Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's nine month report for 2019. At this time, all participants are in a listen only mode. There will be a presentation followed by question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I would like to advise you that the conference is being recorded today on Thursday, the 3rd of October, 2019. I would now like to turn the conference over to your speaker today, Karl-Johan Persson, CEO. Please go ahead, sir.
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 third quarter and nine-month results for 2019. With me today is our CFO, Jyrki Tervonen, and our Head of Investor Relations, Nils Vinge. You will find the nine-month report on hmgroup.com, Investor Relations. Before we start the Q&A session, I will give a short summary about the quarter and current developments. We continue transforming our business to meet customers' ever-increasing expectations. Well-received summer collections and increased market share clearly shows the customers are appreciating our efforts. The positive development of more full price sales and reduced markdowns continued in the third quarter, contributing to an increase of 26% in operating profit. Looking at sales numbers in the quarter, total sales increased by 12% in Swedish krona and 8% in local currencies.
Growth was driven by both physical stores and online, and we had a very strong increase in online sales of 30% in Swedish krona and 25% in local currencies. Customer focus is our highest priority, and activity levels related to our transformation work remain high throughout the H&M Group. We continue driving change through our strategic focus areas, and we have gone through these before, but these are to create the best customer offering for all our brands, which includes investments in the assortment in physical stores, our online stores, and the integration of stores and online. It is to make sure that we have a fast, efficient, and flexible product flow, to secure a stable and scalable infrastructure, our tech foundation, and to add growth by expanding through physical stores, online stores, and digital marketplaces. To summarize, we see that our ongoing transformation work is clearly having effect.
The new season has also got off to a promising start with a positive reception for our early autumn collections. Sales in local currencies increased by 8% in September. Looking ahead, we remain humbled considering the rapid shift in the fashion retail world and the challenges it brings. Our transformation work will therefore continue at a fast pace in all parts of the company, included continued upgrades in the supply chain. We're convinced that this will contribute to positive development for the H&M Group for many years to come. Thank you. Now we are happy to take your questions.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. Your first question comes from Charlie Muir-Sands from Exane BNP Paribas. Please go ahead.
Morning, guys. Thank you very much for taking my questions. I've got two, please, to focus on. The first is related to markdown. You clearly overachieved against your ambition for Q3. You haven't given any indication in the statement on Q4. I wonder if you can elaborate on whether you think there's still much or substantial markdown opportunity to come in the fourth quarter or indeed into the next financial year. Secondly, just on the operating cost side, it's great to see you delivering some operating cost leverage, but you clearly make reference to the ongoing transformation work. I just wondered whether you envisage a time when we might start to see some of those costs related to transformation perhaps coming back out or getting leveraged more substantially. Thank you.
Yeah. Thank you. If we talk about the markdowns, we've seen an improvement through the year, which is good and in line with our expectations, and it's showing results from the work that we do. Over time, we believe there's good potential to continue to improve with all the initiatives we have related to the supply chain work, improved collections, and a lot of other things. The big potential lies in the bigger reduction quarters, quarter one and quarter three. Then for quarter four, I think it's too early to say. A good start in September, but we still have October and November to go. Over time, we believe in further improvements, biggest potential in quarter one and quarter three. When it comes to the OpEx, we have a good cost control, but at the same time, we're having high activity level.
It's necessary to secure a long-term development for the company. We believe we will have a continued high activity level going forward, roughly at the same level for quarter four and at a high level for next year as well. We don't know exactly what level.
Great. Thank you very much.
Thank you.
Thank you. Your next question comes from Daniel Schmidt from Danske Bank. Please go ahead.
Yes, good morning. Another question on the gross margin. When you reported Q4 last year, you incurred extra costs related to the implementation of new logistic systems and also a negative year-end effect, and the upcoming transition of logistic systems in Germany of SEK 560 million, of which most of that related to COGS. Are you seeing any extra costs sort of repeating itself also going into this Q4? How should we view those extra costs?
Yeah. Thank you. There are many factors, as you know, affecting the gross margin. Normally, we comment on these big external factors, currency being a big one, especially now. These external factors, currency, raw material prices, transport prices, capacity, and salaries, are roughly at the same level as they were for purchases made for Q3 at the same level then for purchases made for Q4. As you said, we had some extraordinary costs last year that we communicated. Year-over-year compared to 2017, they stood out. This year we have a higher activity level or planned activity level, so roughly at the same level as the year before.
All right. Could you say anything when you talk about sort of transformation and extra costs and sort of a high level going forward as well? Could you say anything about sort of where we are in terms of maturity in many of these projects concerning AI or logistics or tech, which have been driving costs a lot? Are we sort of halfway through, or is there any way to quantify for us where we are in those stages?
I think it's very hard. For us, of course, we have a plan for the coming years, but the activity level will remain high. I think that these are planned activities, really good activities, necessary activities that will help the company for many years to come. I don't think that will stop. Some of the extra activities for last year were non-planned. We had to put in extra resources to tackle some of the issues that we had with the implementation of the new systems. There we have made improvements. We're seeing efficiency gains, and then at the same time, we're investing in new things. I know, long answer, but it's hard to say, to give an exact level.
You did comment in connection with the Q2 call. You said that sort of SG&A costs were elevated, but looking sort of into the future, they will come down in terms of sort of year-on-year growth. Now it sounds like it's a little bit more sort of postponed into the future.
No, I think there is potential that they will come down, but the activity level will remain high. What I'm saying, I think it's hard to give an exact timing. We have tried to do that before, but there's so much uncertainty, and I think to give an exact date on when things will happen is hard. I think there's potential that they will come down in relation to sales. Yes.
All right. Thank you.
Thank you.
Thank you. Your next question comes from Fredrik Ivarsson from ABG. Please go ahead.
Morning. Thank you, operator. Two questions from me as well. Firstly, you're replacing the logistics systems in China during the end of this quarter. Just curious whether we should expect any significant extraordinary costs due to this like we did last year in Europe and the U.S. Second question is on Germany. You're now live with the new online platform in that country as well. That was the last country that you did, and I'm curious to hear what you have seen in terms of improving the services there, i.e., are you where you want to be in terms of deliveries? Also, the return policies and everything that comes with the new platform. Thanks.
Yeah. When it comes to the first question, China, we did Spain successfully, which helps in our confidence that we will transition China in a good way. Hopefully that will go well, and we are putting in extra resources to secure a good transition. Some extra costs are related to that, the preparation work. We are confident that we will do it in a good way. When it comes to the new platform in Germany, we're happy that we did the transition. Obviously, that will give the customers a lot of benefits now and also over time. That's a good, stable platform that we can build from. We will add new good things for customers over time. We're seeing some improvements already.
A quick follow-up on that one. You're not really where you want to be in Germany yet?
No, not in any market, because we have a lot of activities that will give improvements for the customers over time. We see a lot of potential to improve. Also when we launch a new platform, new logistic systems, things are not perfect from day one. It's often a so-called J-curve, and that we can see in Germany as well. In the beginning, we had some problems with deliveries, delivery times, delivery accuracy, but that's improving and getting up to a much better level. We can improve from this level as well.
That's very clear. Thank you.
Thank you.
Thank you. Your next question comes from Rebecca McClellan from Santander. Please go ahead.
Yes, good morning. Could you please tell us of the constant currency sales growth you've had in Q3 and in September? What the beat to that is of the improved full price sales?
Sorry, we didn't hear you that well. Can you repeat the question?
Of your constant currency sales growth in Q3 and in September, what contribution comes from the full price sales improvement?
Well, as you know, we don't quantify it, but then clearly there has been, as we state again, continuously improved full price sales and less markdowns, but we don't comment on the mix. Sorry.
that's a similar dynamic in September than in Q3?
No, not really, because we don't want to comment on markdowns in Q4 yet. It's too early.
Okay.
A year later, introduction to whatever one.
Right. Okay. Thank you.
Thank you.
Thank you. Your next question comes from Simon Irwin from Credit Suisse. Please go ahead.
Good morning, everyone. I think we can say congratulations on a great quarter. Couple of questions for you. Firstly, can you just talk a bit about price investment? It was this time last year, with autumn/winter, that you signaled an increase in price investment. Is that annualized, and should we think about that not continuing, or will that continue through autumn/winter?
Maybe a big answer, but it's that we will continue to invest in the customer offering. Improved quality, improved prices. Some of those investments will come from our efficiency gains that we pass on to customers, and sometimes it will be affecting the margin. Yeah, it can be a combination. We will continue to invest, and the most important thing for us is to look at our business idea, to have the best combination of fashion, quality, price, and sustainability. We have to benchmark us against the customers' expectations and us against our competitors in every market and follow that. Over time, we will continue to invest.
Okay. just in terms of overall stores, now you're still adding reasonable number of stores, but reducing a lot, and the net number is a pretty small number. It's quite hard to ascertain the change in space for your business. Can you give us a sense about the relative size of stores being closed relative to the size of stores being opened?
Our whole work with the store optimization of the portfolio includes right-sizing stores. Some stores we are making smaller, some we are making bigger. Stores we close can actually be a mix of bigger stores and average-sized stores, smaller stores. It's hard to say a difference between those and the ones that we have and the ones that we open. Roughly, so far, the closing of new stores, in average, they are more or less the same size. As Karl-Johan said, it could differ on expanding markets where we open a flagship store still and closing down smaller. Roughly, in space, it's the same. Yeah.
It's not so much size that matters, Simon. It's more about the profitability and how it fits in the total picture.
also the square meter selling. We're expanding more in emerging markets and closing down stores in more established markets, as Jyrki said.
Right. Thank you very much.
Yep.
Thank you. Your next question comes from Anne Critchlow from SG. Please go ahead.
Good morning. Thanks for taking my question. We've been reading quite a bit in the press about H&M's lease negotiations in the U.K. I'm just wondering if those lower rents could next year have a noticeable impact on the cost line from our perspective in the modeling.
We have a big possibility, a lot of stores that comes up for renegotiation next year. In many markets, we believe the rent levels are too high, given what's happening in the retail market. That's one of the reasons why we are a bit more cautious when it comes to opening new stores, why we have revised goals. Yeah, so we believe rents should come down in many markets.
Should we see that in the operating cost line? Will it have a noticeable impact from our perspective in modeling?
Yeah, it's hard to give an exact figure, but we believe there's potential and rent should come down. Yeah.
Okay, thank you.
Rent support, yeah. Right.
All right. Thank you. Your next question comes from Nicklas Fharm from SEB. Please go ahead.
Thanks, operator, and good morning to all. I was just wondering if you could give us some idea of the magnitude of the price investments in gross margins in this quarter, given that the share markdown impact was actually higher than you initially thought. Please.
Hi. Sorry, we don't go into details on our exact investments. What we normally comment on are these five big external factors, and they had a big negative effect on purchases made for the third quarter.
Would you care to give us some hint of the number of net new store openings that you plan for 2020 at this stage?
Sorry. We're in the preparation of goal setting goals for 2020, so that's not finalized yet. We will get back to that later.
Yeah, sure. Final question, if I may. About a year and a half ago, you set an inventory target at the Capital Markets Day, I'm referring to. Obviously a lot of things have happened since then, and I'm sure you have been contemplating how the sector has really been changing, and I was just wondering, do you think you could give us an update on sort of a new ballpark number for where you think inventory should be on a more normalized level where you are now one year ahead?
We haven't changed that. We believe it's possible to go down to that level that we set during the Capital Markets Day in the range of 12%-14% in relation to sales. We believe in further improvements in stock levels, but it's hard to put a timeline on it. all the work that we have, a lot of the activities will help us achieve that. we still have a belief in that.
Okay. That's very clear. One final small question. There's a quite strong cash flow in the period, and one of the points sticking out perhaps is of course, the change in current receivables in working cash. I was just wondering if you could touch on that briefly, please.
Yeah. I think when looking at the group cash flow statement, I really think, as you mentioned, we have a quite strong improvement in free cash flow. I think it's up SEK 3.5 billion compared to last year. Trying to look into each row in the cash flow statement, it's very hard because there are so much currency effects affecting the rows. In general, we are working hard with the working capital and stock in trade, as we had mentioned earlier, is a big potential to release working capital. We are comfortable that we are in the right direction. The most important thing is that we start to deliver on top line and profitability, but also to start to generate the cash flow. We think it's the first sign that we are in the right direction.
Thank you for taking all these questions.
Thank you.
Thank you. Your next question comes from James Grzinic from Jefferies. Please go ahead.
Yes, good morning, everybody. I had two quick ones, really. The first one, perhaps to try and put into better context the reception of this autumn/winter range. Can you perhaps clarify what the comps looked like in September, October, November last year? My second one was around club membership. Can you perhaps update us on what that membership total is at now, and whether you have changed some of the conditions, inducements, offers, in some markets that come with that membership sign up? Thank you.
Yeah. Good reception of the collections then for September. It's only a month. It's very hard to draw conclusions from a month. We're meeting, if I remember correctly, I think in plus six in local currencies for the quarter last year. September was a bit weaker, so we will see. I think it's a sign again, that the work that we do, customers are appreciating that and the collections that we had in stores and online so far. When it comes to, what's your second question around the number of members in the loyalty?
Yeah.
Yeah.
In the club, what's the build to now and whether you're changing some of the mechanics for some of the services offered with the membership?
Yeah. We're introducing new features all the time for members, and we have had a good growth. We went into the year with 30 million. I think we stand at just above 50 today. Good growth and customers are appreciating the club. We hope to see further growth in that over the year.
Thank you.
Thank you.
Thank you. Your next question comes from Niklas Ekman from Carnegie. Please go ahead.
Thank you. Yes, just a quick follow-up then on September. Is there any tangible weather effect that's worth mentioning? I know in June you had a very significant weather effect. Was there anything similar you've seen here in September?
Yeah, I think looking at it varies from market to market, but many big markets for us had a positive weather effect, especially in the first half of September, a bit weaker in the final week of September. That's what I mean. It's only a month, and it can change quickly. We'll see. When we look at all the markets, we still see that we take market shares, that we do well, and our customers are appreciating our collections.
Okay. Great. Thanks. Also on inventory, can you just comment a little bit on the difference here between inventory being down 1% in local currency and up 9% in SEK? I think when you look at the currency translation effects, they are significantly smaller than 10%. How come you have such a big discrepancy between SEK and local currency?
Yes, as you mentioned, it's a combination of translation effects as the Swedish krona is depreciating against our portfolio of currencies. There are also some accounting transactional effects, which is causing quite big currency effects. It's connected to that we hold 50%, 60% of our stock in GBC AB, the Swedish company, in Swedish krona. That will give a quite big effect as the Swedish krona has really depreciated against the US dollar.
Okay, thanks for clarifying. Coming back to OpEx growth. I'm trying to understand here the acceleration in OpEx growth. Obviously, if you look at store expansion, has slowed quite considerably from over 6% one year ago to under 3%. Comparisons, you had very strong OpEx growth last year. I'm trying to understand why OpEx growth is continuing to accelerate when you're slowing stores and facing easy comps.
Yeah, it's different things. most it's connected to the high activity level that we have had for several quarters, and that will continue for the quarters to come. that's correct that, of course, the store side is not expanding as earlier, but we are expanding with online quite heavily, both when it comes to our newer brands, but also with the H&M brand. it's not only about the physical stores, it's also online growth that is increasing from year to year.
In the past couple of quarters, you've had a lot of costs related to this transition of your logistics systems. Is that something that is still weighing a lot on cost? Is there a lot of these costs that are kind of temporary in nature, or should we expect OpEx growth to remain at a quite elevated level for the next year or two?
Yeah, two questions in one there. As Karl-Johan already said, yes, we still have a very high activity level throughout the company, and that affects both COGS and OpEx. It's good things we're doing, as we see, and we see that they give results. We continue, of course. When it comes to COGS, yes, we had some one-offs last year, but this year it's again, very high activity level. We are preparing for the year transition in China, as we talked about, and we also have the big move in U.K., where we're moving into big, new automated logistic center.
Excellent. Thanks for taking my questions.
Thank you.
Thank you. Your next question comes from Miguel Medina from JB Capital. Please go ahead.
Yeah, good morning. Just one question. It's regarding the sales evolution in the Spanish market. If I look at the data for the first half, it's fairly constant at 7%, 8% growth in local currency, and then in Q3 it's just 1%. I was wondering if this is because there was less sales activity discounts in Q3 or the macro slowdown in Spain, or a combination of both? Just to see whether there was any specific reason for the performance in Q3.
Yeah. Less sales is one reason. The performance in Spain is according to the plan that we have. If I'm not mistaken, I believe we're meeting a bit higher comps also in quarter three in Spain compared to earlier quarters in the year. Yeah, according to our plan.
Thank you very much.
Thank you.
Thank you. Your next question comes from Richard Chamberlain from RBC Capital Markets. Please go ahead.
Thank you. Morning, everybody. A couple of things please, I'm interested in. On inventory, I wonder if you can comment on the inventory reduction in Q3, to what extent it was driven by any particular areas. For instance, in the U.S., I think you had an inventory backlog last year in the DC in New Jersey. I'm just trying to get a sense of how much that inventory improvement is a one-off or more of an underlying trend. Thanks.
No, this should not be a one-off. This is part of the transformation improvements that we are doing. We expect the improvements of the inventory to continue.
Okay. Thanks, Nils. My other one was just on the high activity level that you mention in the statement. You say that you're doing some more work on supply chain. I wonder if you can just give us a bit more color on where you are with that, talk about the upgrades that you're making and potential impact on gross margin in the fourth quarter, if you can. Thanks.
Yeah. We have listed some activities in the report, but those are only a few of the many that we have, and the supply chain activities is just one area. As Nils mentioned before, one part is preparing for the China transition. A lot of preparation work going into that. We also have the big new warehouse in the U.K., Milton Keynes, fully automated, big, that we believe will generate great things for us as a company, but obviously a lot of investments and a lot of cost goes into that as well. Those are only two examples within the supply chain work, and the supply chain is only one area within the total activities of the company.
one have to remember also, for instance, in the U.K., opening up Milton Keynes, at the same time, we have to run the old warehouses at the same time. we have double cost during quite a long time. that's, of course, a kind of one-off during certain points.
Okay. Sure. One-off costs. Yeah. Will that U.K. warehouse be the first more integrated warehouse that H&M has that can serve online and stores?
Yes, we are on the journey, and gradually we are doing more and more in the supply chain, yes.
Sure. Okay. Thanks very much.
Thank you.
Thank you. Your next question comes from Anne Critchlow from SG. Please go ahead.
Thanks. Just a follow-up from me, please, on store refurbishment. I know that you had a new program of store renewals. I'm just wondering if that's accelerated and whether we need to consider any disruption to trading in stores?
Oh, yeah, we have a program. The look of the store, formats of the store, rebuilding stores in different versions. We have a program for that and a plan for it, and we will see some more refurbishments in the next year. We're confident with the plan that we have and that it will generate good results.
Okay, thanks. Do you think there will be disruption due to areas of the store being closed while that work goes on?
Yeah, obviously, when rebuilding a store, there are some disruptions to that, but that's in the plan. The refurbishment time, how much that will cost, but we also see a big upside, of course, from the stores, selling-wise, profit-wise. Everything is in the calculation.
All right. Thank you.
Thank you.
Thank you. Your next question comes from Simon Irwin from Credit Suisse. Please go ahead.
Oh, hi. Just a quick follow-up on tax. I know that generally for Q, the tax rate tends to bring the full year level down. How should we think about overall tax rates this year?
Yeah. As normally, we are using 23% in Q1, Q2, and Q3, and then the final calculations is done in connection with Q4. We still believe that the tax rates will be between 22 and 23 when we end the year.
Okay. Thank you very much.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Rebecca McClellan from Santander. Please go ahead.
Yes. Hi. Just a question on inventory. Can you just give us an idea of how integrated inventory is across the two channels? Against your goal of 12 to 14% over the medium term, how much of that is related to improved inventory integration?
Yes. As we've been speaking of many times before, virtually, of course, it's integrated, but physically it couldn't split for various reasons. In this phase where we are right now, where we are still expanding online, new markets, we're expanding online, the share of sales in online is slightly higher than for the stores, but over time, that should normalize.
Okay. Thank you.
Thank you. There are no further questions at this time. As a final reminder, if you wish to ask a question, please press star one on your telephone.
Okay.
We have no further questions, so I would like to hand you back to your host for closing remarks. Please go ahead.
Thank you all very much for participating in this conference call, and we wish you all a good day. Thank you.
This does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.