Thank you all for standing by, ladies and gentlemen. Welcome to today's six-month report for 2020 conference call. Our presentation for today will be followed by a question-and-answer session. To ask a question over the audio, you may press star one on your telephone keypad. Please be advised, this call is being recorded as well. I would now like to hand the conference over to our speaker, your CEO, Ms. Helena Helmersson. Thank you.
Hi, everyone, and thank you for joining us today. Welcome to this telephone conference about the H&M Group's six months and second quarter results 2020. With me today is our CFO, Adam Karlsson, and head of investor relations, Nils Vinge. After a short summary of the second quarter and current developments, we will be happy to answer your questions, and you will find the six-month report on hmgroup.com/investor relations. The COVID-19 pandemic continues to impact people, communities, and companies around the world. As we continue to gradually reopen our stores, we do it in line with authorities' decisions. The safety of our employees and customers remains our highest priority. It is encouraging to see that sales are starting to pick up, even though market conditions are still challenging. There is no question about that. Our sales recovery so far has been better than we'd expected.
We see that our assortment is being well-received, just like it has been well-received online throughout the pandemic. Before the outbreak, we performed strongly. It was the result of our improvements and long-term investments to meet the digital shift in fashion retail and create the best offering for our customers. This, combined with the fact that we have acted quickly to counter the negative effects of COVID-19 and that we are accelerating our transformation, convince me that we will come out of the current situation stronger. At most, around 80% of our stores were closed in the second quarter, and in the markets where stores were open, demand was significantly subdued. We had already beforehand communicated that the quarter would be loss-making. Thanks to a range of decisive measures in areas such as rent, marketing, and staffing, costs were considerably reduced.
However, it was not possible in such a short time to compensate for a sales decline of 50%. The net result was -SEK 5 billion. Thanks to rapid adjustments to product purchasing and buying plans, we managed to reduce inventory somewhat in the second quarter compared to the same time last year. However, as there is an oversupply of spring products throughout the industry and the market remains weakened, we expect markdowns in relation to sales to increase in the third quarter. We continue to adjust costs to counter the negative impact of COVID-19. Since end of April and early May, we have gradually been reopening stores as restrictions have been eased. Consumer confidence has generally been subdued to start with, but the pace at which sales are recovering varies a great deal between markets.
In the period of the 1st to 24th of June, sales decreased by 25% in local currencies compared to the same period last year. During the pandemic, it has become clear how important the interaction is between digital and physical channels to meet customers' needs. When the majority of our stores were temporarily closed, we focused on redirecting product flow to our digital channels, which have remained open all the time in nearly all our online markets. Online sales increased strongly during that period and have continued to develop very well since we began reopening the stores. We can already see that the pandemic has caused changes in customer behavior that will accelerate the digitalization of our industry. To meet this future, we will continue adapting the organization and improve our ways of working to become more flexible, fast, and efficient.
As we are accelerating our digital development, we continue optimizing the store portfolio and integrating the channels. Our leading sustainability work will also contribute to strengthening our position and help ensure a long-term positive development of the H&M Group. Thank you very much for listening, and now we're happy to take your questions.
Ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, you may press star one on your telephone and wait for your name to be announced. To cancel your request, you may press the hash key. Once again, star one if you wish to ask a question. Okay, the first question, it's from the line of Fredrik Ivarsson from ABG Sundal. You may ask your question.
Operator, thanks for taking my questions. First one on the OpEx reductions. You obviously managed to lower SG&A by 25% in Q2, and you guide for minus 10% in Q3. My question is, should we expect parts of these reductions to be rather permanent than temporary? That's my first question.
When guiding for both the second and third quarters, we give an estimate of what we believe is the short- and mid-term flexibility in our costs. It's actually a wide range, both from the more long-term, slower, and less flexible cost to the really short-term actions we can take when it comes to staffing in stores and so forth. It's a combination, but it's more related to short- and mid-term flexible costs.
Thank you. Second one is on consumer behavior, and maybe if you could give some color on what your first takes from the markets that you recently opened up are? Also maybe apart from the acceleration of the migration from stores to e-commerce, how do you think that the COVID-19 pandemic will change brick-and-mortar retail?
Right. When we look at customer behavior, we do see that we have increased the customer base online, and many of our customers that have been store customers are now multi-channel customers, which of course is encouraging. When opening up, we do see that we gradually, of course, improve the sales, and it's a little bit better actually than we thought in our scenarios. Still the digital channels are going really well. Going forward, of course, it's all about to meet the customer wherever they choose to go. It's very much about the flexibility, where we do believe that digitalization is being accelerated and more customers will also choose to meet us in those channels. What's important when talking about online and physical stores is, of course, the integration between channels, and this is where we focus our, and accelerate the transformation then going forward.
Another change of customer behavior is the awareness around sustainability, which is also very evident where, of course, our sustainability work, well, we hope to engage and collaborate even more with customers around that going forward.
Thanks. That's all my questions.
Thank you. The next question, it is from the line of Daniel Schmidt. This is from Danske Bank. Thank you.
Yes, good morning, Helena, Adam, and Nils. Couple of questions from me. Obviously, looking at Q2 operating leverage on fixed cost and COGS was a big burden given the drop in sales of 50%. How do you view that going into Q3? Have you done anything when it comes to the fixed cost base in COGS, making it more flexible in any way compared to how it was a couple of months ago?
As I mentioned previously, in the guidance, it's more related to what we short-term can be flexible with. In the same way as our SG&A, there are a variety of flexibility levels also in costs that we have under the COGS, so to say. Not a black-and-white answer, so to say, but it's a variety of fully flexible and then more long-term flexible costs.
I'm just trying to get to, are you in any way more flexible going into the summer than what you were during the spring? Is it about the same operating leverage that we should expect, of course, depending on the sales drop that the impact will differ, of course, but has there been any change? Do you see what I'm getting at?
Yes, with sales increasing, then of course the negative leverage in itself will be lessened, but as time evolves, we're also addressing some of the costs that might be more mid to long-term flexible. I think we should focus more on the negative leverage generated by hopefully higher sales levels than for the third quarter.
Yeah. Just looking at the sales performance at the start of Q3, and of course you have very difficult comps in June because June last year was very strong. Can you say anything about the reopening schedule, the way you see it, or do you have any sort of visibility on that?
Well, right now, most of the stores are open. We have 350 stores that are still closed. It's really hard to predict what will come. We see some major markets that we're focusing on now to open stores, hopefully. There are also restrictions when we open stores due to the safety for staff and also for our customers with a bit of limited opening hours. For how long that will hold is really, really hard to predict. We really just try to be flexible and welcome the customers and staff back as per authorities' recommendations, and try to meet the customers wherever they want. It's hard to predict.
Yeah. All right. I understand. One of your main competitors were out saying that they expected most of their stores to be opening key markets by the end of this month, but I guess you're also basically on that track. Okay, the final question is in terms of consumer behavior changing and online, there's been a few others saying that sort of return rates are coming down as more men are entering online clothing. Are you seeing any way a similar pattern?
We have seen a positive tendency in the more customers, of course, finding us through the digital store. Throughout this quarter, we've had a strong online selling that may result in lower overall returns. There are differences between customer groups and customer behaviors, but we haven't sort of detected that as one of the key drivers in this quarter. There are a lot of dynamics changing, but, to that example, we haven't seen clear evidence.
All right. Thank you, guys.
Thank you. The next question, it's from Richard Chamberlain from RBC Capital. Thank you.
Thank you very much. Morning, everyone. Question for me, please, on the purchasing outlook. I think in the statement you're talking about the external factors improving a little bit from somewhat to slightly negative. I just wanted to confirm, is that comment mainly to do with currency or were there other significant factors driving that comment?
Well, the majority is related to currency. Of course, we can predict that the underlying pressure on volumes in our purchase market is also highly volatile. There, we have some bit of uncertainty, but our guidance here is primarily due to the currency effects and a somewhat I believe that the capacity pressure in some of our production markets will be slightly less than.
Okay, great. Thank you. Just one more please, on the U.S. market. It's obviously been one of the more challenging markets over the last few months, and I wonder if you can give an update on recent trends, in particular plans for store openings and closures in the U.S. market. Thank you.
We're really following development, and it's right that U.S. is one of the most challenging markets when it comes to reopening, and of course, also there, we're trying to follow recommendations going forward. Today, we have 120 stores closed in the U.S., and on top of that, it's been other turbulence also regarding Black Lives Matter, of course. Hard to predict when this will change, but of course, we're hoping for reopening real soon with the necessary safety measures.
Cool. Okay. Thank you very much.
Thank you. Our next question, it's from Nicolas Champ from Barclays. Thank you.
Yes, good morning. Thanks for taking my questions. I have two. First of all, you adjusted your store expansion plan for this year. Could you please be a bit more specific and specify which countries and which markets you decide to close more stores and in which countries you decide to open less stores? The second question is about your cost structure. Did you complete your negotiation process with landlords? Could you please be a bit more specific about potential upcoming savings that could arise from this renegotiation with landlords going forward? If possible, specify the level of proportion of flexible rents that currently represent your rental charge, please. Thank you.
Okay. For the first question, when it comes to store openings and closures, it's actually, we look at every market by market. Of course, as we said before, in the established markets, mainly in Europe, we see more closures than in the other new markets where we see more openings.
On the cost structure question, the greatest part of the saving is due to the opportunities we have with the flexible and turnover-based rent. That is the main component of our rent saving, and that will, of course, continue when, and if sales continue to be dampened.
We had a very good dialogue with many landlords regarding more short-term adjustments also to the more fixed components of our rents. That dialogue will continue, and we believe that the market is trying to get through this situation together. We are in good dialogue, and some of these dialogues will permanently affect the rents. The absolute majority of the effect is connected to our turnover-based rents.
Okay. We will take our next question. It's from Simon Irwin from Credit Suisse.
In rough terms, your COGS are down about SEK 16 billion on where you might have originally expected them to be in the quarter, and yet your inventory only went up by about SEK 3 billion. Can you talk a little bit about how you've managed to reduce your inventory levels so fast, given that presumably you weren't hardly planning around inventory reductions in March, and whether this reflects total commitment or just inventory on the balance sheet? Are there commitments which you've slowed down in terms of taking delivery a bit later?
We have, as Helena mentioned, really worked on the flexibility and took decisive measures already when we saw indications of this situation in early spring. We are very pleased with the effects that we've gotten, and that's also a very close collaboration with our suppliers. The internal teams have worked super hard in mitigating the negative effects, adjusting purchase plans, and ensuring that we are in a healthy positioning going into quarter three. There has been some limited disruptions in the supply chain, particularly Bangladesh and India. These are now resolved, we don't expect a big backlog into third quarter.
Right. Can you just talk a little bit about the kind of composition of inventory and how you're trading it through? Do you think you will trade through most of your spring/summer inventory through this summer and clear it in sales, or would you expect to be holding some of it through to spring next year?
We divide it into a couple of different buckets. The majority, and we also guide for it in the report, that we will most likely need to take more reductions throughout quarter three to reduce the levels of spring garments so we ensure a strong composition into the autumn. We also had the opportunity to spare some garments that are more long-term, that we believe that we don't have to activate throughout the summer, but rather bring these more, or actually less seasonal garments out to our stores and the online channel throughout the autumn. There are a number of different activities ongoing, but the majority is that we, of course, with the flexibility, reduce purchasing, and then we will activate slightly more than the last year throughout the summer here to improve and get into the autumn with a good stock composition.
Great. Just one final question. Can you tell us, what was your exit rate in China? Are you now back in positive territory?
Sorry, say again.
What is the exit rate for China? You gave us the overall quarterly sales for China in the report, but are you now back trading positive year-on-year in China?
We're not fully back yet, there are some markets where we're actually doing better than last year. China is still not back fully. Of course, day by day or week by week, but the overall picture is still below last year in China.
Great. Thank you.
Thank you. Our next question, it's from the line of Niklas Ekman. This is from Carnegie. Thank you.
Thank you. Yes. Can I ask you a bit how you've been planning for autumn collections, given your comment that sales are performing better than you have thought? How quickly can you adjust in terms of sourcing just to have a well-balanced inventory for this autumn if sales are now truly recovering?
Right. Of course, we need to buy with a different kind of speed for a bigger part of the assortment now than what we've done before, and we are super impressed by seeing the collaboration and also the changed way of working to get this kind of flexibility. We do see that, of course, in this case, since it's still quite unpredictable, that late decisions is really favorable for us. Largely, we can manage that through working in different ways and together with our suppliers.
Okay, great. Coming back to this cost issue going forward, if you look at costs per store in 2021, do you expect those to be tangibly lower than the corresponding costs in 2019?
It is, of course, very much related to our sales predictions and, or actually how the sales will develop. We're working as we always do to try to be as efficient in how we operate the stores, but without compromising on the customer experience. With the uncertainty of how store sales will develop, we of course, as Helena said, in the same way as we create flexibility in buying, we also work hard to create flexibility in the cost structure to mitigate the potential effects of this situation.
Okay, thanks. Also, you mentioned here in the results that you're looking at additional financing. Could you give any indication of the size of issuance of new bonds here, and would that replace current debt, or are you planning to increase your debt situation?
We are changing the focus a little bit now from securing short-term liquidity into ensuring that we have a long-term plan. What we're now creating is another tool to put in the toolbox to ensure that we have a good access to capital if needed. It is a way to secure that we can make these judgments as we go ahead and ensure that we have the needed financial flexibility going forward. It's not decided on when, and it's not decided on levels. This is something we will evaluate once we are active and this program is in place.
Is it a tool to increase your debt or is it just a different balance?
It's to widen the access to capital, so to say. It's not to increase debt per se, but it's rather to have more tools in the toolbox.
Excellent. Thank you very much.
Thank you. Our next question, it's from the line of Charlie Muir-Sands. Thank you. You may ask your question.
Yes. Good morning, guys. Thank you for taking my questions. Two from me, please. The first one is, I wonder if you could just clarify, you obviously talked about the trends remaining strongly online as the stores have reopened. I wondered if you could just clarify whether you're actually seeing the same kind of rate of growth or acceleration or perhaps a little bit of moderation in the pace of growth as stores reopen in the online channel. The second one is, would it be possible to give an indication as to how much government support was provided to your cost base in the second quarter? Whether you anticipate a similar scale or perhaps a bit less in the third quarter? Thank you.
Trends online, we talked about a little bit before. We are encouraged by seeing that even though when the physical stores are reopening, we still see good selling in the online channel, which is, of course, really good. Again, we see that we have increased our customer base and that quite many of our customers that used to be a customer in our physical store is now multi-channel customers. Again, instead of only focusing on the growth in one channel, we think flexibility is key. That means that meeting the customers where they choose to go is really what we are focusing on. That is why the integration and the flexibility of the channels is the most important part.
Regarding the second question, regarding the government support, we estimate that about a fifth of the cost reduction here in the second quarter can be attributed to cost reductions related to government support.
Great. Thank you very much.
Thank you. Our next question is from the line of Anne Critchlow. Thank you.
Thanks. Good morning. I've got two questions. The first one is on the current trade. I think you've been positively surprised. I just wondered in which markets or regions you're now seeing sales growth and where the best surprises have been. On the second question.
Sorry, we lost you there, Anne. Can you rephrase the question, please, because we lost you.
Sure. Sorry. Regarding current trading, I wondered which markets or regions you're now seeing sales growth in. Because I think you've had some positive surprises, so just wondered where they were. The second question is on RFID tagging. When we went to the London store last year, I think you were showing us tags, which had the RFID chips in the tags, and not all products were tagged at that point. I just wondered where that project was and what your expectations are to do with RFID tagging.
Connected to the RFID, it's still an important part of the plans to ensure that we have the availability of the right garment in the right store. That project is still in the middle of the rollout phase, and we just added China now during the spring, and we see positive effects of having the RFID tags on our products. We're keeping the rollout plan, and we see the positive effects of it from a size availability and customer experience point of view.
Today, we have RFID at 20 markets. If I talk a little bit about the sales and what we have seen, of course, we all felt that it was really unpredictable, so we worked with several different scenarios in parallel. It's quite hard to just pinpoint a few countries or regions, because overall, we would say that when reopening the stores, we've had a slightly better sales in the physical stores than we thought. However, we have to be really humble for what's coming the next coming weeks and months, because it's still very unpredictable, and it varies so much from market to market. It's difficult to see patterns, but of course, encouraging to see the overall sales figures as we reopen.
Okay, thank you. Could you highlight any countries where you're seeing positive sales growth?
I can mention a few markets like Korea, Japan, Norway, to mention a few.
Okay. Thank you very much.
Thank you. Our next question is from the line of Rebecca McClellan. McClellan, you may ask your question.
Yes, good morning. Just a couple of questions from me, please. Firstly, could you sort of develop just slightly, what stage your cross-channel integration is and how you want to take that and when you hope to achieve sort of your optimal integration? Secondly, does the recent experience change your sourcing strategy with different markets that you might be sourcing from, the need for more rapid sort of lead times, et cetera?
When it comes to the channel integration, I don't know, I think this is really an ongoing work for a long time ahead. Of course, we have taken a lot of measures already, and this has been a transformation that has been going on for some time, that we now accelerate further. Part of that agenda is then the customer experience. Whether you choose to go to the online store or the physical store, that it should be like an integrated experience. We have different examples on visual search. We have find in store, we have scan and buy, click and collect, returns in store, just to mention a few projects that we've been trying out for some time in many markets and rolling out further.
The other part in the integration, which is really important and has been highlighted in this crisis, is the supply chain and the importance of being flexible then between channels. We're happy to see that we already have done some investments. For example, the omni distribution center in Milton Keynes, to mention one, where we can enable that. That transformation, we will also accelerate going further.
For the Milton Keynes distribution center, it can distribute to both online and offline, but this is a rare example, no? It's only in the U.K. that you've got that capacity at present. Is that right?
We have more or less different solutions, but it's not just about the warehouses as such, it's more about the thinking, about the system behind and throughout the entire supply chain.
Of course, order orchestration between the parts of the network, which is crucial to be flexible.
Okay, thank you.
We have the question on sourcing markets.
In this crisis, when we have been forced to kind of take flexibility to a different level, as I mentioned before, the main part and reason for us being able to take much faster decisions and kind of be faster as such is different ways of working. I would rather highlight that than specific and major changes when it comes to the sourcing market mix.
Okay, understood. Thank you.
Okay, next question is from Michelle Wilson. Thank you.
Hi, good morning. Two questions from me, please. The first one, just clarifying on the selling and admin cost guidance for Q3. Is that all volume related, the 10%? Year-on-year reduction in cost. If so, what assumptions have been made around sales for the quarter to get to that number? You mentioned in the release this morning, the government grants that accounted for about, I think, a fifth of the drop in costs over Q2. Is the assumption that all of those government grants will drop out over Q3, or will we still have government grants over the period? The second question, just on the store estate, do you slow the rollout program or adapt to the rollout program in 2020? We've seen one of your major peers take a more significant restructuring in light of acceleration of channel shifts driven by COVID.
Is that something that's being undertaken by H&M? Is there any sort of review of the store estate going on, or have you already reviewed your store estate and you're comfortable with what you have?
To start with the OpEx guidance for, or SG&A guidance for third quarter, it is our best estimate of how stores will continue to reopen and, of course, when they reopen. We are right now at 93% open. There is a big volume component into this saving. When we open, of course, stores need to be up and running close to what they were before. Volume is, of course, important here, but we're also prioritizing really hard to ensure that we do everything we can to mitigate the cost effects. Primarily opening stores reduces the flexibility in cost, but of course underlying, we're working very hard to secure that we have a strong cost structure to back this up. Second question.
Government grant.
Government grant. Yes, exactly. We believe it's too early to say. The conditions are changing along the way. We believe that the third quarter will be less impacted by government support than the second quarter. We believe that the majority is now in the second quarter. As previously said, there's still uncertainty and changing conditions.
When it comes to stores, of course, we put a lot of focus on the store optimization. We did that also before. We do it continuously, in the crisis, when we also see that more customers have been introduced to digital channels, this is highlighted even more. Optimization of the store portfolio, that means that some of the mature markets we would probably see more closures, while we also have newer markets where we will keep on growing. Again, I want to highlight the importance of the integration of the channels, of course, and the flexibility in that. Also we have flexibility with the landlords when it comes to physical stores so that we could renegotiate roughly one fourth of all the store contracts yearly.
Okay, great. Thank you.
Next question. It is from Andreas Lundberg. Thank you.
Yeah, thank you. Good morning, everyone. Andreas Lundberg with SEB. On your supply chain, more long-term from this pandemic, what do you think, what kind of changes of your geographic distribution do you foresee, if any, can come from manufacturing or your own warehouses, et cetera?
Thank you. We touched on that a little bit before, but again, when we see the sourcing markets, that is kind of continuously reworked to see how it can best suit with the customer offer and the business idea and mix of price, fashion, quality, and sustainability. Again, I would more highlight to work in different ways, use digital tools in different ways that can make us more flexible and fast to act on customer demand than a major kind of shift in sourcing markets.
Do you still expect that, let's say, 80% of the sourcing will be placed in Asia also three years from now?
Again, it's a continuous work, but we don't see a major shift.
Okay. What areas of change do you think will be permanent for the business from this pandemic?
I would mention first of all, the organization as such, where we have great learnings in how to be more efficient, fast, and flexible. That's more linked to our teams, our ways of working, and organizational structures. Secondly, it's obvious that this has accelerated digitalization, so to be able to meet the customers where they choose to meet us, we are quite certain that it will be really important for us to accelerate our own digital shift when it comes to competence, and also when it comes to certain development. As you know, we've done a lot of investment in the past, and we have also reorganized that part internally to be able to be more customer-focused and do more with less. That is good. Again, the agenda on integrating the channels is, of course, linked to the digitalization.
Another permanent part that we are foreseeing is around sustainability, where customers are more aware of the importance of both social and environmental questions. Us being a leader in the industry when it comes to this, makes us feel that we simply want to collaborate even more and engage even more with our customers in these questions. We want to deliver even better ourselves to make sure that we have a more resilient business. For example, you might have seen that we just launched the Higg Index as a test, where we also on a garment can show a sustainability scoring.
Thank you. Lastly, a quick one. From how many of your stores can customers pick up online orders as of now? Thank you.
We don't have a specific number, of course, it's something we are looking into. That's online returns. This is, of course, a very important opportunity in having the integrated model with the stores and online, where stores will serve as a logistic hub, so to speak. You can pick up products and pick in stores and return in stores and so on. We don't have a specific number at the moment.
Okay. Thank you.
Thank you. Our next question, it's from the line of Caroline Weinbeck. You may ask your question.
Hello. Thanks for taking my question. I'm Caroline Weinbeck from Der Spiegel in Germany. Germany being your biggest market and you mentioning closing a lot of stores or closing more stores in established markets, can you be, in any way, be more specific on your plans regarding store closures in Germany? If that's not the case, then can you at least give an idea of how many stores you might be closing in established markets? Thank you.
We, as Helena mentioned previously, constantly revise our plans for the store network. Throughout the last couple of months, we've seen that this dynamic is just changing even quicker with a lot of active rent negotiation changing the landscape and also the customer behavior shifting. It's a little bit too early to say anything about 2021 and onwards, but of course, we need to ensure that we have a store network that is linked to how the customer wants to meet us. It's too early to say anything about specific countries, but continuously revising the plan.
Okay, thank you.
Okay, next question. It's from Adam Cochrane from Citi. Thank you.
Good morning, team. A question from me on online profitability. Given the significant increase in online sales performance over the period, and to a degree, that the fixed cost nature of some of the online IT costs and warehousing things, if you were to allocate the costs to online and stores, have you seen an improvement in online profitability over this period? With that, as you mentioned collected store, with stores being shut, have you seen any change in behavior in terms of customers being delivered to home rather than to the store? Does it have any difference in cost profile for H&M? Thanks.
In the same way that obviously the store profitability has been negatively affected by the volume decreasing, we can see the opposite in a positive way for the online channel that increased volumes over time will increase profitability. On a general level, we see this as a totality when we look at our profitability development. All in all, of course, volumes comes with scale, and with scale comes efficiency. We've seen a positive trend when it comes to efficiency and profitability in the online channel throughout this period.
Would you expect as stores reopen, that increase in online profitability, assuming all of those online sales don't reverse, there's no real reason why that online profitability shouldn't stay at higher levels. Then on the store-based profitability, as you see volumes come back and as you see rental renegotiations and things, it should have a positive impact on the overall group profitability, everything else being equal.
Yes, agreed.
In terms of the home delivery versus collected store, are you seeing any different trends in online that impact?
how the profitability profile might evolve.
Say again, please repeat the question. Sorry.
I'm assuming that when a customer picks an order up at store, it's slightly more profitable for you than if you deliver it to their home, given that the 80 million H&M Club members probably get some degree of free delivery that you have to bear the cost of. Whereas if it goes into a store, it's generally a more profitable metric for a retailer. As the stores have been shut and as they're reopening, are you seeing the growth or recovery in the number of orders being picked up from store as the stores reopen? Or is it a permanent change that people say, "Do you know what? Getting it at home is better than going in store.
We try to be, and this is also very market specific regarding how customers are used to and want to pick up their parcels, because obviously last mile deliveries is quite a substantial part of the cost connected to our online business. We believe that if we can integrate, as Helena said, the experiences, we have a positive upside in having deliveries to stores and welcoming the customers to that experience as well. We see picking up parcels in store as something positive going forward.
Okay, thank you.
Thank you. Our next question, it's from the line of Sarah Battistini. Thank you.
Hi. Sorry, actually, my questions have already been answered. Maybe if I can have a follow-up question on your calls and the fixed component of it. Sorry if I missed it, but could you actually clarify how much of your cost of goods sold is fixed so that we can think about this also in the upcoming quarter? Thank you.
First of all, maybe I should clarify, they're not fixed as such, but of course, in a quarter like this, with a sudden drop of 50%, of course, most costs are pretty fixed in the very short term. We have a sizable organization connected to buying, sourcing, shipping, IT, all of that connected to the COGS, which is a great asset for us. Of course, that's a way for us to assure that we can control the products and make sure that they're sustainably produced from an environmental and social perspective, and also from efficiency perspective. Typically, this is a great asset, but of course, in a quarter like this, it gives a pure mathematical deleverage on the gross margin. We prefer not to give exactly the size of it, but indirectly, of course, you can back out that it's pretty sizable.
Thank you, Nils. We should expect, of course, to a lower extent, a lesser extent, but we should still expect a drop from this in Q3 then, on top of the markdown cost.
Of course, sequentially from Q2, of course, hopefully we should see an improvement.
Yeah. Perfect. Thank you very much.
Thank you. Our next question, it's from line of Geoff Ruddell. You may ask your question now.
Good morning. Just one very quick question, please. A quarter ago, you were flagging that you expected to make a loss in Q2. You haven't made any comment at the moment. Can we assume you're expecting to make a profit in Q3?
We have sort of gone from 1 type of uncertainty. When we looked into the second quarter, it was regarding how long should this lockdown period last. Now we have some more answers on that side. Obviously, we go into another type of uncertainty. How will customers respond, how will government ease restrictions, and so forth. What I'm alluding to is that the profitability estimates are so much depending on the top line, and we don't dare to do that with any precision right now. So difficult to say. It's all about how now the trading will develop. We've indicated parts of June now, and of course, we will hope that this will continue in a positive direction, but still with high uncertainty.
You're not sure yet whether you'll make a profit in Q3?
We dare not to give any estimates here. We focus on ensuring that colleagues and customers are safe, that we follow the regulations, and then believe that we have a strong offer. We do our best to ensure that the trading improves as we look into the summer.
Okay, thanks very much.
Okay, our next question, it's from Niklas Ekman. Thank you.
Thanks. Just a quick follow-up, if I may. I am curious about markdowns overall in the industry. Have you seen any dramatic changes in how your competitors have behaved? Are you seeing a lot of peers struggling with markdowns, or does that seem to have been balanced in the way that you have managed your inventory?
It's hard to compare with others, but obviously there will be a lot of commercial activities, and that we see already now when it comes to coming to a place where we have a better mix when it comes to composition now of stock. That goes for us and obviously also for others. We just focus on getting to a better mix through great and creative kind of commercial activities in all channels.
Okay. Thanks for taking my question.
Thank you. We have the next question is from Magnus Raman.
Just wanted to come back to the prospects ahead of the autumn-winter season. You mentioned here being careful in the sourcing, making late decisions, et cetera, and perhaps we could expect similar competitors acting in a similar fashion. At the same time, we see now a rapid pickup in demand. You mentioned here that sales in physical stores have been coming in above your expectations. I'm just thinking, wouldn't this make for a picture ahead of the autumn-winter season when it comes to balance supply-demand, being much more favorable than the one we see to the summer?
The most dramatic effects that we took, or the actions we took, were related to summer and the more seasonal garments. We believe that the purchase adjustments will sort of ease out throughout the autumn. We have had a very big focus on ensuring the best possible composition here with a lot of uncertainty when it comes to absolute levels. We are confident that the autumn will bring improved composition week by week and month by month into the end of the autumn.
Right. Then on online and online delivery, we saw that one of your key competitors ran delivery from closed stores over the spring here, and they've been reporting very strong online sales numbers. I guess that has been a way to be able to meet the very strong demand that's been in the marketplace during the special circumstances. I just wanted to ask what your plans are in terms of online deliveries. Do you see a potential to deliver out of stores, or do you see that efficiency and profitability is best delivering dedicated from online fulfillment centers?
Well, we are looking at different ways to meet customer demand and of course, focus a lot on availability and of course also delivery time and the mix of speed and cost kind of mixed to that. I would say we have different tools in how to do that, but big investments have gone into the availability part overall and will be accelerated also going forward.
Go on.
Yeah, go ahead, please.
Regarding your specific question about pick from stores, as I said previously, that's of course something that we look into and we are trying, but that should be seen in the whole picture where, as Helena said, availability is key, but of course, a balance of cost and efficiency.
All right. Just finally, maybe on the online deliveries. Well, actually, I think I cut it short there in terms of time. Thank you very much.
Okay, thank you.
There are no further questions now, is there?
Thank you all very much for participating in this conference call, and we just wish you all a very good day.
Thank you. That concludes our conference for today. You may all disconnect. Thank you all for participating.