Good day and thank you for standing by. Welcome to the 6 Month Report for 2021. At this time, all participants are in a listen only mode. After the Please be advised that today's conference is being recorded. I'd now like hand the conference over to your speaker today, Helena Helmersson, CEO.
Please go ahead.
Hi, everyone, and thank you all for joining us today. Welcome to this telephone conference about the H&M Group's 6 With me today is our CFO, Adam Carl and Head of Investor Relations, Nils Vigna. I will start with a short summary of the 2nd quarter, followed by current developments. And after that, we will be happy to answer your questions. You will find the 6 month report on hnmgroup.cominvestorrelations.
Even though the pandemic continued to have a big impact also in our Q2 with closed stores And reduced footfall, we managed to deliver a solid result and further strengthen the financial position of the group. We can clearly see that customers appreciate our offering when they have the opportunity to shop. As markets are gradually being opened up, store sales have picked up, while at the same time, online sales have continued to perform very Our much appreciated collections, combined with our ongoing transformation, are all contributing to a strong recovery. In the current quarter to date, we are almost back at pre COVID levels Despite continued restrictions and a very strong comparison base from 2019. I am so proud of all our colleagues' commitment and drive during this challenging period.
We have shown resilience The crisis has made us even stronger as The company and the lessons we have learned will not only enable us to be even faster and more resilient in the event of new sudden headwinds, They will also enable us to grasp new opportunities even better. Our digital initiatives are continuing along with our store optimization. We are continuing the integration of our sales channels to offer customers a smooth Our core is to give our customers unbeatable value with the best Our transformation continues at full speed in order to meet customers' ever increasing expectations and to strengthen our competitiveness further, we are developing the existing business and brands as well as creating new complementary revenue streams. Continued good cost control and a robust Thank you very much for listening, and we are now happy to take your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Magnus Brandman of Kepler Cheuvreux. Please ask your question.
Thank you. Yes, my first question relates to Supply disturbance is in effect from rising freight costs. If you could perhaps elaborate a little bit what you see currently and potential effects Going forward here.
Yes. We spoke about it in the previous quarter. We are seeing some disturbances in the overall supply chain. They are Not material and not affecting the top line. If we look ahead then, we are not Unaffected by some of the cost increases, but we see that we have really strong plans to mitigate them.
So we see them as Non material, but still existing and something that we actively manage looking ahead.
All right. So I read you as that The pricing environment is rather favorable as you see it.
There are many components to it. And we have is working in our favor currently and then other aspects working against us. So we are confident that we can manage the situation without Sort of major impact.
Great. And then on the current trading where fair to say that you met gradually more challenging comparisons in June given the recovery Already in June last year.
Yes. If you look at the comparable figures Last year, as you probably saw the curve in the annual report, you will see that the comparable figures are really high and same also So overall, if we just look at how the Q3 has started, we see this as a Clear sign on strong recovery on well appreciated collections and products And definitely also a sign that the channels are strengthening each other now when most of the stores
Thank you. That's helpful. And then just finally, another sort of supply disruption question here. But the recent lockdown talks Regarding Bangladesh, I believe that's or that is your most important sourcing destination. I guess it's clearly more important than China even.
So can you do you have anything to say here of how you regard this affecting you?
Yes. We're following the situation, of course, closely. And we've gotten used to handle situations like this also throughout, Well, more than a year now. So factories, ports, transport is Not included in the restrictions and the lockdown in Bangladesh. So right now, we can manage This in a good way, but also looking back at previous restrictions and lockdowns in Bangladesh, But also in other production markets, we have been able to be flexible and manage it well together with our close partners.
So we do think we will manage also this time.
Great. Thank you very much.
Thank you. Thank you. Your next question comes from the line of Daniel Smich
Maybe 1 or 2 questions from me then. And looking at sort of the fact that you're now back to 2 almost 19 levels and pre pandemic levels on sales. You were not the CEO back then, but the former CEO said 2 years ago in Q2 report in 2019 that the reversal Markdowns, medium term should go on for quite some time and we should basically get Back to historical levels and maybe beyond that, given the investments that you've done in terms of RFID and optimization of Warehouse and so on. Do you think that's still valid to start with?
Yes, we absolutely think so. We have a strong plan and a lot of enablers in place now. We are Obviously, actively managing the situation that we and the rest of the world are in, but the long term trajectory and ambition is absolutely still there.
Yes. All right. And then maybe just moving on to rental agreements. I think you wrote in the Q2 report that implicitly you're renegotiating at a bit faster Pace, if I remember correctly, it was 1 quarter of all stores being renegotiated last year and it's 1 third this year. And could you say
something about sort of where rents have been
heading over the past six Thinking about sort of where rents have been heading over the past 6 months compared to last year and what you see ahead of you in the second half of this year?
I think you sort of spotted one of the biggest effects of last year and all of the renegotiations. 1 is Obviously, the flexibility in the terms and the other one is also that we together with our partners Have ended up in a more sales related turnover based rent setup. So I think both flexibility when it comes To the lease term, but also that we when we expect recovery now, we'll obviously share the upside with Our landlords, but also manage the risk together with a more turnover based rent setup.
Yeah. And then thirdly, on sort of comments on dividend, you're right that it's sort of high likelihood Of a dividend during the autumn, and you're also right that you haven't received any Swedish government support since the end of March. Is that the key deciding factor in terms of lead time from government Support to when you're allowed to distribute cash or is there any other sort of government support out there that we need to consider?
Overall, I would say that government support we have taken as we have needed it. And of course, That varies a lot in the different markets since restrictions have been looking a little bit different over the past months and weeks. But then looking at our financial position, we do consider that it's strong. As you know, the dividend part is all according to the assessment from the Board. But We do see very good prospects for a cash dividend to happen then later during autumn.
But The level and the timing for that is all up to the Board when we can also review The situation and the consequences of the pandemic, which we are still in.
Yeah. But I just wonder from a legal perspective, is there any other sort of government authorities like Tilvaxi Kit in Sweden, Which is requiring 6 month lead time, is there any others that you need to sort of consider in such a decision in other markets Where you receive government support or is it the Swedish one?
Till Exverket is sort of the governing Body for our Swedish company and that is where the mother company is based. So, Tilvik Circuits is the regulatory body, so And that is the enabler or hinders, so to say, to pay dividends.
But that's That answers the question. Okay. Thank you, guys. That's all for me.
Thank you. Your next question comes from the line of Adam Cochrane
A couple of questions. Firstly, have you got any comments on China and How you've reacted to the business to the conditions there? Secondly, on OpEx.
Adam, please, One question at a time please. So I'll let Lena answer. Sure.
Okay. I can go with that question. In the report, you see the numbers for China. We're still in a complex situation. And other than that, I would kindly refer to our statement that we gave Last time from the 31st March.
So hope for your understanding on that.
Yes. I was just sort of hoping from comments made from some other companies that trends We're improving throughout the quarters month by month. Would you be able to give any indication directionally?
No, I'm sorry. We refer to the previous statement and also what you can see then in this the report.
Okay. Next question please.
Thank you.
No, Adam, he has another question.
Okay.
Reductions, how much of what proportion of your leases are now variable in terms of As a proportion of your total lease rent roll?
I would say the majority Has a big component on variable in the contracts, but of course in many cases there is a minimum or taxes that you have to consider. But it's definitely a very the majority of the contracts now.
So as we think about your sales recovering, You're managing to achieve, hopefully, cheaper rents on some. But as your sales recover, You'll get some of the variable components coming back. So is the total lease charge going to be So dependent on those two factors as you look forward to the rest of this year and into next year.
You're right. Of course, that's the Part of the construction that as revenues increase again, of course, rents will also increase. But hopefully, at fair sales, they could still improve.
And on the last one, inventory down 1% in local FX. Is that In line with as you're expecting given the sales performance in the quarter? Or is there anything within your inventory where you're Building up stock for expectations of higher sales, etcetera. Is that the number that you were looking for?
We see a very Positive development, both on the total stock level, but also the composition. And it's shown Obviously, strong sales recovery and also sort of during challenging Times well managed reduction level. So we feel confident both with the level and the composition of the stock. Then obviously, as I mentioned before, the long term Ambition is to continue to work along the lines we did already in 2019 early 2020. But here and now, we are pleased with The level and the composition.
Okay. Thank you.
Your next question comes from Rebecca McLennan of Santander. Yes, good morning. Could you please give a bit more granularity sort of behind your statement visavis Ongoing continued lower stock levels driven by more efficient supply chain and further integration of the sales channels. What are you referring to in terms of
The inventory level and how we manage it, it's a truly end to end process that we manage in all aspects, everything from obviously planning, designing, quantifying the assortment to how we set up The logistics network and what we do within that is to enable sort of later decisions of where to sell and how to distribute The products and it's all dependent how quickly we can respond to how consumers shift where they want to buy with us. So It's a responsiveness that we're building up to be able to meet the customer demand as it's moving quicker and quicker between the channels, A lot driven by the restrictions, but also going forward that we see that customers will continue to shop in both channels and we need to be responsive Allocating the garments to meet that demand.
Adding to that, also integrating Tech and AI in the supply chain processes is making us more fast, of course, and also efficient, Both when doing product development, but actually throughout the end to end supply chain process.
Thank you. Thank you. Your next question comes from Rosie Sheppard of Retail Week. Please ask your question.
Hi, good morning. I just wanted to have a little bit more color around the complementary revenue streams you're mentioning. Is it things like Get the Park and Sellvia and things like that?
Yes. So both within the different brands like H and M, like Monkey, like Weekly, etcetera, we are trying out new kind of complemented revenue streams to meet more of customer demands, resale being one And also what you mentioned that we're trying out new business ventures such It's a park. We have Singular Society with subscription and those kind of new businesses where we are exploring, which is really interesting. And of course, as you saw in the report, also really happy to see some of these scaling, for example, ship that we
have. Okay.
And you're also exploring more kind of platforms and things like that as well?
Yes, we are. That's It's the part is one of those examples of a new platform model.
I meant more with 3rd party platforms. You mentioned
something about Laura and things like that?
Yes. So we are also working, of course, in partnerships. So we have different 3 denial strategies, all of them trying to find the best channels combined where we can meet our customers. So, Salora is one partnership that you can read about in the report of this quarter.
Okay. Thank you. Thank you. Thank you. Your next question comes from the line of Georgina Johanan of JPMorgan.
Please ask your question.
Good morning. Thanks for taking my question. It was really just a follow-up on the June trading, please. Appreciate that trading is Probably extremely volatile at the moment. But if I'm right in my calculations, it implies the exit rate in June was negative high single digit.
And whilst I appreciate that the quarter overall in 2019 was strong, the comp has eased, I think, through June, if I'm not incorrect. So I just wondered if you could help us understand that shape. Is it about trading
As I said before, when looking at At the beginning of this quarter, we definitely see this as a strong sign of recovery and well appreciated collections, a If you take kind of week by week. So if you look at weather, for example, you have seen Cold weather in some of the countries in Europe during the past week. So it's really a combination of, of course, how restrictions are being lifted, weathers, etcetera, but most of all, it's, of course, Comparable high figures, both if you look at 2020 2019. Not sure if that answered your question.
Is the was the comparative similar for the whole of June then as it was for the start of June, please? I'm just trying to understand if on an underlying basis there was actually a deterioration or not?
I think one good description is what Refer to the diagram in the full year report where you could see there was a very, very rapid recovery Early quarter 3 last year and compared to quarter 2 where we had half selling loss and a lot Less difficult time during the Q3 and that was a week by week recovery. So I think that will give some flavor to this discussion to look at that. And hopefully, that can guide you on a At least on a pattern and a weekly trend basis.
Great. Thank you very much.
Thank Your next question comes from the line of Charlie Muir Sands of Exane BNP Paribas. Please ask your
questions. I've got 2. The first is, you've reported that you've released DKK 6,000,000,000 of net working capital Year to date out of the €10,000,000,000 target planned, I just wondered if you could provide a figure as How much of that is being delivered through reverse factory?
But that is the effect that we see from the supply chain financing program then. The combined efforts We have together with the suppliers of making our payments term more towards industry standard and then supporting With agreements with banks to enable the suppliers to finance themselves in a good
Understood. Okay. So the material evolves out. And then my second question is a big picture Question for Helena in particular. You referred to being establishing a good position to return to sustainable growth After recovery, obviously, historically, pre pandemic, the company for many years used to talk about targeting 10% to 15% growth, Albeit that was historically heavily driven by net store expansion, which at least at the moment is not clearly part of the business plan.
I just wonder what you think could be a sensible midterm target growth rate after the recovery?
Well, of course, now when we do believe that gradually we're leaving the pandemic behind us, We can gear up for growth again. And even though short term is still pretty unpredictable, how much, which is why it's really difficult to give you such a midterm number. But of course, we see great potentials also for growth Moving forward, and then I would say we see potentials both within our core, if we just look at Now how the channels are strengthening each other and how customers want to sometimes go to physical stores to and try out garments and do some shopping and how that interlinks with digital channels that has been growing so fast during the pandemic. We are in a strong position, and we also definitely see that the channels strengthen each And that means that we have a potential for growth, looking at those channels altogether. And on top of that, we have then for growth.
So we definitely look forward to getting on that growth journey again after such a turbulent
Very clear. I look forward to hearing
some more detailed plans once you are recovered. Thanks.
Thank you. Thank you. Your next question comes from the line of Anne Critchlow of Societe Generale. Please ask your question.
Thank you. Good morning, all. I wonder if you could talk a bit please about the cost of sustainable materials compared to the equivalent standard of materials. And Whether you think inflationary pressures are maybe building there as everybody is looking now for these sustainable materials? And could perhaps inflation in these materials such the progress you hope to make on markdowns in the coming years.
What's your thoughts on all that, please?
If you look at cost of sustainable materials, we have such an experience of doing that. We have invested in that for so many years. And of course, our guiding star is our customers, meaning the combination of price, passion, quality and sustainability, we are such a big player, meaning that we can also invest In those new materials in early days and the focus right now, if you look at new initiatives is, of course, Textile to textile recycling and True Circularity, and that is also the partnerships and the investments That we do. The materials that we have worked with for a long time, those I mean, it's about supply and demand, right? So we can help of also increasing the demand and that will So gradually have a consequence that on the costing.
So I would say that when we try out new sustainable materials, we will have to invest, and we always try to be guided by our business ID from a customer point of view in those investments.
Okay. Thank you. I just wonder if you could follow-up and give us an idea about how high the inflation is in these types of materials at the moment. For example, sustainable cotton I know you're at 100%, but what sort of inflation are you seeing there?
It varies From material to material, but as we mentioned, we do see a temporary increase in the cotton prices and the sustainable cotton prices. But we believe that throughout the autumn, the situation will normalize and we manage the situation on a day to day basis in a good way. So we see the effects, but have strong plans to manage the situation
Thank you. Thank you. Your next question comes from Frederic Iverson
The U. S. Market, obviously, that's sort of boosted by the packages consumer get. I think most of them hit bank accounts in March. So I'm curious to hear what you've seen throughout the last month.
Has the U. S. Sort of Weakened over the last, well, April, May, June or what are you seeing in that market? That's my first question.
If we look at U. S, we see a really strong recovery. And as you are aware, we have also seen that restrictions were lifted pretty early if you compared to some of the other markets where we are present. And we also know that The economy has been boosted in many ways, which is also looking at the market as a whole. And if you follow the industry, you do see a big increase.
On top of that, looking at our own operations, We have a really strong team in place. They have been driving an impressive agenda to also do the recovery in the best way possible, and we clearly That the customers appreciate both the experience and the customer offer, which It looks really promising for the near future.
Okay. So it's not like April was Materially stronger than June for instance if we compare it to 2019 figures?
No, I think this is again, you shouldn't look at it week by week or month by month with this very strong recovery in the U. S. As Lena said, and we are back on plus compared to 2019.
Okay. Fair enough. And another question on the HIG Sustainability Index. I think you went live Have you seen from your customers in that perspective?
This is a really interesting pilots a bit hard to draw major conclusions, but we do see a big interest. This index is showing sustainability on the material. So it's really good for us to explore the customer engagement Around this. So I would say we're still learning, but so far a positive response from our customers on an engagement level.
Thank you. And a short follow-up on that. Has any of your peers Competitors initiated that index as well?
We are one of the first, But not alone. I don't have in my mind right now exactly how many. There's a few brands
Your next question comes from Nicholas Champ of Barclays. Please ask
Good morning. Thanks for taking my question. I have 3. The first one is about China. I think you said in March that Around 20 stores were closed.
Could you update on this number? Has it changed since March?
We have around 10 stores closed at the moment out of, as you can see, around 500 stores.
Okay. Thank you. Second question is also again Stockholm because you closed down a net roughly 100 stores since the start of the year, I think you guided towards a net decrease of your store portfolio of around 250,000,000, so you are Slightly late. Could you confirm you are still target to close down this 250 stores net For the fiscal year?
We are, I mean, continuously revising the situation, obviously. We are fairly close to Half of what we guided for, but we monitor this. And there's so much happening in the market, both the positive, of course, of customers returning, but also new opportunities. So We will continuously update when we have information that sort of has Big difference to what we previously discussed, but we'll probably get back to it in quarter 3 again. But as of now, we are Following our plan and continuously working with assessing the situation as we continue To open stores and or reopen stores and gradually getting out of the COVID situation.
Okay. Is it possible to have a bit more granularity regarding the geographic breakdown of this Store closure since the start of the year, I think you closed a gross number of 155 stores, I mean, In which regions more particularly please?
You have it very clearly on Page 18 and 19 in the report, country by country.
Okay. So last question is about your plan to fill up €10,000,000,000 of working capital. So you already completed EUR 6,000,000,000 since the start of the year. Don't you consider that your EUR 10,000,000,000 target is not Overly cautious, I would say. No need to update this figure.
No. Yes, it's depending on we do it market by And we've been working through some of the bigger markets so far. So we still believe that the SEK 10,000,000,000 It's a valid guidance for the full year and it's a little bit depending on what market is onboarded when.
Okay. Thank you.
Your next question comes from Charlie Muir Sands of Exane B. Paribas.
Thanks very much. One quick follow-up question. I think at Q1, you guided full year CapEx It would likely to be around SEK 7,000,000,000 to SEK 8,000,000,000. I just wondered if that's still the number you're looking at?
It is on a Rolling 12 basis, we believe that we will probably end up in the lower part of the interval, but more to be seen as a delay now Also based on that second quarter was more affected by COVID than we potentially previously anticipated. So lower end of that spectrum and potentially slightly delayed a little bit more into 2022.
Your next question comes from Paul Rossington of HSBC. Please ask your question.
Good morning. Apologies, I was late Could you just comment on the gross margins? I think markdown was perhaps slightly higher, but underlying was still better than the market Going forward or the achieved gross margin than you were going forward. You may have commented on that already. I apologize.
But if you could comment on the gross margin movement, that would be great. Thank you.
Could you specify what you're curious about? Because I mean, we gave you the markdowns recovery, which was Around 300 bps, so almost back to 2019 levels. And then of course, we have unwinded The delivery we saw from the semi fixed cost in the COGS. So and then regarding external factors, of course, we were helped by the dollar. Other than that, we haven't commented anything.
But is there anything specific you're curious about, Paul?
I was just wondering if there was
Sorry, I didn't hear your question.
No, but it is if you talk about the big components, it's what Nils said and obviously, the mark And then the lesser negative deleverage compared to 2020, and then we are
Your next question comes from Andreas Lundberg of SEB. Please ask
Yes. Good morning, everyone, and thank you for taking my questions. You mentioned that the unwinding of the fixed costs Gross margin driver, will you say that the fixed costs are the same in absolute levels as last year?
I would say it's actually slightly higher due to our investments in tech and also the online growth with Part of that ends up in the COGS.
Okay. That's good. And also on the big geographical mix Changes here year on year, would you say that that has been a positive or negative for your group profitability?
It goes both. It's difficult to say. We obviously see that U. S. Has taken a big share now with the quick recovery and then we have other markets having a more slow So it's we haven't specified the profitability impact on the sales.
Okay. But let's say if you have the other way around, if the big markets in Europe had the big growth rates, Will the profitability be higher or lower than what you reported?
I see where you're getting at, but sorry, we don't give the mix effect. Sorry, Andreas.
Okay. Thank you. And lastly, can you give us some update on the treadler initiative? What has happened since you launched that A
year ago or so. Thank you.
Well, we're still working a lot with the business plans So with external partners or potential partners, but we have also refined, as you always do when you 2 other actors in a belief that, that will also make the whole industry more sustainable since we have such long experience in working with our partners on making sure that, that is the direction for the future.
Do you have any contracts as of March?
Yes.
Question comes from Richard Chamberlain of RBC. Please ask your question.
Yes. Thank you very much. Good morning, everyone. Couple of follow-up questions, please, on the margin outlook. First of all, Could you just comment on the overall industry pricing environment?
We are seeing quite a few chains struggling. I pricing environment and could that be helpful for gross margin in the second half?
Well, again, as we said last time, of course, after such an extreme situation like this with imbalances in supply and demand, there will be Volatility in the wake of the pandemic. So this is very much expected. But again, we have a long experience. I think we've proven We can navigate through this in a good way and we don't see any drama in this going forward. I think we have a big advantage of our big Global scale, our efficiency, our speed and our long term relationships that we have with our partners.
Okay. Thank you, Niels. And my second one is on the impact from continued strong online and home delivery sales. Is that having a positive effect on the gross Obviously, the business is getting a lot more integrated these days, but how is the impact of much Stronger online sales during the pandemic impacting the gross and operating margins? Thanks.
Yeah. Again, I think it's important to
see the integrated business
model, the omni.
And again, the Business model, the omni. And again, the customers clearly show us that they appreciate to shop in both channels. And we see that the channels, they complement and strengthen each other. That's number 1. And if you break it down per channel, again, obviously, in a year like this, The online channel has been very profitable, whereas the store channel has been less profitable.
See what I mean? But as things normalize again, We should see more normality, but I think the mix that we have is very good for profitability and for growth, But most important for our customers.
Okay. Thank you very much.
Thank you. There are no further questions coming through on the line. Please continue.
Okay. Then we say thank you all very much for participating in the conference call, and we wish you all a very nice summer.
Thank you. That does conclude our conference for today, thank you all for participating. You may all disconnect.