector.

Now I understand you had slightly tougher comparable basis, but it seems that for many other companies, the comparable base didn't really matter. So any additional comment would be helpful.

Perhaps you closed some additional stories and anything like that. And then just finally, on the EBITDA guidance, now with the upgrade of the sales guidance for the full year, what is the main reason for not upgrading the EBITDA guidance?

Is it just purely FX related, some additional brand investments or anything like that?

Thanks, Zuzanna. And let me start with the last point because we'll come back to the impact of exchange rate movements, also in your first question.

So you're right that we have -- while we have come more precise on our EBITDA guidance, which we now expect to be stable. And one of the two reasons we gave as an explanation that we see the negative impact of exchange-rate fluctuation versus the euro.

So this has played a role and I will come back when -- also on your question on the gross margin. But secondly, we also have seen a quarter with some -- quite some investments not only in some CapEx but predominantly, from OpEx from upping our game in the marketing.

So this was a quarter, where we had two major fashion events plus a smaller one for BOSS women's wear, also demonstrating our commitment to this line. So -- but it was not only the shows that we did for HUGO and BOSS, but we also used, generate a lot of digital content predominantly to create awareness for the new operating on the BOSS side.

And this comes together with the introduction of some important new services that we have introduced just, so taking our CIM execution in-house has started to pay off very nicely. So these investments are clearly playing a role in improving our like-for-like trends beyond the improvement in collection, but they come at a cost and this has seen an investment, we have seen in the third quarter in our marketing spendings.

Just on your question on Greater China. You're right, we benefited already with a quite some sizable acceleration after the price adjustment in 2016, so we expect that this growth trend to moderate, but when we continue to see a quite difference in performance between Mainland China and Hong Kong and Macau, please keep in mind that our Mainland China business compared to many other of our peers is still relatively small, so the impact is -- and we feel it, in especially the store closures that we are downsizing -- closures plus downsizing in China plus the more muted development in Hong Kong and Macau has overall dampened a bit the positive momentum we have seen in Mainland China.

As I said, gross margin is also affected by exchange rates. So this is the explanatory factor that we have not seen, what you probably calculated as a pure channel mix effect.

The growth differential between retail and wholesale, which clearly was positive. So this was also on the gross margin and dampened by exchange-rate fluctuation, which had an impact on our gross margin.

We don't break out the quantitative impact, but it has been measurable in its impact on gross margin development in the third quarter. All other factors -- so maybe just to finish on that rebates, inventory write-downs -- rebates on neutral inventory write-downs, not in the third quarter, but in previous quarters had a slightly dampening effect in previous year and didn't play a role in the third quarter as it was neutral.

Okay. Perfect.

That's very helpful. Just one follow-up, if I may, on Hong Kong and Macau, I mean, I understand that these were the two regions that seem to have put a little bit of pressure on the performance in China.

But on the other hand, I mean, what we've been hearing is that both Hong Kong and Macau have been improving a little bit. So do you think that the market is still very volatile and brands perform very differently or is it something quite specific to your positioning?

Is there anything else you could maybe say about Hong Kong and Macau?

No. I would also say that we have seen a sequential improvement in both markets, but that's still lagging the Mainland China performance.

And it's -- so I would subscribe to the view that we've seen a stabilization, even a slight improvement in both markets, in particular, with the Macau, we're seeing that visitors are coming back, but we noticed that also in terms of quality of visitors and quality only in the sense of spending power, no other dimension, but also that the improvement in the visitor numbers to both cities has not translated to at least for our business, and we heard similar observation from other fashion brands, does not improve the fashion -- buying trend. Also keep in mind that the price differential also as part of our strategy between Hong Kong and China is now smaller than it was historically, which also might have played a role that people will come to a lesser degree, to Hong Kong, Macau to buy PAL products than in the past.

I have three questions, please. The first one, on your retail like-for-like, you said largely driven by volumes with ASP slightly down.

You had some tailwinds, as you said. How did you see the fourth quarter in October developing?

It looks like German apparel data was poor. There were quite a lot of negative headlines on U.S.

retail landscape and mixed China Golden week. Secondly, on wholesale, you're about to deliver Spring/Summer '18.

Are you able to share with us some of the feedback from the key wholesale partners in terms of how they think of the product assortment, style, the quality, pricing, et cetera? I know it's early to discuss for winter, as you said, but is there anything you would do differently in that campaign to ensure the order book is up rather than flat, and so you can gain market share from the competition in a challenging environment in department stores as your partners seem to budget for next year?

And finally, a question on retail and your new store concepts. Can you maybe give us some feedback on what type of sales uplift you're seeing?

How do the store differ in terms of traffic conversion, ASP, maybe average basket size? What is the overall budget CapEx for next year for these new stores?

And perhaps the CapEx per store?

Yes. We are quite happy with the first indicated feedback we received on the new store concept.

So for us and says, it's a positive. It worked.

It has become somewhat technical than the former store concept, so there are -- for those of you have a chance to visit it's in either in Geneva or Birmingham, but more will come. We'll discover that.

We have now incorporated, what we call, a seamless consumer experience when it comes to omnichannel services, smart mirrors and others. So there's a far more technical.

It's not only that it looks flawless in terms of execution but also functionality. Qualitative feedback from industry experts and first consumer feedback has been positive, but bear with us, as we don't have yet meaningful data on sales uplift to draw any conclusions.

We're happy with the build-out expenses. It was also an important factor for us, so we're -- and we're confident that investments cost as we described also for the Investor Day will be efficient for the new BOSS concept.

We'll also start now to get the first learning of HUGO. As I said in the call earlier, we only expect first deployment of the new concept in the first quarter.

On the wholesale, actually, Thomas, there's not too much new flavor to be added. We were quite happy with the Spring/Summer order intake, giving or keeping in mind that our wholesale partners are now buying our collection, where they have no reference, especially to the new casualwear and athleisure offering, which we have integrated into the BOSS overall line.

But these people do recognize the quality investments that we have done, which clearly increased value, and we have in this context, been able to increase prices in the Central European markets, Germany, Austria and Benelux, which we also explained to you back in August. We were quite pleased that the European price harmonization was something received well, also from our wholesale partners.

We are all waiting now for the first sellout data, be it in on retail business or for the partners or wholesale partners have bought. And I guess that after when we meet again for full year results, I think that's a good time also with Fall/Winter '18 orders in our books to be more precise on our outlook and the feedback from our wholesale counterparts.

Like-for-like, outlook for the fourth quarter, yes, as I explained at the end of the call, we upped slightly our outlook on the like-for-like, not to the Q3 levels. And I think this was, as we try to explain, also helped by some technical factors, and an underlying, call it tailwind conditions on markets, which we've seen also, this commentary from some German magazines or the German markets in October might have reversed slightly.

So I think our full year guidance of low to mid-single-digit like-for-like development for the full year, is probably also a healthy proxy for the remainder of the year, but there's still two very important months ahead of us. We are happy with the momentum building in our ecommerce business, which you remember has been weakening in the fourth quarter last year.

So this falls probably into category of easy comps to beat. But as Zuzanna was asking earlier about the strong momentum in China we had last year, this makes it clearly a more challenging comp to beat.

But overall, you see us quite confident that we will deliver on the slight increase like-for-like guidance, also into the fourth quarter.

I just wanted to go back again to your margin guidance and upgrade in top line. Is it correct to say that effectively, you're seeing more investment needed from an OpEx perspective to deliver your top line effectively, you're operating leverage equation has changed a little bit over time?

What I mean, is that perhaps now to see some margin improvement, you would need to see a like-for-like that is mid-single-digit or above given that you need to support that with more marketing expenses and digital investments as well? And I guess, my sense is that what you're doing right now is not really a point-in-time investment, but is more like you're recurring way of doing your business?

So this basically would imply that also next year, you would need a like-for-like a little bit higher to see margin expansion. And my second question is on the trends you're seeing in formalwear and casualwear.

I was looking at your comments on BOSS and HUGO, and what you're saying is that effectively in BOSS, performance was mostly driven by the Green brand and the athleisure offering. What's going to happen when this line gets discontinued and what was the underlying development of your formalwear lines?

And lastly, a question on online sales, I've noticed that after a bit of volatility, they were up just 6%. You seem to be one of the very few players that is not seeing high double-digit increase in online sales, so what do you think is missing there?

And what are your expectations for the coming quarters and next year?

Well, thank you, Elena. Let's start.

Quite some complex questions you put in front of us. So, like-for-like, minimum to maintain profitability in our retail business or to grow retail profitability is where we should start the discussion, hasn't changed, in our view, over the last couple of quarters.

So we have seen a mitigation in rental, inflationary pressures in most markets. And so we do, depending on the markets, need low to mid-single-digit like-for-like to be margin accretive in our retail business.

All other factors on our overall business are never the same, which has been clearly a dampening factor now in the third quarter. We have two factors that we don't expect in the same magnitude going forward.

One is the impact on exchange rates, I'll come back to that in a second, and also the dampened the effect that I also described on the -- our wholesale development in the U.S. wholesale market.

So overall, the like-for-like for our retail business needed to maintain or improve retail profitability hasn't changed much. Their limited effect, what we can do on that translation impact of an appreciation of the euro versus other major currencies, this had a very quite measurable impact on the profitability development in the third quarter.

That's why we highlighted this element, driving up or dampening the EBITDA development also in the third quarter. I agree with you that there is a new normal in terms of marketing allocation between classical print and online.

We are following other industry trends. And I agree with you that this is a new level of marketing spending.

So if we also should plan for, as we also guided you and the other participants at the Investor Day, that this is probably also the new level to be expected in the outer years. So moving on to your question on online.

After we had a very difficult start to the year, I'm quite pleased that we have now recorded two quarters of return to growth in our ecommerce business with some even stronger performance in the North American business. We continue to see a strong demand for our HUGO BOSS merchandise.

We highlighted our cooperation with Zalando into HUGO, that our products are being bought either on our own website or from multi-brand ecommerce offers. But there's still a number of things that we have to do to improve performance of our own ecommerce business, which we are making progress.

So we expect a further improvement on our ecommerce performance also as we go into the fourth quarter. And we have to work intelligently with the asset that we have in advantage for us relative to online pure plays to have an intelligent combination of services, we call it omni-channel services, between our physical stores and our online.

And here, we would claim that HUGO BOSS is already leading many other branded players in terms of integration of these services between its physical store network and this ecommerce site. So we are clearly committed to the sales channel where we have an unprecedented control over key sets of value chain.

But I agree with you, we will not be satisfied with the current growth rate. We expect a further acceleration in terms of ecommerce, in terms of growth rate but also relative share on our business.

In terms of casualwear versus formalwear, just be clear that you are not falling into a trap. We have no plans to discontinue BOSS Orange and BOSS Green.

Both lines will be fully integrated with Spring/Summer '18 deliveries into the BOSS overall offering. So we will even strengthen our offering in this casualwear and this leisure offering with the integration, which allows us, and we are very pleased with the first indicative results, so that we have now the ability to offer these former, quite separate brands also in our own stores again and benefit from this trend to casualization in demand.

So we will take a major step forward with the integration of BOSS Green, BOSS Orange with the Spring/Summer '18 collection, which allows us to bring even more of these categories into our wearing occasion into our own stores, which fuels our confidence that we have the sustained growth potential in the casualwear -- menswear casualwear segment also into 2018.

Just one quick follow-up. So what you were saying about the operating leverage equation is that if next year, would again see a low to mid-single-digit like-for-like and the normalization in wholesale, that would be enough to see some margin upside?

Depending on some other factors that you ignored now. So we see right now that, at least for the for 6 months, even if you freeze current exchange rates, Europe versus many others, this will be a depressing factors on early development in these for the first 6 months like we have seen in the third quarter.

But if you exclude the same-store effect, I would agree with your statement.

I've got three questions, please. Maybe just starting with gross margin.

If we think about the investments that you're making in price, and obviously, skewing a little bit more to entry casualwear, et cetera, into next year, is it fair to say that there is no gross margin uplift effectively in 2018? So at best, we should expect flat gross margin.

My second question around -- is around CapEx, the capital allocation effectively. You have deferred some of the renovations this year for obvious reasons around the new store concepts.

So what sort of meaningful uplift should we expect in terms of CapEx? I think you've talked about not reaching peak levels of €220 million, probably be above the €130 million to €150 million.

Could you give us an idea in terms of where you think CapEx will grow? Are we talking about a 25% uplift the next year and then normalizing thereafter?

And then you mentioned that out of the 15, I think, the 15 out of the 20 stores, the underperforming stores that you would have closed down by the end of the year and the 5 stores that you're keeping open, I think you've mentioned that you've sublet some of the space to some other brands, I think, in China in one of the flagship stores at least. Could you let us know which brand has taken some of the space in the stores that you're effectively subletting?

Thanks, John. Let's start with the gross margin topic, and I think that we try to shed some light on this topic over the Investor Day because you're right -- as you rightly pointed out, Spring/Summer '18, it's -- a lot of factors will be -- have an impact on our gross margin development, '18 versus '17.

The investment into product quality is one aspect to it, which already started to impact our third quarter 2017. But also keep in mind that we have both, in fact, increasing and decreasing prices with the price summarization in Europe.

So there is the final price adjustment from the German market, to a lesser degree from Benelux and Austria, but there are also price decreases in other markets, in particular, the Swiss market and some others. And depending on price-volume sensitivity, this can be a neutral, slightly negative impact to our gross margin also in 2018.

The same applies to not all investment in our quality initiatives that we have started with the Spring/Summer. It's the first fully impacted one, which might have a stronger impact on gross margin than what we have seen in the third quarter with the Fall/Winter '17 deliveries.

Overall, we expect, and this is what we said back in August, that the improvement that we do forecast to come from further channel mix improvement to be reinvested into quality in a way of price adjustment is also. So you could indirectly surmise as a quality divestment on the other hand.

So in short, we do expect that these factors will have a dampening factor on the channel mix effect, that gross margin might be flattish or only slightly improving in 2018. As always, we'll give you more light on that as we have more visibility on the final cost at the beginning of 2018, where we also have more data on the volume reaction from our wholesale buying partners and first market reaction.

It's also bit difficult to forecast -- let me just quickly go on to CapEx. So it will definitely be more, as we said, because we lowered our CapEx outlook initially from €150 million to €170 million this year to €130 million to €150 million.

I would prefer not to give you a now exact range already at this point in time for 2018 because it might limit the necessary flexibility that we need to have to, as we see, of -- coming back to Thomas' question earlier. If we see a very positive uplift from the new store concept, we will push and decelerate rather than the rollout of this renovation.

If we see that there are certain learnings to be incorporated and improvement is a concept, then we will pursue with a more normalized speed. So let's work with the range between €150 million to €200 million at this point in time, and we will provide you with more details on the CapEx needs for 2018 in March of the next year.

Yes, not all of the five, which we have decided to continue where we use in size, where we just gave two examples, and part of the agreement since we never disclosed which location we meant to resize, we also have a nondisclosure agreement with [indiscernible] not to provide a more details on who's subletting or who's -- typically, we do not sublet. We give these spaces back to our landlords who sold typically decide on their own which is the right tenant for them on the store.

So I can't give you any more details on that.

Maybe just one tiny follow-up on the gross margin. The flattish guidance in 2018, is that in [indiscernible] currency?

Well, currency could, as we all know, play in both directions. It has played against us in 2017 so far.

It has been also a dampening factor in 2016 to a lesser degree. So a further appreciation of the euro could change that.

We have so far opted against price adjustment in this market. The British was a predominant one.

I think we have been asked on this occasion previously. We have no plans to change our price positioning in the UK at this point in time.

However, further deteriorations in the UK pound, we might change that or we'll see, we'll monitor very closely what competition is doing. But you're right, this is before any further appreciation of the euro with the other currencies.

I was just curious, if you could provide a bit more color on the like-for-like evolution, and in particular, the contribution from volumes versus ASP. Obviously, you're saying that ASP is slightly down, but could you just give us an order of magnitude how much ASPs are down and how much volumes are up to drive towards the 5% retail like-for-like?

Typically, we don't break it down in terms of visitor conversion rates and ASPs, but the question is that people buy down or did they find the product finally they were looking for because we were too pricey on our offering before. So it's a tricky question to answer.

I wouldn't necessarily say that people don't trade it but they took positive advantage of the widening of the offering in the entry price point. Also to the question, I think, that Elena asked earlier, with the ability to introduce a broader casualwear offering to it, we are now serving these customers, maybe not so much only on the casualwear, formalwear wearing opportunities, but these customers now have found also an attractive casualwear offering to our stores.

So you have to be careful. That's not necessarily we are not a one category firm where you say, well, we sold less expensive outerwear jackets than last year.

It can also be a mix between that people have now bought more items to complement the look. So that's why we do not necessarily see in lower average selling price as a negative indicator to the performance of our business, as this comes in the combination of better sales densities in our stores.

So overall, we were, as I said, almost up 5%, in particular, in our full price stores. And as we said, the ASP decline was only marginally negative to an otherwise positive trend.

I think what we were especially pleased, it is the first quarter where we're able to hold a negative traffic trend in our own physical stores, which we see also as an encouraging sign that if the offer, but maybe also the services that we have introduced, a better CM activation, there were people now back to our stores where they hopefully will discover with the new BOSS store concept something that will connect even stronger with them in the past.

Okay. That's very clear.

And just following up on the CapEx, if I may. So obviously, with some of the refurbs pushed out into 2018, with that revise CapEx guidance, how many stores do you plan on refurbishing on an annualized basis, just thinking about the potential to short-term disruption to the network as you roll out the new concept?

Well, we have been always a bit careful that we put the total number of renovations and there's a wide range of renovations, only if the store is closed for, I think, at least two weeks, and will be -- not be part of our like-for-like going forward. So as we try to execute in a smart intelligent way.

But if you take into consideration not only our freestanding stores but also our shop-in-shops, we would probably have a number of more than 100 POS that we will renovate in the year 2018.

First of all, Mark, just a general question on individual projects that you have already worked on that might to go into 2018, in terms of your omni-channel activities, in terms of IT logistics, your mobile activities, i.e. a new mobile app for Android.

What are these projects have you already worked on or completed? And if you look into 2018, what do you think is an additional work that you need to do here in terms of OpEx lines that will affect the P&L?

Also from the perspective of the lease contracts that you have renegotiated with your landlords, how much of that is already completed? Or how many maybe additional benefits could we expect in 2018?

That's the first one. The second one on HUGO.

I think the brand dynamic or the momentum slowed down in the third quarter. You gave a little bit of comments here in this respect but maybe some additional comments as to what really led to that slowdown?

And lastly, maybe more with respect to the U.S. market.

How is your current feeling about the market, especially your business with the department stores? How do you see the development there, especially with your core client, Nordstrom, for example.

Thank you.

Yes. Thank you, Jurgen.

Well, there's not one project where you say, okay, once this is completed, be it from a temporary project resources or from a CapEx need, then you have kind of like installed a new norm that will -- where you can basically pause on these merits. That's not how we see it.

But the omni-channel rollout, which is happening as we speak, will have -- be fully implemented by, and this, I think, was the timing we gave you also at the Investor Day, at the end of the first quarter. And yes, a full year effect to that, that we hopefully see the further acceptance from core customers.

Our sales associates are getting increasingly familiar with that, so that we see it will be an integral part of our offering. But clearly, competition doesn't stop there.

There's also already ideas to use our own retail space, at the least in major metropolitan areas, plus same-day delivery options, something we are currently evaluating very carefully to see whether that's a business case also for HUGO BOSS. And there are other elements, be it on a curated shopping services, which also offers very nice combinations between utilizing our physical store network with our digital capabilities.

So as you can see, and I'm just highlighting a very few of a long list of ideas that we see being already present in the market or being developed at HUGO BOSS, that could have meaningful and positive impact on our retail performance. But it's not only front end, it's also, you mentioned, logistics and IT.

We were very pleased with the first test of our first completely digital showroom for HUGO in Berlin, which we completed for pre-fall '18. So that's the first digital showroom for HUGO BOSS where we had no a physical samples available and with just fabrics and watches.

And it was something which was not only a digital presentation of the collection but it was fully integrated into our SAP system with automatic availability checks. So when the customer left the showroom, he had a full visible image of what he bought or she bought with the confirmation that whatever they ordered will be available at the promised delivery day.

So fully integrated with the same functionality like we have with our physical orders. And we are clearly now looking at these services to be brought for the showroom.

So here, we clearly have a new and improved benefit, which nicely comes together with savings because this will, over time, allow us to use our cost associated with physical samples, the core part side of the cost element in our business system. So we try to be smart on where we allocate and which project to work on.

First and foremost to be customer-centric in the benefit but also keep in mind that we need to run a lean organization to fund some of the new projects I just highlighted. Also on the retail side, I want to say it's a buyer market right now.

Prime retail locations are still in high demand, but we see also when we are now actually [shoot] relocations, extend our rent agreements, that the inflationary pressure has slightly muted. But we need -- and I think this was the question earlier asked about minimum like-for-like that remains an inflationary pressure that we need to compensate with an outperformance in like-for-like.

Otherwise, we will not improve our retail profitability just from renegotiated rental terms in some markets. On HUGO, we are quite pleased with what we have seen so far in order intake and on retail development, in particular, in the European markets.

So there's already a long pipeline and long list of interest to go into shop-in-shops with the brand. And our market leaders have seen our new retail store concept, which is quite CapEx efficient, while it has some very interesting functionalities.

So as I said, we will have the first examples of, first, HUGO freestanding stores at the end of the first quarter and we are really looking forward to that. But at the same time, we'll discontinue a HUGO distribution that we think it's out of sync with the brand mix of this partner.

So we are -- especially in the U.S., some department stores where HUGO was just out of sync with the other brand offering, was part of our former strategy to use HUGO more on a price entry strategy rather from its fashion statement, and this is what we're reversing on. With the strengthening of the BOSS entry price point, we are able to introduce in some accounts the BOSS brand.

In others, we will discontinue this business relationship quietly because there's no offer in the HUGO BOSS over range to be present in these accounts. And this is also my answer to your last question on the U.S.

market. We are making -- I'm pleased on the feedback on the first progress we are making in some categories with Nordstrom.

We are far off from our glory that we enjoyed at this account, but the momentum is right now on our side. So we need to be up in our game, be it on the formalwear, be it on the casual wear part of it.

But in terms of collection feedback, I'm very happy that with our target accounts, we will see a return to -- on improved performance to what we had seen in the two, two and a half years in the U.S. market also for HUGO BOSS, be it the BOSS core brand, but also for HUGO, for example, at Bloomingdale, we see -- continue to see a very interesting business potential.

I have one very quick follow-up. The mobile app that you're going to launch an Android, will that be a combined BOSS and HUGO?

Or do you plan to have a separate mobile app for BOSS and HUGO individual?

No. We are continuing to use the hugoboss.com.

But if you go to the page today, we are not quite happy with the brand separation on-site. So in terms of product description, navigation, it's still very much integrated.

But with the new -- it will be still the hugoboss.com, but basically, we get two options to follow. It's just one potential navigation but if you are -- and we can actually track that.

So if you have clicked on a HUGO banner, you will automatically be directed to the HUGO shopping world within hugoboss.com and vice versa to make live navigation for you even more convenient. But we will not separate the websites to have a BOSS or a HUGO website.

It will be the hugoboss.com also going forward.

I have a few questions. The first one on your comment in terms of capsules, that you increased then the number of capsules and will have a stronger focus on that in your collections.

Could you please quantify the potential impact of these capsule collections as a percentage of sales of the seasonal collection maybe for the medium term? Then my second question is on Europe.

Quite pleasing development in the third quarter, better than I hoped for. Clearly, there was of weather support.

However, maybe you can elaborate more in which categories did you outperform and it which regions beyond the UK And my third question relates to FX. Could you please quantify the FX impact on EBITDA in the third quarter and for the full year, which came in unexpected, as you highlighted that?

Well, capital, they come in all sizes, shapes and color. So it's not one capital.

So for example, the cooperation that we have with the Mercedes-AMG Formula One team, and we call it the Motorsport capsule. It's commercially a quite relevant one or that we have with the German national football team or with Dimension where we have capsules which have strong commercial buyers to it.

And we're thinking we have similar ideas to utilize our cooperation with the British Open when it comes to golfing, and maybe to a lesser degree, we're thinking about a selling capsule also to make even stronger because there was strong demand after the success of Alex Thomson 2016 and '17, that there is -- that this is a sport and then as an inspiration by selling that people would like to see also in our commercial collection. And there are others.

Take the one we did with Vogue at the Berlin Fashion Week, the Gallery Collection, which clearly has more aspirational fashion-inspired appeal to it, where we have commercially a smaller impact to that, but it will help us to create awareness ready at competence. It will give us editorial coverage.

So what I tried to explain is that capsule will have the continuum of a high commercial relevance and a high editorial fashion competence relevant and we need to be smart to combine that. And I can assure that this is very high on the agenda, with my two BOSS colleagues, Ingo Wilts, so creating the ideas, and also from Bernd Hake, who's balancing market demand regionally and by brand and gender to have the calendar filled with relevant capsules.

On Europe, as I said, don't get too overexcited with the positive momentum we have seen in the wholesale on a single quarter. This was clearly ahead of the underlying trend.

But we were positively surprised by a very robust like-for-like development, which was especially pleasing, and at full price, outperformed outlet. I think that was high on our agenda and we're very pleased that we achieved that.

We clearly have now to stabilize the strength that we will support and grow our highest margin sales channel in retail. But besides the UK market, which clearly stood out by the reasons, all other European markets also performed very nicely.

The German markets, which was, I think, overall was in the black numbers, was particularly nice. And I think it's just a number of factors, be it the collection, be it services, be it maybe a more effective marketing, which has contributed to this positive development.

On the exchange rate, it's something that we have now seen -- it has been now a burden for almost 18, 24 months in our earnings development. And in the past, at least on a margin perspective, it has been neutral.

So the absolute profit level has been down since we guided for an absolute profit development this year. We said more light on the impact in the third quarter.

What we are now considering is also to provide you more light, but we will probably do this with our guidance for the full year 2018 to give you also -- coming back to John's question earlier, that we give also margin projection, be it on the gross margin or be it on EBIT level, excluding our constant exchange rates. But then we would do this also going forward, not only to explain if this has negative impact because there was also in the last eight years in my role as CFO, I will say, benefited from exchange rates where we might have not always disclosed a positive impact to you in the same way like we're now disclosing the negative one.

So it could, from today's perspective, at least where exchange rates stand today, will have a dampening effect on the first half year of 2018, that's relatively sure. If exchange rates even would stay at this level, a further deterioration could happen.

Even stronger negative absolute profit impact in 2018. So these are factors which we have to deal.

Besides price adjustments, there's limited weight how we can compensate these exchange rates affected by hedging. But we will keep you posted, and we'll provide you with more information, probably at the analyst conference on the topic.

My final question on the distribution in the U.S. Your off-price adjustments, the cleanup, has this been now completed?

Well, we initiated this process in the first half of 2016. Major accounts were discontinued over Summer '16, so it still had a smaller impact or the decreasing impact in the second and third quarter.

We are, in 2017, now clean. There's no business relation with a third-party off-price general but it was at least partially still in the base from last year.

So besides the timing effect that we explained that also has an impact on an inflated basis of previous year, but both factors came together -- well, actually, with three factors, there was an overall lower order intake before winter to begin with. There was timing and phasing.

So for full price, there was a timing impact on the delivery and there was nonrecurrence of still some smaller off-price business as we did in 2016.

So, this would complete our conference call for today. If there's still some questions on your side that you would like to get more details or granularity on, Dennis and his team will be ready to answer these calls during the course of the day.

Otherwise, thank you for your participation, and we're looking forward to seeing you latest at our analyst conference next year. Thank you very much.

Bye-bye.