Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's six-month results for 2018. 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 advise you that this conference is being recorded today on Thursday, the 28th of June 2018. I would now like to hand the conference over to your first speaker today, CEO Karl-Johan Persson, please go ahead.
Hi, everyone. Thank you all for joining us here today. You're very welcome to this telephone conference in connection with H&M Group's six-month results for 2018. With me is our CFO, Jyrki Tervonen, and our Head of Investor Relations, Nils Vinge. I will start with a short introduction about the second quarter. Nils will take us through the financial details, I will give an update on developments within our priority action areas, before it's time for the Q&A session. You will find the slides to this telephone conference on hm.com. Our industry is going through a period of rapid change, we are in the middle of a transformation that is both challenging and exciting. Challenging because it is complex, extensive, the pace of change is fast. Exciting because we see big potential ahead positive trends from the improvements and investments that we are making.
Let's start by looking at the second quarter. Like we had already signaled, the first half of 2018 would be tough. We entered the second quarter with too much inventory as well as with some imbalances still in the H&M brand assortment, something that we are gradually correcting. One important part of our transformation work is to make our supply chain faster, more flexible, and more efficient. Therefore, we're making necessary transitions to new logistics systems, we are automating our warehouses and changing the way of working. These are very important actions. However, in connection with changes of this magnitude and complexity, temporary interruptions and loss of efficiency are not entirely uncommon.
Unfortunately, this occurred during the second quarter in some of our large markets, this had negative impact on sales and profits in the U.S., France, Italy, and Belgium, it also affected online sales in the Nordic region. This is, of course, not good, like I said, these are important transitions that will benefit us greatly going forward, they are an essential part of our transformation work. We are, of course, solving the temporary interruptions, we are making the adjustments needed to tune the new systems. Due to the interruptions, an inventory backlog was built up in these affected markets, this is something that we are gradually correcting. Looking at revenue in the quarter, group sales, including VAT, increased by 2% to approximately SEK 60 billion. In local currencies, sales were unchanged. Profit after financial items amounted to SEK 6 billion.
All in all, we're not happy with the performance in the second quarter. With that said, we are happy with the ongoing transformation work that we are doing. We'll come back with more details about this shortly, but first I hand over to you, Nils.
Thank you, Karl-Johan. Starting with top line. Sales including VAT amounted to SEK 60 billion in the second quarter, net sales reached SEK 52 billion compared to SEK 51.4 billion last year. Like Karl-Johan explained, conditions for the quarter weren't the best. In several markets, however, sales developed positively, including Sweden, Norway, Denmark, Finland, and Eastern Europe, where we grew a lot faster than the market. This shows that we are on the right track and that our improvement work and digital investments are starting to give results. Sales also developed well in growth markets such as Russia, Mexico, and India. Online sales grew approximately 17% in the second quarter, for new business, which combines the new brands of the group, store and online sales together grew approximately 14%. Looking at some profit numbers. Gross profit was SEK 29.2 billion, which corresponds to a gross margin of 56.1%.
Markdown costs increased by slightly less than one percentage point as a share of sales. Cost control in the group remains good. Selling and admin costs increased by 7% to SEK 22.2 billion. In local currencies, the increase was 5%. The increase is related to the expansion in stores and online. In comparable stores, costs decreased. Profit after financial items was SEK 6 billion, profit was affected by weak sales as a result of a still challenging market, but also by the internal factors that Karl-Johan mentioned. Net profit was SEK 4.6 billion, including earnings per share of SEK 2.80, compared to SEK 3.56 in the corresponding year earlier period. Looking at some key data. Stock in trade on the 31st of May amounted to SEK 36.3 billion, an increase of 13% in SEK. In local currency, the increase was 11%.
The main explanations for the increase are high inventory level going into the quarter in combination with the sales development in the second quarter. The inventory level is still too high, will lead to increased markdowns in relation to sales in the third quarter compared to the same period last year. Gradual improvements to the balance and precision of the H&M assortment, combined with shorter lead times, which will allow us for more buying in season, will result in more full-price sales, and with that, improved inventory levels in the future. Cash flow from current operations was SEK 9.1 billion in the second quarter, investments in terms of CapEx totaled SEK 5.7 billion compared to SEK 5.5 billion. For the full year 2018, CapEx is expected to be approximately SEK 12 billion, with a continued shift from new physical stores to digital. Liquid funds amounted to SEK 11.1 billion.
At the end of the quarter, loans amounted to SEK 15.6 billion compared to SEK 6.2 billion last year. Return on equity was 26.5% rolling 12 months. Now, back to you, Karl-Johan.
Thank you. Our transformation work continues at full speed in order to take the H&M Group to a new level. We are driving change through a number of priority action areas that we see as strategically important to get there. Our first focus area is developing the core of our existing brands, our highest priority is H&M. This area includes the products, the assortment, the customer experience in store and online, as well as the integration of the two channels. The most important part of this work, obviously, is to improve the assortment. In addition to correcting the imbalances of the assortment, this work also includes all the time getting better in terms of design, quality, and price. Here, we are already seeing positive signals from our summer collections, which have sold better than the equivalent collections last year.
In parallel, we are testing new store concepts for the H&M stores with the aim of making the shopping experience more inspiring and convenient for our customers. We continue this work by developing the tests further, verifying the findings, in parallel, we are making plans to gradually roll out the best ideas. Looking at the online store, we are focusing mainly on enhancing the product presentation to make the experience, also by personalizing our apps and our sites. We are improving various functionalities, such as payment options and deliveries. When it comes to the integration of the physical and digital channels, this work includes improvements and rollout of features such as click and collect, online returns in store, and online shopping in store.
This brings us to our next action area, which we call our key enablers, these are investments that we make in our supply chain, the tech foundation, also advanced analytics and AI. We have good indications from a number of tests in this area within personalization, quantification and allocation, price management, also trend detection. It is worth pointing out, though, that as these are still pilot projects, effects are yet too small to be seen in our overall performance. With these investments, we are building something very valuable for the future. Therefore, as our test results are very promising, we will scale this up for more markets and more concepts. Our next focus area is to add new growth. We continue developing and optimizing our store portfolio.
At the same time, we are growing across digital with our existing brands, and we are also launching new brands to meet new needs. In 2018, we plan to open 240 new stores net. The number of planned closures has been somewhat lowered because we have obtained substantially improved lease terms for some of the stores that we have planned to close. For the H&M brand, focus on new openings will be in emerging markets. In more established markets, focus for H&M will be on optimizing the portfolio, including closures, changes of store area, rebuilds, and relocations. For our newer brands, however, stores will open mainly in our more established markets. We continue to see great potential for new stores in the coming years, and our newer brands gradually will come to make up an increasing share of the store portfolio.
Looking at our digital expansion, we are broadening the assortment online for all our brands. At the same time, we continue our global online expansion to new markets. H&M will open its online store in Mexico in 2019, and we are also looking at more markets. We're also expanding through external partners. H&M launched on Tmall in mainland China in March, and the start has been very successful. Today we have nine brands in the H&M Group. Two weeks ago, we launched our most recent brand, Afound, with hundreds of specially selected fashion and lifestyle brands offering products at bargain prices. Afound opened its first store in Stockholm and Malmö, along with its digital marketplace. The reception has been very good so far, and we're looking forward to open Afound in more locations in Sweden already this year.
I would also like to mention that we're looking forward to broadening the assortment of H&M Home. H&M Home is developing very well, and within shortly we will add new product categories such as furniture to the H&M Home selection, which has until now included mainly textiles, decorative items, and products for the kitchen. This was a short update on some of the areas through which we are driving our transformation work and that we view as strategically important for the future of the H&M Group. Before we move over to the Q&A session, a few words on the current year. We can see that things are moving in the right direction, even though many challenges remain and there is a lot of hard work still ahead of us.
The first half of the year was somewhat more challenging than we initially expected, but we believe there will be a gradual improvement and that we will see a stronger second half. We have a long-term approach and are optimistic about the future for the whole H&M Group, with many years of good growth in both sales and profitability ahead of us. Thank you, and now we're happy to take your questions.
Thank you, ladies and gentlemen. As a reminder, if you wish to ask a question, you'll need to press star and 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, and if you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. The first question comes from the line of Chiara Sheridan. To me, please ask your question.
Hello, good morning. Thank you for taking my questions. The first one would be on the temporary interruptions you've mentioned impacting your quarter two sales. I was just wondering whether these interruptions have now been resolved, and you're not seeing any impact anymore. Would you be able actually to quantify the impact of these issues in Q2? The second question on inventories that are still higher than previous quarters, can you talk more about the actions you're taking to reduce the levels of the inventories? Are you planning to reinvest part of all of the Forex benefit that is about to come through, in pricing and promotional activity to also help on the inventory side, please? Thank you.
Okay. If we take the interruptions caused from the change of the logistics systems, the course of it, the technical issues that we have had, we have more or less all corrected, which is good. During this time we have built up a backlog of products that we could not allocate. We will gradually improve this backlog, so to say, during the third quarter. The effect on the second quarter, on sales, it's hard to quantify exactly, but roughly two percentage units on the group. The effect on the third quarter, although we have solved the technical issues, it will be affected by the backlog, but not as much as in the second quarter. I didn't get the last question. Was it connected to the FX?
No. The second question would be on the level of inventories in general, if you could talk more about the initiatives you're taking to work through these excess inventories levels and if those initiatives also include reinvesting the FX benefits into higher promotional activity for the rest of the year.
Okay. Sorry. Yes, the inventory level is too high, and that is because we haven't sold according to plan. Obviously with the work we have, connected to improving the assortment, correcting the imbalances, improving in terms of design, quality, price, we believe we will have a better assortment and sell better. Connected to that as well, we are making a lot of investments in the logistic, in the whole supply chain to become even faster, more flexible, and efficient, and that should help as well. Also in the AI tools that we have invested in to be able to quantify better, to allocate better, and also when it comes to price management, just to mention a few things. Going forward, we believe that we will buy better, plan the assortment better, and we believe the assortment will be better as well.
That should lead to a healthier inventory level in relation to sales. When it comes to the gross margin and the FX, we prefer not to quantify exactly what we do, but we will stick to our business idea, to have the best customer offering in terms of fashion, quality, and price. Sustainability. We know as the competition is getting tougher all the time, we want to be the best. We know that being on the same level as the last year is not good enough. We constantly have to improve, and part of that is improving value for money as well.
Thank you. If I just may squeeze in another question on your omni-channel and click and collect. Can you just remind us where click and collect is available now and provide an update on the timeline for the rollout of click and collect, please?
Today, U.K., but we will roll out many more markets during the autumn 2018.
Great. Thank you.
A global rollout for 2019.
Great. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Magnus Råman. Please ask your question.
Thank you. You mentioned here that net financials was negatively affected due to IFRS rules for leasing. Can you give us any more flavor here on potential effects going forward when it comes to net financials?
Yes, that's correct. It's the IFRS rules connected to how to treat the financial lease in our books, and the effect in Q2 is around SEK 30 million in negative currency effects. Last year in Q2, we had a positive effect of around SEK 15 million. Going ahead, it's impossible to say how the currencies will fluctuate, but without this negative currency translation effect of SEK 30 million, the net financial items should have been on a level of positive SEK 35 million in Q2.
Okay, thank you. Then, you mentioned that in terms of buying, you will be somewhat more cautious in your budget going forward. At the same time, you guide for increased markdowns year-on-year in Q3, whilst in Q3 2017, markdowns grew a full 280 basis points. Can you help us understand the reasoning here? You expect increased markdowns on this very easy comp, while you see somewhat more cautious buying at the same time.
Going into the third quarter, the inventory level is too high. The majority of the inventory level is current collections and the garments that we would like to have, but we still have too much of older garments still with value. We would like to, of course, take care of that in as cost-efficient way as possible. We believe that markdowns in quarter three will be higher than quarter three last year. What I said was, we haven't lowered our ambitions for second half 2018, but with the possibility to buy more in-season, with the initial purchasing, we will be a little bit more cautious and to buy more in season. The improved flexibility and the ability to buy quicker will help us in that sense.
Right. Just finally, you mentioned at the press conference also that June sales was somewhat better than the flat local currency sales growth reported for Q2. Can you just give us any sense of the magnitude here, if it's just a slight improvement or otherwise?
What we have said that we believe in a gradual improvement. We're not happy with the first half, obviously, and we believe in a gradual improvement for the second half year. The second half has just started with June, and what we said is that it is somewhat better than what we have seen in quarter two. It's not high growth figures, but somewhat better.
Okay, thank you.
Yeah.
Thank you. Your next question comes from the line of Charlie Muir-Sands. Please ask your question.
Hi, guys. Yes, I've got three questions, please. The first one is to follow up. You made the comment about positive results of your summer collections suggesting that they are ahead of the prior year. Is that just the seasonal collections, or is that your entire H&M Group on a like-for-like basis, you're currently experiencing as being ahead? Perhaps you can elaborate a bit more to give us some comfort that the collections are starting to work better. The second question, it relates to the supply chain IT changes that you've made that caused you some problems in the second quarter. Can you tell us what proportion of your global revenue base has been re-platformed now, and if there are any major countries still ahead? Indeed, what mitigation you can put in place to avoid this disruption going forward?
The final question relates to your comment about expectations to close fewer stores because you are getting very good rent renewals. Can you talk about what level of rent reduction you're getting and what proportion of your stores you are able to renew each year? Thank you.
Okay. When it comes to the summer collections, what I said earlier was that the recent summer collections that are built on the learnings that we have from last year and the imbalances that we had and other improvements as well, has been received very well from customers. It stands for, it's not the entire H&M store collection or the online collection, but it's a good start. If it continues on the same track, week by week, it will take up a bigger share of the stores and of the online store. It's a good first sign, and I hope and believe that we will continue on that track as well. When it comes to the supply chain and IT and logistic transitions, there are several parts. One is the online transitions that we're doing to the new platforms, eight countries.
We have done the transition for seven countries, so one country remains. Initially, we had some technical issues with the transitions, but those have been solved. The latest countries that we have done, we have done in a very good way without any disturbances. What I'm talking about, what has happened now in the U.S. and some of the southern European countries are connecting to the warehouse management system. There have been some technical issues connected to the integration between the warehouse management system and automation in the warehouses. These are things that we have solved the clear majority of it. In solving that, we have solved for future countries to come as well. Of course, we're learning along the way as well when it comes to working routines and so on.
During the autumn, we will not transition more countries with warehouse management systems. We will make sure that we stabilize what we have and that we prepare well for other countries that will follow during 2019. With us having solved it, with us during the autumn, making sure that all countries are well prepared, we feel confident that we can do the countries for 2019 with less or no disturbance.
Great.
When it comes to the rent, we constantly look at when we open new stores, we have a clear roadmap. We know what the business cases are for the new stores, and same goes for stores that we will close. Some stores that we look at to close are in good locations, but the rents are too high, and they are performing well, but the rent is at the wrong level, or it's in a location that we don't really have a strong belief in, that we would like to exit. It depends on what the rent production is, really. When we get the rent production, we take a new view at that location and see if it's something that we would like to stay in long-term, or is it something that we can stay in for the short term.
We have a good view of new stores and the store optimization work that we're doing.
Your last question was also how much flexibility we have in the contract, right? As we stated in connection on the Capital Markets Day, around two-thirds of the store portfolio, we have contracts where the right to cancel or renegotiate two-thirds of this contract within two years. Okay.
Thank you. Your next question comes online of Mariana Lopez. Please ask your question.
Yes. Good afternoon. It's Rebecca McClellan at Santander. Just a couple of questions. Would you agree that the stock in trade as a % of sales from the 2016 levels are the sort of levels which are probably the optimal levels for you, and that the growth in the % of sales seen since is basically what you could quantify as excess inventory?
I think we stated in connect again on the Capital Markets Day that the long-term target is to be at around 12%-14% of sales rolling 12 months. Of course, now when sales have been quite slow last year this KPI looks pretty distorted in a way. We feel comfortable. We feel that we are on a good journey, that going forward, we will come back to leaner inventory levels. Of course, it takes time, and it's a difficult balance between being aggressive on markdowns, but at the same time have renewal and the new product in the stores every day. I think these incidents that we have seen in connection to the transition of the warehouse systems in the U.S. and France and Italy, et cetera, show how crucial it is to have new products in the stores every day.
Okay, thank you. In terms of the average age of the inventory, I understand that you're saying there's quite a lot of recent inventory in what is the build, but is there an average age of the inventory that you can give us, or what percentage of inventory is not current season?
As we said earlier, the clear majority of the inventory is current season or season-less products. Then we have a part that is not the current season. We feel confident that we will handle that during the summer sale. They understand it in our own channels, and to do that as cost efficiently as possible. Because the aim is to go into the new season or after the summer sale with a better situation compared to the same time last year.
Okay. Thank you.
Thank you.
Thank you. Your next question comes from the line of Adam Cochrane. Please ask your question.
Good afternoon. A couple of questions. Firstly, on the 14% growth you had in new businesses, this seems quite disappointing and a slowdown from what you were talking about at the Capital Markets Day. Is there anything you can just highlight as to whether this is a temporary issue? I understand the range issues within the core H&M brand, but I wasn't aware of any within the smaller brands, just a commentary around that.
Yeah.
Secondly, in terms of the Sorry to go on about the inventory. Given it's getting bigger as a proportion of sales, I think theoretically it must be getting slightly older. Do you think that in terms of the percentage discount you need to take off each of those items, do you think that that's going to be a bigger discount in Q3 as a proportion of the retail sales value than it has been before, as the stock's getting slightly older and you get more keen to clear it? Thanks.
Yeah. Thank you very much. If we start with the new business portfolio, we were still aiming for the 25% boost for the full year. We planned a little bit lower than that for the second quarter, but came in at 14, which is lower than our plan. One of the reasons for it is also connected to the logistics systems and changes that we have made. A big part of the new business portfolio is connected to warehouses that have been affected. Problems with allocations and replenishment affecting the new business performance. That's one of the reasons. We still feel confident in that we will get to the levels that we're aiming for the full year. When it comes to your second question was on the inventory level and if we need to do bigger discounts.
We prefer not to comment on the exact discount levels now. There's still some way to go during the quarter. What we have said is that we'll have higher reductions during quarter three, and then we'll see at what levels.
Okay. Just in terms of that, you're saying now that you expect the markdown to be higher or to be more marked down than this time last year. You had such a big markdown this time last year, were you originally expecting Q3 of this year to have less markdown than last year?
Yeah. To be honest, yes. We haven't sold according to plan, we had the logistic challenges affecting the sales by approximately two percentage units for the group. That was not according to the plan, we have a higher inventory level compared to the plans, leading to higher markdowns. Yes.
Okay. That's great. Thanks for your help.
Thank you.
Thank you. Your next question comes from the line of Cédric Lecasble. Please ask your question.
Yes, good afternoon, gentlemen. Two remaining ones for me. First one on your U.K. click and collect experiment. It's been there for some time now. What are the main learnings you have from that, and are you happy with the experience, and is this a benchmark for the rollout, or do you expect progress on your new regions? That's the first question. The second one is on the impact of your logistics adaptation transformation on the percentage of fresh inventory you can send to the stores on a daily basis. You say you must have more fresh products in the store. To what extent can it change the kind of dynamic on a daily basis? Thank you.
If we start with the first question, the click and collect is just one of many important omni initiatives. During the test phase and the rollout phase in the U.K., it has been well received, appreciated by customers, and also good for H&M. Therefore, it's something that we are rolling out, as we said earlier, to many more markets during second half 2018, and then a global rollout during 2019. In addition to that, we're obviously also improving the service so that we not only expand with it, but we also improve it.
If I may, what impact would it have on your economics? What can we say at this stage?
From all the tests we're doing, I don't want to go into exact details on the financials. As we are expanding with it, clearly it's good for us, not only from more satisfied customers, which of course helps as well, but pure financials also. Sorry, but I didn't really get your second question.
Yes. In your automation, in all the progress you try to make on logistics to be faster, to be more automated. I was wondering what impact it had on introducing new products on a daily basis into the stores and dynamizing a little more the product offer on a daily basis.
Yeah. The automation of the warehouses and the whole logistics systems will make us faster. We will have quicker deliveries to customers online. We will have quicker throughput to the stores. It will increase transparency, meaning so it's a foundation and an enabler for things like RFID. It will help us to be more flexible between channels and between markets. In this work, we're also further segmenting our product flows. Differentiating between super quick orders and replenishment orders, so helping in that sense as well. Many improvements coming from the automation of the warehouses, the new warehouse management systems. Unfortunately, it disturbs us now in the quarter, but still it's something that is great for the company.
Thank you, good luck.
Thank you.
Thank you. Your next question comes from the line of Michelle Wilson. Please ask your question.
Hi, good afternoon. You talked about a more cautious buy on inventory. Could you give us an indication of how much more product you're buying this year compared to last year? Secondly, just to follow up on your comment about broadening the assortment online across all brands, has that contributed to the inventory problem at all? Presumably, that means that you're buying shallower on each SKU. Will that have any impact on underlying growth margin going forward?
Yeah. Sorry, we don't want to go into the exact details of our purchase plan going forward. As I said earlier, we have not lowered the aim. We still have a good belief in the assortment for all the brands for the second half of the year. With the possibility to buy more in-season, and with other improvements as well, our initial commitment is lower compared to last year. We can buy more in-season. When it comes to broadening the assortment for our brands, we have broadened it. It's a gradual broadening of the assortment for all the brands, and it's not the reason behind the excess inventory. The clear majority of it is good inventory, so to say, and something that we want to do. It has not had a negative effect on the margins.
Okay, great. Could I just ask on the first question then, are you buying on the basis that you deliver positive like-for-likes?
Sorry, I don't want to go into details or give a forecast or prognosis on the like-for-like development, nor how we buy.
Okay. Thank you.
Sorry.
Thank you. Your next question comes from the line of Chris Chaviaras. Please ask your question.
Hi, guys. Thank you for taking my questions. Two remaining questions from me as well, please. The first one, talking about the gradual improvement in the second half, is there any feasible, workable scenario where if sales go as you plan in 3Q and 4Q, the full-year gross margin could ever be not negative overall? That's the first question. The second question on the OpEx growth. The run rate in the second quarter was quite a bit worse than the first quarter. Is that the run rate that we should expect for the rest of the year, or is there any dual running costs from the disruption from automating your warehouses there other than the sales disruption, whether you had any sort of additional costs that can be considered, let's say, one-offs? Thank you.
Okay. When it comes to give a gross margin prognosis for the rest of the year and for the full year, we will not go into giving that. Of course, it will be tougher if we expect, for instance, higher markdowns in Q3 compared to last year. That will, of course, make it very challenging. Going back to OpEx growth, we have a very good cost control in the company. That's one of our core values, and it's sitting deep in our DNA. I don't think the local currency development, it was plus 5%, the SG&A in Q2, and that's also for the six-month period, plus 5%. That what we say during the Capital Markets Day, we expect the SG&A in local currencies to grow somewhere between 4%-5% this year in local currency.
There we are, and we believe that we will remain there for the rest of the year. As always said, this can differ between different quarters, but on a yearly level, we feel confident that we will be more or less in that range.
Okay. Can I ask a very quick third one then, please? In terms of the markdowns in the third quarter that you expect, would you expect that a similar level to the second quarter or higher or lower? Any color there?
We will not give any prognosis for the reductions. What we say, they will be higher than the corresponding quarter last year.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Dana Telsey. Please ask your question.
Good morning, everyone. As you think of the progress that you're making in supply chain, what are the key stepping stones that we should be watching for to show that it's having the effect that you're looking for? Whether it's in inventory, whether it's in merchandise margin rates, how should we think about that path? Thank you.
You mean what we want to see from the supply chain work that we're doing?
Correct.
The work that we're doing with mapping out the whole logistic network, the automation of the warehouses, the new warehouse management systems, the new product flows, the sourcing network and so on. Also the work we do connected to artificial intelligence and advanced analytics when it comes to quantifying and allocation. All in all, it would lead to a lot of good things for the customers. It will lead to increased sales, by allocating better, by forecasting trends better, for example, by speed to market and so on. Obviously improved sales, improved profits, lower markdowns, lower inventory levels in relation to sales. That's what we're aiming for.
Will this be beginning in second half of the year, first half of 2019? How do you think of any timing?
There are several activities connected to this area, and they will be rolled out in different phases and will have different impacts. It's not a certain date for everything. It will be a gradual introduction and thus also a gradual benefit realization of the different things that we're doing. It will have, over time, a very positive effect on sales and results and inventory levels.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Simon Allen. Please ask your question.
Hi. I'm very sorry to be going back on this whole inventory thing, but I'm not quite sure I understand some of your comments. You lost effectively 2% of sales in the quarter. You were saying that inventory was up 11% in local currency terms, excluding that, it still would've been up nine, at a time of year when you're normally at a seasonally low level of inventory. You seem to be inferring that you think that you can clear most of this excess inventory. Relative to say, we go back to the last time you were trading well, inventory seems to be, say, 30% higher than it might normally be. Do you actually think you can clear all of that through during the summer selling season and be relatively clean going into autumn winter? Is that what you're saying?
Can you just explain how those numbers actually work practically, when you've got inventory of SEK 36 billion and your 3Q COGS are only SEK 25 billion?
Yeah, I'll try to give you an answer on that. The logistic issues is not the whole explanation, obviously, exactly like you say. It affected sales roughly 2% of the total group. The main reason is that we have not sold according to plan. We will clear this during summer sale as good as we can in our own channels, and we will look at external parties as well. The aim is to go into the season after the summer sale in a better situation in relation to last year. That is the aim. Then it's important when we look at the inventory levels that not everything of the older seasons are old products without value. A lot of the products are season-less products as well, that we have to take into account when buying new season-less products.
It's a balancing act of doing it cost efficiently and setting the stores and the online store up well for the new season.
If we look at the absolute volumes, does this imply that there is going to be a material amount going out through third parties? It's very hard to see how you could get that much inventory through your business in one quarter.
We don't want to comment exactly. We have a good plan for how to sell it during the quarter, we'll see how it goes, and where we end the third quarter. The aim is to be in a better position compared to last year.
Can I just ask you about the H&M Member, which is now a year old?
Yeah.
What impact has that had, particularly in terms of average basket size?
Yeah. We don't want to go into the exact details on the financials or the different KPIs connected to that. It's something that we have worked with in a number of markets for many years and built up a big group of loyal customers. We are improving the club, and we're rolling it out to new markets. We're introducing free shipping and free returns, much appreciated by customers. That's something that we have tested before rolling it out. The reason we're rolling it out is we, of course, it's good for the customers. Again, it's something that is financially good for H&M. All in all, we're happy with the club. More and more customers are joining the club, and it's something that we see as a long-term important thing for our company.
Okay. Could I just do a follow-up on the imbalances? You talked about it for three quarters, four quarters now, and you obviously seem to be more optimistic that you are past the worst. Can you just explain in layman's terms exactly what you mean by these imbalances, and exactly what you've done to improve the collections or the balances or imbalances as you describe them?
Yeah, same as last quarter. We don't want to go into too much details on that. We have a broad customer base. For now it's mainly for the H&M brand. When it comes to, for certain customers, certain collections and concepts, we went too narrow, and didn't cater wide enough, and had the same article width and the same commerciality in the assortment mix as we normally do for our core customers. We went a little bit too broad in other areas that we don't normally do. That's what we mean, and that is what we are correcting. On top of that, we are of course, always looking to improve the fashion, the quality levels, and the prices. I'm sorry I can't go into where we have gone too narrow and where we have.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Mariana Lopez. Please ask your question.
Yeah. This is Rebecca again. I have got three follow-up questions, please. Hopefully, quite short. Firstly, what do you mean precisely by a third-party solution to inventory? My second question is, you mentioned having initial season commitment lower than last year. Is that for the autumn/winter? My third question is, what would constant currency OpEx growth had been excluding sort of additional inventory handling costs related to the unsold inventory, the inventory overhang?
The first question was about how to treat the stock in trade with a third party. We are looking to different markets for resellers, for instance, how to sell part of the high stock in trade level to sell it to resellers. What was the second question?
The second one, you were questioning about lower commitment, right? Where we are.
Yes.
This is something we've been talking about now since Q2 last year, and it's a work in progress. Of course, it will continue. That's why we feel going forward, we're going to have even better opportunities to buy more in season.
What is the open to buy, for example, for autumn/winter 2018 versus autumn/winter 2017?
We don't want to specify a number, but it's lower.
Okay. Thank you.
Thank you. Your next question comes from the line of Niklas Ekman. Please ask your question.
Yes, good afternoon. Could I just put these various questions on the inventory in a slightly different perspective? I was just merely wondering why would you choose at this stage, knowing that stock-in- trade has been increasing now for quite some time, to protect gross margins and see inventories increase by this fairly big amount at the end of the day, rather than, to cut to the chase, cut the inventory and therefore take the cost in your margin. What's the rationale behind this decision to report this gross margin versus this end of period stock-in- trade decision, please?
Sorry, Niklas, you asked this question this morning, it's not a trade between protecting margin versus a higher inventory. If anything, I think we are sacrificing the margin by having high markdowns. Of course, the target is always have to optimize to have the best offering to the customers and still have a decent markup, so to speak. The FX transactional gain suggests that we should have a higher markup than achieved. Obviously we've invested some of the gains into even stronger customer offering.
Mm-hmm. That was actually my follow-up question. If you would be kind enough to sort of give us any idea of what your product investments will look like, maybe or at least what they were in Q2, please.
Yes and no. Sorry, Niklas. Again, we prefer not to comment on the exact investments that we are making. Normally, we comment on the five big external factors affecting the gross margin, the currency effect, the material prices, transport, the salaries, but not our exact investments in the customer offerings.
Okay. You do reiterate that you will continue to invest in your product over the coming year, as you said, I think in Q3 most recently last year?
What we're saying is that we need to improve the assortment. We have to correct the imbalances that we have had. We also have to improve when it comes to design, quality, and price. The same level is not good enough. We constantly want to improve. That's what we're going to do.
Final quick question. I'm probably just dense, but there's some confusion in the market with regards to your statement on the summer collection performance. I would just for the record like to ask you, are you saying that this part of your total offering in the stores and online is up in like-to-like terms, or is it a less negative like-for-like development to the same performance last year?
We're comparing the recent current collections to the equivalent collections last year. It's not the whole store, but it's the recent ones, and they are performing better than the equivalent collections last year.
Okay. Thank you very much for taking these questions.
Yes, thank you.
A correction from my side. I think I misunderstood Rebecca's question about open to buy for the autumn. We have more open to buy and the commitment is lower than last year. Okay?
Your next question comes on the line of Charlie Muir-Sands. Please ask your question.
Hi. Sorry, one final follow-up question from me. You said you'd had a good experience with Tmall, and made a sort of broader comment about third-party platforms. I wondered if that meant you were considering putting your main brand onto platforms in other parts of the world, such as Europe or North America. Thank you.
No plans as of now, but we are constantly looking at other platforms as well, and it could be part of the main brand's collection also, that we could test on some other platforms, but nothing decided for H&M.
Thank you.
Thank you.
Thank you. Your next question comes on the line of Jörg von Appen. Please ask your question.
Hello, I'm sorry. My question was asked and answered. I just didn't know how to sign off. I'm sorry. Okay, thanks.
Bye-bye.
Thank you. Bye-bye.
Thank you. Your final question comes on the line of Michelle Wilson. Please ask your question.
Hi. Just a follow-up question from a comment you made on the Q1 call that you expect PBT to increase year-on-year. Is that still the case at this stage in the year?
Obviously, we still believe in a stronger second half and a gradual improvement. Of course, since the first half turned out to be even more challenging than we anticipated, in connection with the disturbances we have with the transitions of the warehouse systems, of course, it will be even more challenging to reach.
Okay. Thank you.
Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be taken. There are no further questions at this time. Please continue.
Thank you all very much for participating in this conference call, and we wish you all a good day.
Bye-bye.
Bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.