Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's nine months result for 2018 conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must also advise you that this conference is being recorded today, Thursday, the 27th of September, 2018. I would now like to hand the conference over to your speaker today, Karl-Johan Persson, CEO. Please go ahead.
Hi, everyone. Thank you all for joining us today. You are very welcome to this conference call about H&M Group's nine-month results for 2018. With me today is our CFO, Jyrki Tervonen, and our Head of Investor Relations, Nils Vinge. I will start with an overview of the third quarter. Nils will take us through the financial details, then I will give an update on our strategic focus areas before it's time for the Q&A. You will find the slides on hm.com, Investor Relations. As you know, our industry is going through a period of rapid change, and consequently, the H&M Group is in a phase of transformation. We are making improvements across the assortment and the customer experience.
We had a strong development online in the third quarter, and as we are adapting to the digital shift, we're working full speed to roll out online globally and to continue integrating store and online. The H&M Group sales increased by 4% in local currencies and 9% in Swedish SEK in the third quarter. Our transformation work contributed to gradually better sales and increased market shares in most markets. In some markets, however, we experienced problems related to the implementation of new logistics systems. Most of these issues are now solved but entailed extraordinary costs that had a negative effect on profits in the third quarter. The new logistics systems are an important part of our transformation work and will contribute to a faster, more flexible, and efficient supply chain. This will also enable further integration of our physical and digital channels.
That was the short introduction, and with that, I hand over to you, Nils.
Thank you, Karl-Johan. Starting with top line. Sales including VAT increased by 9% in the third quarter to SEK 64.8 billion. In local currencies, the increase was 4%. Net sales amounted to SEK 55.8 billion compared to SEK 51.2 billion last year. Sales and market share increased in most markets, above all in Germany, Sweden, Eastern Europe, Russia, and China. In the markets that experience logistics difficulties, U.S., France, Italy, and Belgium in particular, sales in local currencies decreased by a total of 8%. Meanwhile, the other 66 markets in the group together increased sales by 8% in local currencies, indicating that we are moving in the right direction. Looking at online, H&M sales in SEK grew by 32% in the third quarter. For New Business, which combines our new brands, multichannel, sales grew by around 20%.
Gross profit in the quarter was SEK 28 billion, which corresponds to gross margin of 50.3%. Markdown costs as a share of sales increased by approximately 70 basis points. Selling and admin costs increased by 13% to SEK 24 billion. In local currency, the increase was 8%. The increase is mainly related to the expansion in stores and online, but also to extraordinary costs due to the issues related to the implementation of the new logistics systems in some markets. These extraordinary costs, which affected both the gross margin and SG&A, total approximately SEK 400 million. Profit after financial items was SEK 4 billion. Net profit was SEK 3.1 billion, equaling earnings per share of SEK 1.87. Looking at some key data. The book inventory on the 31st of August amounted to SEK 38.7 billion, an increase of 15% in SEK, whereas in local currencies, the increase was 12%.
While the level is still high, the quality and value of the inventory is better compared to the same time last year. One indicator that our transformation work is starting to have an effect is that stock turn of new products is increasing gradually. On a whole, the inventory situation is fully manageable, therefore, markdown costs in relation to sales are not expected to increase in the fourth quarter compared to the fourth quarter last year. Cash flow from current operations was SEK 14.9 billion. Investment in terms of CapEx totaled SEK 8.5 billion, just below last year's SEK 8.6 billion. For the full year 2018, CapEx is expected to approximately SEK 12 billion in local currencies, with a continued shift from new physical stores to digital.
Liquid funds at the end of the quarter were SEK 14 billion, with loans amounting to SEK 15.4 billion compared to SEK 3.5 billion last year. Return on equity was 23.9% rolling 12 months. Now back to you, Karl-Johan.
Thank you, Nils. Our transformation work continues, we're driving change through a number of strategic focus areas, which we have presented in detail before. In short, this work is aimed at creating the best customer experience for all our brands, a faster, flexible product flow, and securing additional growth. The most important part of this work is to develop the assortment of our brands in line with customers' ever-increasing expectations. We should always have the best combination of fashion, quality, price, and sustainability for all brands. Our highest priority is the H&M brand. H&M is the largest brand and therefore incredibly important for the future development of the group. We see evidence that we are on the right track with sales of new products contributing to higher sales in many markets. In addition, we are improving the customer experience online as well as in stores.
Customers have responded positively to the changes we're making. For example, in those H&M stores where we are trying out various adjustments to the selection, product presentation, and store image to better suit the tastes and shopping patterns of the local customers. As a result, we are now able to roll out these changes and improvements on the larger scale. In parallel, we are also making improvements to our online store, ranging from personalized product flows, improved product search, and size recommendations to payment options and shorter delivery times. As we continue expanding our integrated store and online mobile, we're making services like click and collect and online returns in stores available to more and more customers. Using digital features in store, we can also provide the richer, more relevant shopping experience across the channels.
The H&M Home Stylist is another example of a new feature contributing to a more inspiring and convenient customer experience. Another important part of our transformation work are the investments in the supply chain that we do to become faster and more agile. Related to this are our investments in advanced analytics and AI that will enable improvements within quantification and allocation. Looking at logistics, we are increasing automation, and we are optimizing the logistics network. Despite the implementation issues during the spring and summer, these changes will give us a faster and more flexible and efficient supply chain. In parallel, we continue our global rollout of RFID, which will also be very valuable for our future. Our growth continues. For H&M, we focus the store expansion on emerging markets, while in more established markets, we are optimizing the store portfolio.
Optimization includes renegotiations, relocations, closures, rebuilds, and adjustments of store space. We see that the online shift in the market is opening up for further improved lease terms, both for new and existing stores. Our estimate for the full year remains a net addition of around 240 stores. Many stores are scheduled to open at the very end of the financial year, and therefore, some of the openings may take place in the beginning of the next financial year instead. We keep expanding our brands online through our own channels as well as through digital marketplaces. Later this year, COS will open its online store in China. We will also launch COS on Tmall, where we have had a very good reception of H&M since the launch this spring, and where our brands H&M Home and Monki are also available. H&M today offers online selling in 47 markets.
Next year, we will open online in Mexico and via franchise in Egypt. We are working hard to be able to eventually offer online globally in all our existing markets and in other markets, too. This was a short update on our strategic focus areas and growth initiatives. We have a long-term approach. Our transformation work continues, and even if many challenges remain, we get more and more indications that we are moving in the right direction. Therefore, we have a positive view of the future and the many opportunities that lie ahead of us. Thank you, and now we're happy to take your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, star and one if you wish to ask a question. Your first question comes from the line of Cédric Lecasble from Raymond James. Please ask your question. Your line is open.
Yes. Good morning, gentlemen, and thank you for taking my questions. First one would be to help us with the split of the one-off logistic cost between the gross margin and the SG&A. That would be very useful. The second one would be on the main supply chain improvements you've seen despite the disruptions, but excluding these disruptions, what was the main additions or improvements you've seen? The last question is regarding the improvement of the product offer or the work you are doing. Could you help us maybe understand the evolution of the number of SKUs, the evolution of price points, what you take out of the store, what are you adding? What work exactly are you doing? Thank you.
Okay, the first, when it comes to split of these extraordinary SEK 400 million, it's more or less, half of it goes up to the cost of goods sold, so up approx SEK 200 million. The other half is within the SG&A OpEx.
Okay.
When it comes to the second part of supply chain improvements, obviously it's a big area and covers a lot of different areas, but one is mapping out the whole warehouse network to ensure that we have the right number, they are in the right location. We have the right setup for stores, for online, for an omni-channel model that we have. It also covers automation in our warehouses. It's also about new systems that we are implementing now that will be a foundation for a lot of the business development work that we have ahead. It's also about changing our internal buying production processes, so we can differentiate more between basic products and buy that more efficiently, and also the products that we want to buy really quick, and mapping out the supplier network to cater for that.
It's an ongoing work and more and more of the work and the improvements are kicking in, and it's also why we know that we can buy more in-season now for this autumn and for 2019. The third question, when it comes to assortment improvements, well, for competitive reasons, we don't want to go down into exact details. What we see is that especially the H&M brand, where it's our highest priority as the team has done a fantastic work in creating collections that our customers are appreciating. Making sure that the right trends, nice looking products, and a great combination of quality and prices. Good work from the team.
Do you reduce SKUs globally?
We are expanding. We are a multi omni-channel company, and we see big opportunities to broaden the assortment online. In total, the SKUs have actually gone up, I don't want to go into exact details how the SKU development has been.
if I may, just a follow-up on your recent new concept initiative on Sweden, smaller stores, more focused assortment. What can you say at this stage?
Well, we are testing different things. We have a really good development online. Store sales have been below our expectations for some time now. We're about to see an improvement in this quarter. We still have a strong belief in physical stores. We know we can do well, which shows in many markets. We see that we need to elaborate with the different store formats, and that we are doing. Many of the tests that we are carrying out around the world are showing really positive signs in good customer feedback, but also in good sales. The things that work for us, we will of course, roll out globally.
Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Magnus Råman from Handelsbanken. Please ask your question. Your line is open.
Thank you. Firstly, on the disappointing rise in inventory in Q3, could you elaborate here if this rise in inventory, which I guess falls below your plan, is an effect of markdown measures not paying off, or is it that sales fell below your plan in Q3?
Yeah. The inventory level is higher than planned. That's right. We are in a better situation going out of Q3 this year than last year. The increase is also explained by the expansion, of course. I think the most important part is to look at the composition of the inventory, and we have less old garments, so to say, with an end date than same time last year. We have more current season and also season-less products. That in combination with the improved buying processes and supply chain improvements, we see that we can have reductions in relation to sales flattish compared to last year. We're confident for those. It is higher than planned, and as we stated during the Capital Markets Day, we will see improvements for 2019 and after that as well.
Right. You are experiencing FX tailwind in terms of gross margin here in the second half of 2018. Can you perhaps help us quantifying what you measure being the positive transactional FX effect to the gross margin in Q3 and what you expect for Q4? Do you want to take a dip?
Well, as we've stated before, yes, of course, there has been currency tailwinds, definitely. There have also been other things that drive gross margin that have been negative. We've stated that all in all, the external factors were slightly positive for Q3 and also for Q4. Of course, the end result of the gross margin is a combination of all these things and, of course, how we decide to price our products. Most of all now, the most important thing is to have the best customer offering, where price is, of course, a very important feature.
Right. Because I am trying to dissect the gross margin components, the gross margin was down 110 basis points in Q3, whilst you talk about 70 basis points in markdowns. I guess there must have been quite large residual negative other effects, given that there is also a positive FX transactional effect in the net.
Yes. As I mentioned, just for your question, is that we have these extraordinary costs from the logistic issues, SEK 200 million of these are affecting the cost of goods sold. It's more or less around 40 basis points. That's also explaining the decrease compared to last year.
That would imply if everything else is flat, that would imply that you did not have any FX tailwind. There must have been
Yeah, that's theoretically, as we've mentioned many times, there are so many different factors affecting the gross margin, and the decision when it comes to working with the customer offer that we decide. There are 15, 20 different other factors affecting the cost of goods sold as we are working with a function-based profit and loss.
Right. When we review Q4 markdown estimates that you expect to be flat year-on-year, we should consider this for your calculations to be the same as they were in Q3 of the net?
Yeah. What we have said is that we would normally comment on these five big external factors, those combined, when we brought that for quarter three, had a slight positive effect, the same is true for quarter four. We don't go down in exact details in every part. On top of that, there are many other factors that affect the gross margin and how we decide to act when it comes to prices and quality as well. That's what we give, we have also said that reductions in relation to sales will be practiced for quarter four. Unfortunately, we can't say more than that. Sorry about that.
Okay. Thanks.
Yeah. Thanks.
Thank you. Your next question comes from the line of Richard Chamberlain from RBC. Please ask your question. Your line is open.
Thanks very much. Morning, guys. A couple of questions, please. First one is, should we expect the logistics disruption in the U.S. and other markets to carry on in the fourth quarter?
It will carry on, it will be less than in the third quarter, it will gradually be less. Less than third quarter, we will still have some additional logistics costs connected to that and probably also some lost sales as we have had in the third quarter, less than the third quarter.
The main issues, they are solved. Of course, we have a backlog that we have to solve. We will run maybe three shifts, two shifts at least, for a while to release the backlog. Of course, there are some minor fine-tuning as well to get these new systems to work as we have planned to get the efficiency that we want.
Okay, thank you. My second question is on the buying gains. I guess in gross margin again. It sounds like you're reinvesting pretty much all of your dollar buying gains in lower prices or more
We don't want to go into details again, so sorry about that. Slight positive effect on these external factors. Yeah, of course, we're working to improve the assortment, and we have done that, and it's a combination of design, quality, prices, and we always look to improve. Yes, some investments we have made as well.
Right. Okay. I guess my question was, should we expect the pricing to now really have more of an effect on the margin than markdowns? Obviously, particularly as we go into next year Q1, which can be a clearance quarter for the autumn season, would you expect that quarter then maybe to have more of a margin impact than Q4?
Sorry, what was the question there? If we expect the first quarter-
It sounds like because of what you're doing on price, potentially the impact on margin might be more through price going forward than it may be through markdowns. Would you agree with that?
We don't want to give a gross margin prognosis. We'll comment on it after quarter one. We feel confident that we're doing the right things, and we have more-
An interest table wide markdown. Yeah.
Yeah.
Yeah. Okay. All right. Thanks.
Yeah.
Thank you. Your next question comes from the line of Fredrik Ivarsson from Kepler Cheuvreux. Please ask your question. Your line is open.
Morning, guys. Thanks for taking the questions.
Good morning.
Most of them already been asked, though. One on RFID. I guess you're expecting to implement that in around 1,800 stores by the end of the year. Can you give some color on the first effects you're seeing from the stores already active?
It's a good effect on the stores, then, of course, it takes a little bit of time as well to get used to new routines as well. We tested it before we decided to roll it out globally, we see the same effects in the stores that we have rolled it out in as we did in the tests, with a good, better stock accuracy, better selling, and a better store experience as well. We can secure size availability with less products. It's a good effect, and global rollout will continue.
Thank you. One on, you mentioned improved lease terms on both new and existing stores, I guess lease terms are a significant share of OpEx. Can you give some more color on that statement?
No. Sorry, we don't want to give an exact number, it's no secret it's been the retail market is challenging and with that comes the opportunity to get even more favorable terms with lower rents, more flexibility. It's something that we are working on, of course. That's a good part with the challenging market, so to say.
Okay, fair enough. One last from me, if I may. Just a clarification, you mentioned markdowns in Q4 not being higher than Q4 last year. Do you expect that figure to actually be positive or more flattish?
No. It's still some time to go of fourth quarter, but we feel confident in saying flattish. That's what we Yep.
Okay, thanks.
Yeah.
Thank you. Your next question comes from the line of Simon Irwin from Credit Suisse. Please ask your question. Your line is open.
Morning, gentlemen. Could you just talk a little bit more about the improvement in sales trends in the quarter? Your 3Q is essentially the kind of tail end of spring/summer, and the beginning of autumn/winter, which is presumably kind of fairly low volumes in the quarter. Collections won't have changed dramatically between 2Q and 3Q, and markets don't seem to have changed dramatically between the two, apart from obviously, weather was quite hot. What's changed in terms of the underlying performance of the LFL between the two quarters?
The main thing is on the collections. We have new products coming in all the time, it's not a completely new collection, but new things comes in during spring, during summer, during autumn. Less during summer, it's true. The new products that we have created are appreciated by our customers. If we continue on the same track, I believe the positive trend will continue. We have to keep that up and keep improving. The store look of the whole store portfolio has not changed from one quarter to another. The country teams are the same, doing a really good job. The main difference is really part of the collection, which is appreciated. We can't say it's been a fantastic quarter. Selling online has been good. The store selling, we still need to improve. It's a step in the right direction.
Was there any difference through that quarter? Essentially, kind of you've got tail end of spring/summer, beginning of autumn/winter. Was there a noticeable difference in terms of the growth rate between those two?
Yeah. That's the reason why we stop with the monthly figures. It's always quite volatile between months, depending on weather and so on. We have a good statistical and analytical tools and comparability between markets. We know what our underlying performance is. We have seen a gradual improvement during third quarter, and that's something that we expect will continue. It's hard to say by how much and when we will hit the numbers that we are hoping to get back to. Again, it's a step in the right direction.
Okay. Can you just talk a bit about OpEx? You said that 3Q OpEx was up 8. If we X out, say, half of the extraordinary costs, we're probably at about [7.7.6]. That's obviously well above space growth, what's driving that? How much of that would you regard as being a kind of long-term increase relating to channel shift? How much of it do you think will come down over time because there are changes kind of going on through the business to make it more efficient?
Yeah. We still have a good cost control in our running operations. This quarter is, of course, as you mentioned, affected by the increased logistical costs, which probably it's even below 7 in local currencies if you deduct these approx SEK 200 million from the SG&A figures. When it comes to the more long-term view of the OpEx development, we are confident that we will keep up the good work that we have done in the countries and in the rest of the organizations. A lot of the business development that we are doing will also give some efficiency gains, which will also be seen. We have guided in the Capital Markets Day that we will have a local currency development this year around 5% in local currencies. Of course, it will be tougher to meet after a quarter when we got these 200 extraordinary costs.
We are confident that the OpEx, we will manage to keep on a good level in the coming quarters as well.
Sorry, can I just pick you up on that, your comment about local currency being under 7, ex the logistics cost, because I thought they were only going to be about 35 basis points or so.
Yeah. When I'm looking, I think it would be slightly less than 7% in local currencies. That's the best estimate when we are doing it. The SEK 200 million, now we have a difference in currencies, 13% in SEK in the quarter and 8% in local currency. It's five units and it's some decimals connected to this as well. If you deduct SEK 200 million, you should be, I think, around seven, maybe slightly less.
Okay. Thank you very much.
Welcome.
Thank you. Your next question comes from the line of Adam Cochrane from Citi. Please ask your question. Your line is open.
Hi. Good morning, guys. A couple of questions. As foreign exchange moves slightly less favorable into next year, some of the price investment and the work that you've done to help the sales and the revenue performance in Q3 and maybe Q4, how do you think about carrying on that price investment when you have a less favorable FX environment and maybe a headwind rather than a tailwind? Is that something that you continue to work on pricing even though you don't necessarily have the same FX benefit? Then secondly, on inventory, is it fair to say that a lot of that old inventory, even though the competition is getting better, is sitting in a limited number of markets? Is there an inventory issue in a number of your markets that needs to be resolved, but more broadly, it's looking better?
Yeah. Sorry, maybe a boring answer on the first question there. The most important part for us is that for all brands, that we stick to our business idea and that we have the best combination of fashion, quality, price and sustainability. We will, of course, monitor what happens in the market and to look at the competition and also, of course, listen a lot to customers to understand expectations and so on. Of course, we have a margin focus as well. It's too early to say. We will see what happens in the market. When it comes to the inventory of the older stock, the total picture is that older stock with an end date with low commercial value is less than last year. That goes for most markets, but of course it can vary a bit from market to market.
The markets affected by the logistic systems are, for example, more affected than other markets. We have the possibility to move products as well if we want, between markets and channels.
In terms of your comment there on price, is it fair that your view is getting the price and the offer correct is priority number one and maintaining the margin is priority number two?
Both are important. The most important thing is that we stick to our business idea and that we continue to be a customer-focused company. To have the best customer offering is the most important thing. Of course, there is always a balance. There's a balance between that and having the best customer offering and balance between short-term results and long-term results.
Okay. Finally, on the inventory. The sales performance was generally, I think, better than we expected. Given that inventory build that you're still seeing, why was markdown not greater in the quarter? Why were you not trying to clear through more of that inventory than you did?
We want to handle it in the best possible way, in the short term and again, the long term. With the structural changes that we're making to our supply chain, we believe that this was the best possible way to handle the markdowns in the quarter. The markdowns were high, and especially was markdowns of more than last year of products with low commercial value, that would have had no commercial value going out of this quarter. It's a better quality of the stock, and we feel confident in the strategy that we chose. Okay. Thank you. Yes. Thank you.
Thank you. Your next question comes from the line of Rebecca McClellan from Santander. Please ask your question. Your line is-
Yes, good morning. It's Rebecca at Santander. Just a couple of questions, please. Firstly, on the optimization that you're sort of undertaking within the store park, if you had to have been able to track cannibalization, are you seeing any improvements in the cannibalization rates given parallel to the growth in online? Then my second question is about the warehousing issues, the logistics issues. I think you were set to roll out these systems in Germany in 2019. Has that been on track, and how confident are you that in such a big market, the risk of warehousing systems isn't there post what happened in the U.S. and in Belgium?
Yeah, sorry, I'm not sure I got your first question. Was that on cannibalization from-
Yeah. If you're seeing any improvements in cannibalization in the market where you're doing some optimization activity.
Okay. Yes, we have good tools of judging cannibalization when we open new stores and when we close stores. When we can close the store, neighboring stores will get a positive effect. Then, of course, it varies from location to location on exactly how much that is. That's right. Sorry? Yeah.
Sorry. Just in the context of sort of the 32% growth in online.
Yeah. Yeah.
Are you managing to sort of get your cannibalization rates down at all?
You mean the online is cannibalization on the store portfolio?
Yeah.
That we see that the 32%. There can be a cannibalization between online and stores, it can also compliment each other. We see the more and more integrated we get, we get the possibility to increase online sales in our physical stores and drive physical store sale through the online store. We believe very much in this fully integrated omni-model that we are rolling out to all markets now. Of course, there will be some cannibalization. Some customers will buy only online that are in our physical stores today, the total is good for the company.
Okay, thank you.
The second part, when it comes to the logistical rollout, the other transitions in our logistic warehouses, yes, we have more markets ahead of us, a lot of the work that we have done now to fix the technical issues will be things that will, of course, fix for continued rollout. Also change management learning. Processes, colleagues working in new ways. A lot of learnings in that area as well. Of course, we have to be humble when we have had these problems and when it's a new rollout. We feel confident that it will be much better than this quarter.
Germany is set for spring 2019. Is that right?
We haven't set the exact date, it's set for 2019. Exactly.
Okay. Thank you very much.
Thank you.
Thank you.
Your next question comes from the line of Niklas Ekman from SEB Equities. Please ask your question. Your line is open.
Thanks, operator. Good morning, everyone.
Good morning.
Morning, just a few quick ones to start off with. Would you care to give us the like for like cost growth development, please, in the period?
Yes. In comparable stores, it was slightly up during the quarter.
Perfect. Perhaps I'm a bit dense, but just for the record, last year in fiscal Q4, you had a markdown impact of 130 basis points. Are you saying today that you expect the same level in this year?
No, flattish to that is the guidance. There shouldn't be higher markdown impact compared to last year.
Okay. I would like to ask you, when it comes to cost of goods, surely there's a quite significant spike in transportation costs. I think if you look at some proxy indices first half 2018, that is, it's up 15%-20%. There's some wage inflation upstream and increased raw material prices. On top of that, you obviously have a more expensive US dollar in terms of transaction flow in the coming year ahead. I was just wondering if you would care to share some thoughts on these developments that will affect next year in terms of external factors. My question is, do you expect the internal work that you have done, the internal factors, to be able to compensate for this inflation upstream mostly? Or are they going to be offsetting? Where do you think you will be?
Well, again, as we've been discussing many times, there are a number of things affecting the input costs and the gross margin. Of course, when things are negative, as you said, raw material and input costs and also currency, of course, we need to try to compensate and offset that. We always work with efficiencies and improvements, but to say exactly how much it's going to offset that's impossible of course. Also it hits the whole industry. It's not just us, but you're right. A lot of the input costs are on the rise.
All right. I guess by your own definition, targeting 12%-14% inventory to sales over time, that would imply probably today at least, that the excess inventory position is close to anything of SEK 10 billion or more. I know this question has been asked in numerous different ways, but could you give us some sort of timeline here and also in some more detail, how you will actually sort of convert that plus SEK 10 billion item into positive working capital going forward, please?
It's not that easy that we can say that amount is excess inventory. We have to look at the quality of the inventory again. Just to simplify, you can say that we have product with low commercial value, with an end date that is less than last year. We have new currencies and fashionable products, that is roughly in line with last year or slightly less actually. Those products are also better balanced, and we believe a better quality in that assortment. The stock turn of those products is actually higher. We have a lot of season-less products with a high commercial value, basic products and so on. That part is higher than last year. That we believe we can balance out with the structural changes we're making and the supply chain improvements and the buying processes improvements and so on.
You can't look at it like that and say, well, that amount is excess inventory. We believe we are in a better position now compared to the same period last year.
Very clear. Thank you for that. My final question, I was a bit surprised there's no discussion anywhere, so far at least, of sort of the imposed U.S. tariff system of 25% as of January next year. I was just wondering if you could share some thoughts of what at least your initial expectations would be of how you would actually handling U.S. import of course of goods and, to what extent the mix of these tariffs will actually impact you and your margins for 2019, that is.
We are looking into that. As we understand it's category 3 products. The list is huge. It's heating boilers et cetera. It will not hit all our articles and products, but we are looking into it as the best to see how that would affect this new custom duty from 1st of January. For sure it will have an effect, but we haven't calculated it exactly how it will be affecting. It's not hitting all our garment types.
As you know, we have a flexible sourcing setup. We can of course, adjust accordingly.
Yeah. Absolutely, I appreciate that. It just sounded, maybe it's the industry organizations that perhaps have been exaggerating the issue a bit. Most likely it's going to take some time to even shift for you guys that are probably much faster than anybody else.
Of course. Yeah. As Jyrki and Nils said, we're monitoring the situation. As we see it, U.S., sure it's a big market. It's not the whole group. Sourcing from the affecting markets, it's a big part. Not the majority. The extra increase on what already exists is there. Not huge. We have the flexibility as well. Our best estimate now is it will cost if it kicks in. It will not affect its margin.
All right. Thank you so much for taking all these questions.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Daniel Schmidt from Danske Bank. Please ask your question, your line is open.
Yes, hello. Good morning.
Good morning.
I think most of the questions have been asked already, could you, which you sometimes do, could you say anything about current trading and sort of September so far, and maybe also in relation to the logistical issues? It sounded like most of them have been gradually solved, and it's maybe more the U.S. Are you seeing any improvement in France, Italy, Belgium, in terms of supply of goods to the stores now?
Yes. Absolutely, we are seeing improvements. As Jyrki said before, the major issues are fixed and now it's more fine-tuning and of course working with the backlog that we have. Gradual improvements in getting the products out to the stores in those markets. When it comes to the current trading, we don't comment on monthly selling, but we see that the underlying trend is positive. Of course, it's been a very volatile month connected to weather, extremely warm in the beginning and very favorable now. We see that the underlying trend is positive.
Okay, thank you. When it comes to the logistics, just to get it right, then you're also referring to the European markets that you've mentioned, and it's still some way to go when it comes to the U.S. market. Is that correct?
Both the affected European markets and the U.S., we have fixed the major issues, working with the backlog, see gradual improvements. It will still affect quarter four, but not as much as in quarter three.
Would you dare to in any way quantify it like you did in this quarter in terms of costs?
It's too early. It will be less, but we don't know exactly how much less.
All right. Thank you.
Thank you.
Thank you. Your next question comes from the line of Magnus Råman from Handelsbanken. Please ask your question. Your line is open.
Thank you. Yes, I just have a follow-up on online sales and store sales. You mentioned here that you're satisfied with the online sales development, you expect more from the store sales. In terms of online sales, do you view the average ticket sizes as an important factor when it comes to the ability to offer free freight? Do you think that the main thing in the market will be that retailers maintain a ticket threshold in terms of offering free freight? Do you think that the market is moving towards all free standard shipping regardless of ticket price?
Well, we'll see what happens. It's part of the total customer offering. The market is getting more and more competitive. We are improving, or many competitors are improving, and with that comes, you have to step up and be even better for customers. Exactly what will happen to free freight, I don't know. Depends on the underlying profitability as well for different companies. We have a very profitable online store. We have a big online store that is growing. We have that possibility as well. I can't comment on other companies. I believe that the competition, as in most industries, will get tougher by every year. Yeah.
Okay. At least you know what you're doing right now, so to speak. Are you increasing share of online sales that is with free freight?
Yeah, we have it for club customers, the club is growing, with that comes a bigger share of that.
Do you plan to expand this? Do you see positive response from the club offering, do you plan to expand it broader?
Yeah, we plan to expand with the club, to roll the club out to new markets, and hopefully the club is much appreciated by our customers. With that and with the expansion of the club, we see the club membership to grow. It's something that we have tested and the free freight, so to say, and we know it's good, and that's why we're continuing with it.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Charles Allen from Bloomberg Intelligence. Please ask your question. Your line is open.
Yes. Good morning. Could you please say what would have happened to your inventory if you hadn't had the logistics problems?
Well, it would have been slightly lower, of course, but that's not the main driver.
Is it really just a marginal thing then, the logistics problems on inventory?
Of course, it's not good what happened, but it's isolated, and we're fixing it. Of course, it has an impact on inventory.
Okay.
We don't want to quantify it. Yeah.
Thank you. Your next question comes from the line of Andy Hughes from UBS. Please ask your question. Your line is open.
Morning, everyone. It's actually Andy Hughes here.
Hi, Andy.
Hi there. Couple of questions. Firstly, on the assortment. You seem much more confident about the assortment right now than 12 months ago. Can you say just how different it is from last year, why you're more confident about the assortment? I know in the fourth quarter last year, you said the quarter started well, and then it obviously got rather poor rather quickly. If you could comment on that, please, to start off with.
We have a broad assortment. Just if you take the H&M brand, we're catering for women, men, kids, younger customers with our Divided concepts, and so on. It's a very broad assortment. We have new collections coming in almost every day. The stock is good of what we have in the stores now of the new season, and the customers are appreciating that. The stock turn is higher. It's a step in the right direction, but I don't want to say too much. We just have to continue improving. Every new collection, it's a new collection, and the customers will decide if it's good or not. We feel confident that we are on the right track. The team is working extremely hard. It's a good team, we have here. In that sense, we feel confident.
We have a lot of learnings as well from last year, where we didn't do well enough.
Right.
It's a tough environment, very competitive, and we have to be humble. We see it as a step in the right direction, and we believe in a positive trend.
Yeah. The indications you're getting about better assortment, is that just because you've had slightly better sales trends in recent weeks compared with last year? What are the ways you look at the assortment just to gauge how successful you might be?
Yeah, we have seen it over the summer, and we see how the older assortment, how much share of that it's taking in the stores and online, and how is that performing, how are the new collections performing. We can eliminate external factors and look at our underlying performance to see if we are doing well or not.
Yeah
The work that we have done with the new collections, it's paying off. So far, the customers, because we get good feedback and good selling receipts. That's that. Every new collection is, as I said, it's a new collection, and the customers will decide.
Okay. Just going back to the stock level as well. It looks like you've got enough stock for all of Q4 and half of Q1 in terms of cost of sales. What message are you sending out to your buyers? Are you actually asking them to buy less year-on-year to actually get stock levels down? Because if it's good stock, I guess you don't need to buy as much as you did a year ago.
Yeah, we're buying less, but we're buying smarter as well with all the changes that we have made. Especially of the more basic garments where we have more than last year. Still, high commercial value and so on. Buying less of that and balancing that part out. Of the more seasonal products, the fashionable products, we have bought less with the ambition to have a higher stock turn. So far it's good, as we're buying more in season as well of that part.
Right. Is it too early to say how Q1 might be in terms of markdowns, so if Q4 is going to be level, do you see a big clearance quarter in Q1 of next year?
It's too early to say. Of course, it depends on fourth quarter. The plan is to improve, but it's too early to say anything, really.
Yeah. Okay, great. Thank you.
Thank you.
Thank you. Your next question come from the line of Rebecca McClellan from Santander. Please ask your question. Your line is open.
Yeah, actually my question has now been answered. Thank you.
Thank you.
Thank you.
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