Ladies and gentlemen, thank you for standing by. Welcome to today's three-month results for 2019 for H&M Group. The meeting will be 60 minutes, starting with a presentation, followed by a question and answer session. I would like to introduce CEO, Karl-Johan Persson. Please go ahead.
Thank you. Hi, everyone. Thank you for joining us today. I'm very pleased to welcome you all to this conference call about H&M Group's first quarter results for 2019. With me today is our CFO, Jyrki Tervonen, and our Head of Investor Relations, Nils Vinge. You will find the three-month report on H&M on about.hm.com investor relations. Before we start the Q&A session, I will give a brief comment about development in the quarter. Our transformation work continues at a fast pace. The positive signals we saw towards the end of last year continued in the first quarter 2019, as this work contributed to stronger collections with more full price sales, decreased markdowns, and increased market shares in many markets. We expect markdowns in relation to sales to be lower also in the second quarter compared with the corresponding quarter last year.
Sales developed well both in stores and online in several markets, such as in Sweden, which grew by 11%, the U.K. by 8%, Poland by 15%, China by 16%, and India by 42%. In the first quarter, net sales increased by 10% in SEK and 4% in local currencies. During the quarter, we successfully transitioned the online platform in Germany. One of the measures we took to ensure a smooth, well-executed transition was to deliberately hold back on sales activities in Germany, this had a dampening effect on online sales. Adjusted for Germany's online sales, total net sales for the group grew by 6% in local currencies. All our online markets are now on the new online platform, and for customers in the German market, this means improvements such as faster, more flexible deliveries and a more seamless experience across our channels, thanks to better integration between the channels.
Profit before tax was SEK 1.043 billion in the quarter, negatively affected by the lower sales in Germany, of course, as well as by costs of around SEK 250 million associated with replacement of the German online platform and costs related to the implemented and upcoming transitions to the new logistics systems. This is all having a negative effect on margins in the short term, but will have a positive effect in the longer term as it will result in a faster, more flexible and efficient product flow. We can see that our investments and initiatives are having an effect. We will continue driving this transformation in the focus areas that we see as strategically important for taking the H&M Group to a new level.
Our focus areas are, as we have communicated before, to create the best customer offering for our brands, which includes the assortment, and the whole customer experience then for all the brands to make sure that we have a fast, efficient, and flexible product flow to secure a stable and scalable infrastructure, our tech foundation, and also to add growth by expanding through physical stores, our online stores, and through digital marketplaces. Today, we're happy to announce that H&M will launch on India's largest e-commerce marketplaces, Myntra and Jabong this year. The rapid change of fashion retail continues, we see that our transformation work is taking us in the right direction, even if many challenges remain and there is still hard work to do. We will continue this work at full speed and are optimistic about the future for the H&M Group.
Thank you. Now we're happy to take your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star on your telephone and wait for your name to be announced. Your first question comes from the line of Magnus Olsson. Your line is open. Please ask your question.
Thank you. My first question relates to markdowns in Q2. Perhaps you can elaborate a little bit about the decrease in markdowns that you expect in Q2. If you can give us any leads further on that, we appreciate it.
When it comes to Q2 markdowns, as we said in Q1, we decreased the markdowns by 150 basis points compared to last year's Q1. We are confident with our improved stock in trade composition, where we sell more with full price, and the composition in itself improved even more from Q4. We will have less markdowns in Q2 this year compared to last year, but it's still too early to give a more detailed flavor. We are confident that the markdowns will be lower in Q2.
On e-commerce sales, it was a little bit below your expectations, clearly so in local currency terms, and maybe that also ties into your announcement today to list on further marketplaces. In terms of fulfillment centers, if you would manage to meet your online growth targets, you should see online sales double in the coming three or four years. If that happens, how many more dedicated online fulfillment centers do you think you would open?
Exactly. The online sales in the first quarter was lower than before and lower than what we expect for the full year. That is planned due to us holding back on a lot of sales activities in Germany. Excluding Germany online and looking at all the other countries, online sales were up 27% in local currency, and 34% in Swedish krona. A good development there. It's connected to the transition. Now all the markets are on the new platform, which is great. It's been a lot of work during the last five years to transition all the markets to the new platform, and a lot of investments connected to that as well. We have invested a lot in new warehouses, new automation, and so on.
We have a much higher capacity now compared to a year before, and it's good investments that will enable good growth for many years to come, and connected to that, a lot of automation in the warehouses as well, which will further increase the capacity. We're happy with the setup.
Just following on that, if store sales goes from current 85% to 70% in group sales in these coming years, do you believe you will shut down or downsize certain store fulfillment centers?
We have done a mapping of the whole logistical network, both for online and for physical stores and for omni-centers, not just based on what the group looks like today, but our expectations for the coming five to 10 years. Obviously, things can change. It's a very dynamic market, and we will constantly monitor that. Yes, in certain areas, we have net closures of stores, like in many markets in Germany. That, of course, is part of the equation when we set up the logistical network.
Thank you.
Thank you.
Your next question comes from the line of Charlie Mears, Sands. Your line is open.
Yes, thank you for taking my questions. I have two topics, please. The first relates to the systems transition. Can you firstly confirm that you have now stability in France, U.S., and Italy, which I think were markets you had problems with before? Generally, I know that e-commerce transition is complete, but the other wider supply chain IT transition is ongoing. Do you anticipate further one-off costs, like the SEK 150 million that you've booked in Q1 in order to stabilize those transitions as well? Or should we be thinking more about clean evolution? The second topic, just related to your current trading. Clearly, that's quite encouraging that it's accelerated in March. Given that you don't report monthly sales, I just wanted to understand whether we should moderate our ambitions in terms of April, May last year. Was that particularly better or worse?
Whether March this year has already benefited from the sort of push with Germany online now fully up and running, or whether that's a benefit still to come through. Thank you.
Okay, thanks. When we look at the work in Southern Europe, and U.S., we are at a stable, good position. Obviously, small investments still to ensure that coming transitions will be done well. A bit of extra cost connected to that, but it will be lower in quarter two compared to quarter one. We hope and believe that we will have good transitions in the future connected to the extra investments we have taken. What was the second question?
It was sort of whether March
Yeah. Sorry.
indicative of what we might expect, whether Germany online has helped that or whether the sort of the weather comparatives on the prior year distort what we should anticipate for the rest of the spring.
Germany is back now. A little bit of the sales in March connected to Germany, it's just up and running, so we haven't really pushed ahead, but it's up and running in a good way, and it was a good transition, so that's good. Weather-wise, it has been more positive in many markets this year compared to last year, especially in Europe. On the other side, we have a negative calendar effect connected to Easter being earlier last year. It's hard to say exactly how that nets out. We continue, and I think the main reason is better collections and that we continue on a good track from February into March, and then we'll see what will happen in April and May. It's still a shaky market. We're still in a transition period, but we believe in gradual improvements.
Great. Thank you.
Thank you.
Your next question comes from the line of Daniel Erver.
Yes, hello, good morning. I have two questions. First of all, if you look at the customer offering that you're providing now online, assuming that you're a club member, I have to say it looks quite generous, compared to many others in Western European markets. What's your thinking on that, now that you're rolling out the club in more markets, and are you in any way contemplating to change the level of investments that you're doing in the offering when it comes to free deliveries and so on? That's the first one.
Yeah. It's a club that we are happy with, appreciated by many customers. We're approximately 35 million customers today, or members in the club, which is great, and we're rolling out the club to many markets. We have introduced a lot of things for club members, after testing. Obviously, we've done it for a reason, because we believe it's good, and then we're always evaluating. One of the things we are looking at is to introduce a limit for free deliveries and returns, just for profitability reasons. It's something that we are evaluating, yes.
Does that mean that this is imminent, or this is something that will take time to reintroduce?
We don't want to go into details, just to say that it's something that we are looking into, yes.
Okay, good. The second question is on the inventory. When you reported Q4, you were expecting continued improvement in the inventory situation. At least my impression was that we should see some further cash release on the inventory as we went through 2019. Now it's actually up quarter-on-quarter. Was that your plan when you reported Q4?
We are in line with what we expected. Currency-adjusted, it is up 5%. Composition is better. It is also a snapshot in time, so if you try to look evenly through the number of weeks, it is slightly better than that also. We believe we will see a gradual improvement throughout the year. Also, as we said, less markdowns in Q2 as a result of better stock composition. Not where we want to be. We are aiming to have a lower stock level in relation to sales, but definitely a step in the right direction.
All right, is the fact that you've added warehouse capacity in any way, has that been impacting the level of stock during this time?
No, not the main reason for the development now. It's more stronger collections and better buying processes. Over time, the whole logistical network that we have and integrating the channels more will lead to better stock in relation to sales. All other things equal, of course. Also the investments that we do in AI will help also in us being much more precise in predicting what type of trends, how much to quantify on a much more detailed level, how to allocate the garments. There are many things that we are investing in coming together, over time this will mean a lot of improvements.
Thank you.
Thank you.
Your next question comes from the line of Chiara Battistini. Your line's open.
Hello. Hi, this is Chiara Battistini from JP Morgan. Just a couple of questions, please, from me. The first one, just a follow-up on current trading, whether you could comment with any color by region, any specific region where you've seen an improvement, of course, excluding Germany, where you have structural reasons why you would have seen a re-acceleration. Then, if you could comment on the OpEx growth and the pace we should be thinking of also going into Q2 and for the rest of the year. Should we still expect such an elevated level of growth of OpEx in Q2 and in H2, or a normalization at some point in the year, please? Thank you.
Yeah, we mentioned we don't want to go into details in all the markets, how they have developed in quarter one. We gave some examples before, like Sweden, where we grew by 11%, U.K. 8%, Poland 15%, China 16%, and India 42%. Many other markets where we have seen good growth and where we have taken market share as well. Less good in Germany, connected to the online sales. Growth in the U.S., but not really where we want to be, which we see that we can improve more there. It's a step in the right direction from the disappointing development in the U.S. in 2018. All in all, a step in the right direction.
If the question was regarding current trading in March, down on the country level, we will come back to that by the end of the second quarter. You want to comment on the OPEX, Jyrki?
Yes. When it comes to SG&A OPEX, the cost control in the group is still very good. For instance, as we state in the report, the development in comparable stores, the OPEX increased marginally. The main explanation to the growth in OPEX is, of course, store and online expansion. Also this ongoing transformation. We don't want to give a guidance exactly where we will be in Q2, Q3, but as I said, we have a good cost control and the aim and the goal is, of course, to have OPEX growth less than the top-line growth.
We are confident in how we control the cost and the aim, as I said, is of course, to have a growth rate in OPEX that is less than top-line growth. All right. Thank you very much.
Your next question comes from the line of Niklas Ekman. Your line is open. You may ask your question.
Thank you. Yes. Most of my questions have been answered, actually. If I could just ask on the currency headwinds that you talk about in Q2 here. Can you give any indication about the magnitude and comparing them to kind of the tailwinds you had in Q3, Q4, and the headwinds that you've seen in Q1? Can you give any indication here, any flavor of what kind of impact that could have on the gross margin? That would be very helpful.
Well, as always, Niklas, there are many factors impacting the gross margin. If you look at the external factors, mainly the currency, as we state in the report, they're gradually becoming more negative. That's all I can say.
Okay, you can't comment that anymore?
No, of course, there are so many other things, there's timing, of course, most important is the commercial decisions that we take ourselves.
Yes, of course. Also a follow-up on the inventory situation. Again here, a bit surprised to see a rise in the inventory, particularly considering that sales are now growing a bit and that you've been focusing so much on decreasing the inventory. When do you expect to see this starting to decrease? Do you expect a materially lower inventory level by the end of this year? How long do you think before you can get to the kind of target levels of 12%-14%?
Again, we have given targets, but given the uncertainty in the market, it's very hard to say exact timing and exact levels. We are aiming for the 12%-14% range that we have, and we believe we will get there. Exactly when, it's hard to say. Maybe a boring answer, but we believe in gradual improvements throughout the year. Where we expect we'll end up by the end of the year is hard to say.
Is there any difference in the planning when you purchase now? Are you more conservative in your buying, or are you still constantly planning for positive like-for-like sales?
Our order or commitment is down now. We have made improvements for we believe are improvements in the buying process, in how we buy. It's also when we say that even though in currency adjusted, the stock is up 5%, the stock composition is better. Markdowns were down in quarter one. Markdowns will be down in quarter two as well. It's for a reason. It's because we believe we feel confident in the stock composition and how we buy and in the collections.
Excellent. Thanks for taking my questions.
Thank you.
Your next question comes from the line of Richard Chamberlain. Your line is open.
Just one question on the loyalty program and one on the U.S., please. The loyalty program, you say it's got 35 million members now and an upgraded version will be launched shortly. Will that upgraded version be available in all markets where H&M has its H&M Member offer? What sort of improvement should we expect?
Yes, it will be available in all markets. There are many different improvements, and there are some things we are evaluating. More services and features will be added along the way, and certain adjustments will be made. Again, one of the things we are evaluating is putting a limit on the order. Yeah, exactly. We're looking at services like buy now, pay later. Yeah, a lot of different things.
Okay. Got it. Thanks. Just on the U.S. market, I know obviously it has been tough last year, but it does look like you're starting to see some signs of progress in the U.S. I wondered if you can comment in particular on customer response to recent marketing campaigns. I think you've had a big campaign in New York, for instance. Also, are you starting to have a more local assortment in the U.S., a localized assortment? Is that starting to help?
There are many different things. One of the things connected to the challenging development during 2018 was connected to the logistics issues that we had.
Obviously, we are at a better level now compared to a year, we're starting to see some improvements. I think we have a good team in place. We are looking into collection improvements, not only for the global, but also if we could do things differently for the U.S. market. Also, like you say, some campaign adjustments as well, or communication marketing activities. We are looking at a lot of different things. We're starting to see improvements. It's better than before, but we still have some work to do.
Got it. Okay. Thanks very much.
Thank you.
Your next question comes from the line of Adam Karlsson. Your line is open.
Good morning, guys. A couple of questions. On online, can you sort of work out or help us explain how online profitability is now comparing to stores, given the improvements in the H&M Member functionality and offers that you're giving to the consumers? As your online sales are growing, do you expect that online EBIT margin to start to improve as you put more volume through your automated systems, et cetera? As you continue to invest, should you expect quite a while before we see the EBIT margin of the online sales start to improve?
Yeah. Okay, thank you. We have a good profitability in our online channel, like we have described before. It's right with the introduction of the free delivery and returns to the club. Margins have come down. We still believe it's good because the customers appreciate it. You have to look at not only margin in % but also in money and also what it gives over time in so-called customer lifetime value, to use that KPI. It's, again, like we said before, it's something that we are evaluating, and maybe we'll make some adjustments to increase profitability. When it comes to other efficiency measures, we have introduced a lot of automation in many warehouses, which over time will greatly improve the efficiency. It takes a little bit of time to adjust to new ways of working.
In certain warehouses, there's been a short-term dip in efficiency. It will improve over time.
Is there big regional differences in your online profitability? I don't want the exact numbers, but does it vary quite a lot by region and penetration?
It varies a bit. Absolutely. Again, we don't want to go into details, but it can vary a bit. We have a good online profitability in all regions.
Then the second question, in terms of the markdown in the first quarter, just so I understand it, did you manage to sell through more of the old product to improve the composition of the new products that you were bringing in, you were selling them with less discounting to give you a lower proportion overall? You were still continuing to get through the old products as usual, but your new products were on a lower rate of discount compared to last year. Is that how the overall-
Yeah, exactly
markdown actually went down?
Yeah, exactly. If you divide the assortment very simplified into new seasonal garments, we are at a good level, a bit less than last year. A higher turnover of those products, more full price selling. If you take older garments with less value, we have much less of those. We have sold those through in a good way. We have more season-less garments where we have more, but we are at a good level where we want to be. A better stock composition.
That's great. Thank you.
Thank you.
Your next question comes from the line of Simon Irwin. Your line is open.
Oh, morning, everyone. Just three quick ones. Firstly, I noticed you didn't give the sales by country in the release. Is this going to be standard going forwards?
We give the top 10 countries and sales by region, which we think is good because it explains the majority of the company. Instead of going into a long list of smaller countries, it's a bit too detailed. Then we'll see what we'll do on an annual basis. This is just quarter by quarter.
Okay. Less disclosure is always slightly disappointing, but anyway. In terms of the SEK 250 of transition costs, is that all in OpEx, or is some of that in the gross margin?
Yeah. Two-thirds in the gross margin and one-third in the OpEx.
Okay. That might then answer my next question, which is just if you can walk us through the kind of negatives within the gross margin. You haven't talked much about price investment, but as you have done in prior quarters, is that one of the major features? Are you still continuing to invest in price as we go into spring-summer?
Yeah, we have invested in the customer offering, in prices, in improved quality. That's correct. Then we have the external factors that we normally talk about, currencies being a big one, of course, that has been slightly negative for the products we purchased for quarter one, and it will be more negative for quarter two.
Okay. If we're thinking about the year ahead, obviously we can make our own assumptions around FX and knockdown, we should assume slightly less impact from transition costs within the gross margin, the kind of continued drag from investment in product and price, presumably through the year.
Yeah.
All right. That's very clear. Thank you very much.
Thank you.
Your next question comes from the line of Niklas Formå. Your line's open.
Thanks, operator, and good morning to everyone. I would just like to get some more color on sort of upstream cost inflation in local currency. Let's say sort of a market comment from your perspective would be very valid. Also, if you could link that to your ESG ambitions. In a sense, should we expect you to have slightly higher upstream costs in sourcing from executing on your ESG plan, please?
As we said, if you look at the external factors, they are slightly negative. Of course, there's an inflation and there are salaries that are constantly increasing. On the other hand, we are always looking to improve sourcing and make it more efficient. Of course, the sustainability or SRI, whatever you want to call it, is something that we invest a lot in, but it's also part of our offering. Very important, it's also on the positive side.
Yep. Absolutely. Can I ask you, would you care to give us any sort of ballpark ambition in terms of the number of club members, by the end of this fiscal year, say?
We are planning to roll it out in another seven markets this year. Of course, we have high ambitions. Right now we are at 35 million members. Well, we have a target. We will come back to that later.
Okay. Also a couple questions which doesn't actually relate to Q1, but perhaps then more easily for you to elaborate on. I would like to ask you, if we look online, in H&M online, how does the average basket value develop versus the number of orders as you launch the H&M Member offering of free delivery and free returns? Could you give us an update on past developments, please?
Yeah. Without going into too much, the average order value down and orders up.
Yep. Okay. Final question, if I may. Also relating to your CapEx guidance for this year, down 17% from the reported CapEx in last fiscal year. If you take the CapEx, the upper end of the range at SEK 11 billion per store, it's 20% lower CapEx per store in your plans for this year. Could you just update me again on the reasoning behind the CapEx guidance for this year and possibly if you have some more color to add to your plans, please?
Yeah. The CapEx guidance still remains. As we mentioned in Q4, that it will end up in constant currency around SEK 10.5 billion-SEK 11 billion. It's a shift from stores to more IT and logistics. The CapEx guidance is still SEK 10.5 billion-SEK 11 billion.
Okay. Thank you very much. That would be all my questions.
Thank you.
Thank you.
Your next question comes from the line of Rebecca McClellan. Your line is open.
Yes, good morning. Just two small questions from me, please. Firstly, can you remind us when the disruption began in the U.S. and Belgium warehouses in 2Q 2018? Is it already in the March base or was it later on in the quarter? Secondly, just when talking about the continued price investment, what have your like-for-like prices done, say, in spring, summer 2019 versus previous pricing?
Sorry, can you repeat the last question there?
Just you mentioned a further sort of price investment. My question is, what is the trend in your full like-for-like pricing, average selling prices?
Okay. When it comes to the disruptions from last year, U.S. was in March, I believe it was mid-March.
Yeah. Mid-March.
We can double-check that, but that was only in the U.S. The Southern European countries was later on, so not in the ground, so to say, in the March figures.
When it comes to like, we have made investments in prices and quality, but we don't want to go into detail on the exact price development.
Okay. Just in terms of Easter, what do you think the effect is of a later Easter in terms of the drag in March or the benefit in April?
I don't know. It is very hard to say. Easter effect for us has been positive the year we have Easter. Not in all markets, but for the group as a total. That is affecting March negatively this year. We are not through the full Easter period from last year. On the other side, as I said earlier, weather in some markets or the majority of the markets for us has been better this year compared to last year. Exactly how that nets out is hard to say.
Okay. Thank you very much.
Yeah. Thank you.
Your next question comes from the line of Anne Critchlow. Your line is open.
It's Anne Critchlow from SG. I've got two questions. The first one is about the limit that you're talking about on free delivery and returns. What sort of minimum order value would you consider? For example, would EUR 25 work for you? The second question is about the store reformatting trials. We've seen a shiny new store open on Cheapside in London. Could you talk a bit, please, about the new formats you are trialing in different countries, how they differ, and whether there might be a rollout of any new format? Thank you.
Yeah, we are evaluating the limit. Sorry for that, but we don't want to go into the exact details of where we are with that. When it comes to different store formats, we are trying out many different formats. Some full rebuild, so to say, a complete new look and feel of the store, then some lighter rebuilds as well. Also just product presentation and a lot of different things. We have a whole test program. A lot of good receipts from that we see customer response is really good, and also sales and profits are up. Now we're taking the best parts and putting it together into a rollout package. When we're ready with that, we will gradually improve the store portfolio and also the new stores that we will open when we are ready with that.
It feels promising, but it's just a start.
Okay, thank you. Would there be a higher CapEx implication if you were to roll out the new store formats?
We don't have all the details yet. It depends on how many stores, the pace, and so on. Obviously, we have a CapEx connected to new stores that we open today and to rebuild today. Not necessarily higher investments, but investments that will make a bigger difference.
Thank you.
Thank you.
Your next question comes from the line of Ashley Wallace. Your line is open.
Oh, hi. Good morning. I have a question on the composition of your 4% constant currency revenue growth in the first quarter. Given the new brands grew 17% and online grew only 10%, can you please confirm if the H&M brand store-based like-to-like was in fact positive in the period? Just on the acceleration of growth in March, is this mainly driven by e-commerce in Germany, or did you actually also see an improvement in the underlying store base like-to-like for H&M brands?
Yeah, we don't comment on comparable sales per channel, but yes, it was better than before for the H&M brand. When it comes to March, it was not only online sales, although obviously it was better with Germany being up and running again, so to say. Store sales has been good in March as well.
Okay, perfect. Thank you.
Thank you.
There are no further questions at this time. Please continue, sir.
Well, thank you very much for participating in this conference call, and we wish you all a good day.
That does conclude our conference today. Thank you for participating. You may all disconnect.