Good morning, ladies and gentlemen. Thank you for standing by, and welcome to today's 3-month results for 2018. At this time, all participants are on 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 one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Tuesday, the 27th of March, 2018. I would like to hand the conference over to your first speaker today, the CEO, Karl-Johan Persson. Please go ahead, sir.
Hi, everyone. Thank you all for joining us here today. You are very welcome to this telephone conference about H&M Group's first quarter 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 market and the first quarter of 2018. Nils will take us through the financial details. Then I will talk briefly about our key action areas for long-term profitable growth that we presented on our Capital Markets Day recently. After that, we will be happy to answer your questions. You will find the slides to this telephone conference on hm.com. As you all know, the fashion retail market is in rapid change. At the core of this change is digitalization, which is changing customer behaviors and driving customer expectations constantly higher. This development is bringing both opportunities and challenges.
For the H&M Group, 2018 is a year of transformation, where we are accelerating our actions to adjust to the new dynamics in the market and seize the growth opportunities that are arising. Our online sales continued to develop well in the quarter. We also see that many of our ongoing initiatives show good indications and results, even if they are not yet on a scale that is large enough to have decisive effect on our overall development. I will come back with more about our action areas shortly, but first, I will hand over to you, Nils.
Thank you, Karl-Johan. Starting with top line. Sales in local currencies were unchanged in the first quarter. Converted into SEK with a negative currency translation effect, sales including VAT amounted to 53.6 billion SEK, compared to 54.4 billion SEK a year earlier. Net sales amounted to 46.2 billion SEK, compared to 47 billion SEK last year. For new business, sales grew by 15% in stores and online combined. Looking at online sales for the whole H&M Group, sales grew approximately 20%. Looking at some profit numbers. Gross profit was 23 billion SEK compared to 24.5 billion SEK in the first quarter of last year. This corresponded to a gross margin of 49.9%. The weak sales in the fourth quarter, partly caused by imbalances in the assortment for the H&M brand, resulted, as previously communicated, in the need for high markdowns in the first quarter.
Markdown costs increased by just about two percentage points as a share of sales. Selling and administrative costs increased by 2% to SEK 21.8 billion. In local currencies, the increase was 4%. The cost control in the group remains good, but the high markdown level in combination with a delayed start of the spring season led to weak results in the first quarter, and profit after financial items was SEK 1.3 billion. Net profit was SEK 1.4 billion, including a non-recurring item of SEK 399 million in tax income, which was related to the U.S. Tax Cuts and Jobs Act. Net profit equaled earnings per share of SEK 0.83 compared to SEK 1.48 in the corresponding year earlier period. Looking at some key data. The stock in trade by the end of the quarter amounted to SEK 35 billion, an increase of 7% in SEK. In currency adjusted, the increase was around 8%.
Due to the weak sales in the autumn, we had too many garments going into Q1, which we've been working to clear throughout the quarter. In parallel, we have had an inflow of new garments. However, the unusually cold winter weather in February had a negative impact on the sales of these new garments. The target of reducing inventory over time remains, but in order to get there, we need to get back to better full price revenue growth. Since the inventory at the end of February is higher than planned, the markdown level will increase in the current quarter compared to the second quarter last year. Cash flow from current operations was SEK 1.3 billion in the first quarter, compared to SEK 2.4 billion. Investments in terms of CapEx totaled SEK 2.1 billion, compared to SEK 2.4 billion.
For the full year. How far did we come before the line was broken?
Hello, you only missed about 20 seconds of what you were saying.
I repeat the last part, I think around from the cash flow. Cash flow from current operations was SEK 1.3 billion in the first quarter, compared to SEK 2.4 billion. Investments in terms of CapEx totaled SEK 2.1 billion, compared to SEK 2.4 billion. For 2018, the full year, CapEx is expected to be around SEK 12 billion, with a big shift from new physical stores to digital. Liquid funds amounted to SEK 10 billion, up from SEK 8.4 billion. At the end of the quarter, short-term loans amounted to SEK 9.8 billion, compared to SEK 1.3 billion last year. The return on equity was 24.1% rolling 12 months. Now, back to you, Karl-Johan.
Thank you. We are well positioned in the market. Today, we have eight strong brands. Just like H&M, our new business portfolio is profitable offline as well as online. The new business portfolio today includes seven brands, all with their own unique identity. In addition to this, we have great strength in all our shared Group assets, such as our supply chain, all the data we have in the Group, our tech foundation, our sourcing capabilities, and all the skills and support from the multi-brand functions and country organizations, just to name a few. We still see plenty of opportunities to improve and plenty of growth opportunities going forward.
Our work now is mainly focused around the following areas: to develop the brands we have, with a focus on H&M, to accelerate our key enablers, like we call them, I'll explain more in a second, and also to add new growth. Of course, also to continue to have good cost control and focus on efficiency gains. The first and most important area is to continuously develop our existing brands, and our highest priority is the H&M brand, which makes up the largest part of our business. The most important thing when developing our brands is to improve and develop the products and the assortment. While the assortment is appreciated by our customers, we have not improved fast enough. In addition to this, we made some mistakes in the assortment mix in the second half of 2017 that affected the top line.
Now we're working hard to ensure improvements, including fashion improvements, to improve value for money further, as well as, of course, then also to have the right balance and assortment mix with the right products at the right time, in the right amount to the right channels. Then, of course, linked to this work is also to improve our physical stores to offer a more inspiring and convenient customer experience for the local customer. We are in the process of testing new store concepts. It's only in test or pilot phase, and they are small scale, but they're showing really positive results, both in terms of customer feedback and sales. So we will do more tests during the year, and then the plan is to start scaling this up during the latter part of 2019. At the same time, we are continuing to optimize the store portfolio.
This is to make sure we have a presence that fits customer demand in each market. In the first quarter, this included 34 store closures, in addition to renegotiations, of course, where we see a big opportunity, and rebuilds and the adjustment of store space. We also want our digital stores performing well, we're developing this channel further. For example, we see that customers appreciate new digital features that we are adding, such as image recognition and also personalized product feeds, just to mention a few things. By now, most of H&M's online markets have been transferred to the new platform, which allows for further improvements for our customers. This includes everything from higher speed to improved navigation and extended payment options. We're also speeding up deliveries for online purchases. We also want to create a frictionless shopping experience by integrating the channels.
This will enable convenient and more flexible services such as click and collect, scan and buy, and online return in stores. Looking ahead, our omni-channel strategy will make our entire assortment even more accessible, which will benefit customers regardless of where, when, and how they choose to shop. This brings us to our next action area, which is to accelerate our key enablers. Here we continue to invest in new technology and ways of working to meet customers' fast-changing needs. One area is around our supply chain, and we have, together with internal and external experts, mapped up to optimize our sourcing logistics network to ensure even more speed, flexibility, and efficiency. In addition to this, we are also investing a lot in automated warehouses. This we have done for our warehouse in Netherlands, Sweden, and Poland.
By these initiatives, some already up and running, we are increasing capacity and efficiency, and most importantly, we shortened the time from order placement to delivery to customer. By optimizing our logistic network, we will also be able to increase product availability and further ahead reduce stock levels in relation to sales. We're also investing a lot in advanced analytics and artificial intelligence. Like we have said before, we see a very big potential here across the board, from assortment planning to supply chain and sales. The areas we are investing in are trend detection, quantification and allocation, price management, and personalization. Our ongoing projects in this field already show very good results and sales uplifts. One key enabler also for future growth is our whole tech foundation. We have invested heavily in our backbone for a number of years.
Now we have a robust and scalable foundation that will benefit the group for many years to come. This will also enable faster development of consumer-facing apps and digital experiences. Our strategy for this is to use technical structures such as cloud, APIs, and microservices. We're also expanding our use of technical solutions such as RFID and 3D. In 2018 and over the next few years, we will be rolling out RFID on a large scale. Our third focus area is that we aim to add new growth on top of the growth generated by our actions in the other two areas. We are expanding across digital, meaning that we are broadening our online assortment. We're rolling out our online stores to more markets, as well as linking to new platforms. In March, both H&M and H&M Home launched successfully on Tmall in mainland China.
We had high expectations, but we exceeded the high expectations, so it was a fantastic launch. Also in March, H&M opened online in India, where customer reception has been very good. This means that H&M now has e-commerce in 45 markets, a number that will grow further this year and beyond. In parallel, we still see room for expanding with physical stores in many regions and countries. For H&M, focus will be on emerging markets, and in total, we plan a net addition of 220 stores in 2018, including all brands of the H&M Group. Developing and launching new brands is an important part of the growth strategy of the H&M Group. Later this year, we will launch our ninth brand, Afound.
Afound will be an off-price marketplace offering carefully selected, broad, and diverse assortment of discounted products from well-known quality brands, external as well as brands from the H&M Group. We're also working on new ideas and innovations that will drive us forward, and this includes new business models that are based on external collaborations and that will build on the many strengths and assets we have within the H&M Group. We're looking forward to telling you more about these initiatives further ahead. I would also like to point out that these investments are relatively limited in size. They're also managed by separate teams and do not take any of our focus from developing our core H&M brand, which is our highest priority also going forward. This was a short recap of our main action areas for future growth.
In parallel with our growth initiatives, we continuously, of course, work to increase efficiency as well. Maintaining a good cost control, we expect operating costs to continue to increase at a slow rate. Efficiency improvements are ongoing with several promising initiatives within buying and production. In addition, the weaker US dollar is currently having a favorable impact on purchasing costs. Looking ahead, we see great potential to reduce markdown costs from 2019 and onwards. Before we move over to the Q&A session, some words on the current year. Our assessment remains that sales from online and new business will grow by more than 25% during the year, and that the H&M Group will reach a somewhat better result for full year 2018 compared with last year. We take a long-term view that together with our knowledge and experience, enable us to navigate through times such as this.
I look forward to telling you more during the year about the H&M Group's continued transformation work, which will get us back to healthy growth in both sales and profitability. Thank you. Now we're happy to take your questions.
Thank you, ladies and gentlemen. We'll now begin the question and answer session. As a reminder, if you'd like to ask a question, please press star one on your telephone and wait for your name to be announced. If you would like to cancel your request, please press the hash key. Once again, please press star one if you'd like to ask a question. Your first question comes the line of Charlie Miresons from Deutsche Bank. Please ask your question.
Yes, good morning. I've got three questions, please. The first one is that you obviously have talked about the errors you made in your assortment in the second half of 2017. I guess it would have taken some time to realize that when the sales were then weak. Given the length of the supply chain, by what point do you think you implemented the fixes, and we should see in your sales results, the benefits of correcting those errors? The second question I have relates to all of the plans you have for 2019 that you've mentioned around store refits. Clearly, the ongoing rollout of RFID and development of digital. Should we expect 2019 CapEx to be higher than the current year? The final brief question is, historically, you've made some comment about current trading.
I wondered if you could confirm that March has been difficult as much of the industry data suggests. Thank you.
Okay, thank you very much. When it comes to the mistakes that we made in the assortment for the H&M brand during the second half of 2017, it has affected the selling in quarter one. It will, to some extent, also affect the selling in quarter two. It's not that any one at a particular point where everything was fixed. It has been a gradual work, and it will be a gradual improvement. We're also meeting the mistakes that we did from last year, from 2017. We will have easier comparable figures. Of course, we're working very hard and focused to make sure that we improve all parts of the assortment, and especially then that we have a better balance and cater well for our target customers.
When it comes to the changes we're making to the store concept, or to the stores, one part is the test that we are piloting with good success. When it comes to the new interior rebuild, it's just one part of it. Of those, we will scale up if the tests continue to be successful during the latter part of 2019. The things that connect to product presentation and other things that is not connected to rebuilds, we will implement quicker than that. RFID, which again, we have piloted in many stores with good success, will be rolled out to 1,800 stores approximately during the year, and more stores during 2019. When it comes to the CapEx figure for 2019, we don't believe it will be higher than for 2018, but our best guess today is in line with 2018.
Current trading, we don't release monthly figures, so we will comment on the full quarter by mid-June. As you have seen in the market figures, it's been a tough month for retail. I think the cold weather has been part of that, delaying the start of the spring season.
Great. Thank you very much.
Thank you.
Thank you. Your next question comes the line of Richard Chamberlain from RBC. Please ask your question. Richard, your line is open.
No, we can't hear you.
Maybe you have been muted by someone. Hello?
Hello, Richard.
Richard.
You're very far away from your phone. I'm sorry, Richard, we're going to need to go to the next-
Hello, can you hear me?
Yeah, we can now. Please continue. Thank you.
Okay, great. Sorry about that. Right. Two topics, please. Yeah, my first question is on inventory. Just wondered if you can give more color on the inventory composition, and also talk about your current level of inventory commitment. The second one is on the China Tmall launch. Obviously got off to a very strong start. I think you say it's exceeded high expectations. Were there any sort of special incentives that you offered to drive initial demand? Do you expect that to be a sort of temporary period of very, very strong demand, and then for demand to drop back? Just some initial thoughts on the China Tmall launch. Thanks.
Yeah. Thank you. Yes, we went into quarter one with too-high stock connected to the mistakes that we made in the assortment. Reductions, as you see, has been very high during quarter one. We still have 7% higher stock than last year, which is higher than what we wanted to be. We still have control of it, and we have a good plan on how to handle it in the most cost-efficient way, taking into consideration sales, profits, customer experience in the stores. We will do that as good as we can. Reductions will be higher during quarter two. We still believe with the stock management work and actions that we have, that reductions for the full year still can come in at flat or show a slight increase compared to 2017. When it comes to Tmall, it's been very good.
We got some estimates from other big international companies launched on Tmall. We knew that we had high expectations, but it exceeded the expectations. We did some extra activities connected to the launch in Tmall. The first day was really high, but it has continued at a good level. It looks very promising, and the good part is that the stores in China has been not cannibalized by this, nor our own web shop. The total selling in China has been very good for us.
Okay, great. It sounds like you are attracting a very different customer with the Tmall launch. Is that correct?
I'm not sure. We've not talked about the customer mix or exactly where the customers are coming from yet. We will have to analyze that, of course, but it's been a very good start.
Okay. All right. Thanks very much.
You're very welcome.
Thank you. Next question comes from Niklas Ekman from Carnegie. Please ask your question.
Thank you. Just a couple of questions, if I may. I'll take them one at a time. Starting with inventory. I'm curious here because the inventory has now been rising sharply for the past two and a half years. You talk about efforts here to reduce inventory, but I was wondering, is that possible if like-for-like sales in physical stores continue to decline at a high single-digit pace the way we see now? I assume that's the reason why inventory has continued to increase, that like-for-like sales have been much weaker than you have anticipated. I was just curious how quickly you can correct if like-for-like sales continue to decline.
That absolutely is connected to that the selling has been lower than planned. Also one has to remember when we give our view on the full year, we're making mistakes from the second half last year. We obviously believe that we will improve from that. On top of that, we believe that we have improved also when it comes to fashion trends, value for money and so on. We believe that the selling will be better for second half year 2018. Then, of course, we're learning, and we have invested a lot in the analytics tools that we believe will help us to quantify and allocate even better. Also RFID and some changes in the supply chain and how we work with different product flows will benefit.
It's hard to give an exact figure, but our view that we gave during the Capital Markets Day is still the same. That we have a good chance of coming down to reductions that are flat or a slight increase compared to 2017. It still remains.
On that topic, with, you say, reduced markdowns in 2019 but not in 2018, is that because of the tough start? The net figure, you're still expecting to be slightly negative for the full year. Same thing here, you are facing really easy comparisons throughout the year, but particularly towards the latter half of the year.
Yes, exactly.
You still expect to reduce markdowns in the latter half of this year?
Yes. Exactly.
Okay, good. I was curious on your guidance for new business and online sales. You talk about growth of 15% and 20% respectively. How confident are you that these businesses will accelerate their growth? Particularly new business, what kind of visibility do you have there that that business will grow 25% for the full year?
Our view is that we will reach those goals of 25% plus for both online and new business. H&M Online, we did what we planned in quarter one. It was a little bit lower than for the rest of the year. New business was actually a bit lower. Our view is that it was tough for the whole market, and partly it's a market, as we all know, a market in transformation, but it was quite a bit affected connected to the cold weather. I think that was specific for the quarter. We still believe that we will reach the 25% plus for new business as well.
The cold weather, I can understand, 10 percentage points below is quite significant, and the structural challenges are probably not going to go away. Is there anything you're doing to accelerate the new business in the remaining quarters?
It's not 25% below. The 10 percentage points below, it varies from quarter to quarter, new business was below the plan we had, but not by 10 percentage points.
Final question here, you talked earlier about shifting to proximity sourcing. Can you give us an update here on where you are in this process, and if there can be any kind of guidance for what share of sourcing that can shift to shorter production times.
We don't give any figure on exact share and how much shorter it will be in production time, it's an ongoing work of, as I said, mapping up the whole, which we have done, optimal sourcing network, optimal logistic network, changing our internal processes connected to that, and also segmenting the product flow so we differentiate even more between how to buy basic garments, how to buy a normal product, so to say, normal fashion products, and also the things that we want to buy super quick and things that we want to test in small quantities and then to scale up. It's not the test period that will continue for a year and then we will roll it out, but we are gradually introducing new ways of working parallel to getting the whole organization ready for working in the new way.
Okay, excellent. Thank you. Thank you very much for taking my questions.
Thank you.
Thank you. Next question comes line of Adam Cochrane from Citi. Please ask your question.
Hi, good morning, guys.
Good morning.
Firstly, on the weather impact, is it possible with your geographic spread to see the clear differences where you've had the snow impact compared to other markets? You can realistically look at isolating what the range issue versus what is the weather? Secondly, you're talking about the external factors becoming more positive as we look forward. Is there a chance for you to reinvest some of that cheaper sourcing into lower prices to maybe start to kickstart some of the sales performance? Clearly, I think one of the main concerns is the underlying sales performance and maybe you just need to, as well as better product, if you can come to the market with slightly more attractive prices. Is that something that you think about doing for the remainder of the year?
Yeah. Thank you. Yes, we see differences between markets connected to weather. We also see in the total sum of the assortment that more weather sensitive products, so to say, more spring-ish garments is performing less good than last year across the customer groups, so clearly connected to weather. There is a weather component, yes. I also want to be honest and saying that we are still facing mistakes from second half last year. That has affected the quarter one selling and to some extent, also will affect quarter two selling. It is a combination. When it comes to favorable external conditions, yes, we have that, especially with the U.S. dollar situation as it is now. As I said during the Capital Markets Day and also today, one of the main priorities is to improve our assortment, especially for the H&M brand.
It is a combination, of course, of correcting the imbalances that we have but also to improve the fashion level and also to improve value for money. We are looking to invest also. The gross margin will be positive for second half 2018.
Have you thought about widening the appeal of the brand to broadening the customer base for the core H&M product? Maybe over the last few years, it's become very narrowly focused on the younger customer.
No, I think you're right. I said it during the Capital Markets Day, that when we got more detailed questions about the imbalances in the assortment, one of the things that we did was that we lost focus on our core customer groups, and we went a little bit too narrow in certain areas. Without going into super details, it's one of the things that we are, of course, correcting to make sure that we cater well for our customer groups and that we broaden the assortment well enough connected to our target customers. You're right.
Thank you.
Thank you very much.
Thank you. Next question comes the line of Simon Irwin. Please ask your question.
Good morning, gentlemen. Three questions for you. The first of which is, do you see anything in the spring-summer ranges, either yourself or across the industry, which suggests that there are any better fashion trends out there? Obviously, one of the problems that the industry has faced for the last couple of years is simply a kind of lack of must-have newness. The second is, can you just talk a little bit more about flexibility in buying, what you're doing about it and whether it's having any impact. Thirdly, can you just guide us to where you think inventory levels should be? You typically run your business on 100, 105 days of inventory. You currently seem to have around 130-plus days. I'm just trying to work out how long it's going to take you to get rid of that excess.
Sorry, I didn't get your first question.
Just in terms of spring-summer ranges, are there any new fashion trends out there that you think are any better, given that the whole industry has simply lacked must-have product for the last two, three years?
You mean our spring summer collection?
No, in general.
Either yours or the industry.
Sorry. Okay. Are the competitors out there doing better fashion, or do I didn't get your question? Sorry.
Well, are you any more confident that there are ranges out there, in your ranges this year, which are better than last year and which are likely-
Yeah.
...come back?
Yeah. We feel confident that we will see a gradual improvement in our assortment this year compared to last year, yes. It's too early to say anything about spring-summer because as we said, it's been cold. In the markets and online also, we see that the assortment for spring-summer or in markets where it's been more normal weather comparable to last year, we see that the spring-summer garments are appreciated. We feel confident in that. When it comes to buying more in-season and having better flexibility, our commitment today, commitment to buy is lower than last year. We are looking to buy for the rest of the year, to buy more in-season.
We believe that we will have a big benefit from the investments that we have done in advanced analytics, in the supply chain work, in RFID, and that we will come down in stock in relation to sales, that we will see an improvement during the year in that, and that during 2019, we will come down to the range of 12%-14% in relation to sales.
Okay. You think it'll take you into next year to get to where you need to be?
Improvements from end of 2017 to the end of 2018, then for 2019, in the range of 12%-14% in relation to sales.
Okay. Thank you very much.
Thank you.
The next question comes in from Chris Siveras from Bloomberg. Please ask your question.
Good morning, guys. Two questions from me.
Sure.
Can you give us some sense or can you quantify, if possible, the magnitude that the external factors will have on your gross margin in this year, in FY 2018, just to get a sense, because it's clearly quite important for the guidance. The second question is on the three warehouses that you mentioned, the ones where you do automation. Can you tell us what% of the overall orders will they handle, and whether you have plans to automate the rest of the warehouses?
Yeah. Sorry. We don't want to give exact details on the gross margin for the rest of the year. We said that it will be a positive gross margin for the second half. When it comes to automation, it's three big warehouses, so it has a big effect. I don't have it actually either, but even if I had it, we don't want to give the exact volume that goes through those warehouses. The plan is, of course, in all the big warehouses that we have around the world to further roll out all the automation investments that we are doing, because we see a big benefit in speed and efficiency coming from that. Sorry I can't be more precise.
That's all right. Can you tell us how many big warehouses you have around the globe? The ones you consider big.
I don't have the exact amount today, but if What was your name again?
Chris Siveras.
Yeah. We can have a look, and if you call Nils Vinge later on, we can see if we can give you more details on that. As Karl-Johan said, we have these three planned for 2018. They are online warehouses. As we mentioned during the capital market day, a fourth one is planned in the U.K. for 2019. We have several huge warehouses around in Europe and also in Asia and the U.S.
We also have this logistic network work that we are doing to look into all the warehouses we have in Europe to map them and see that they are optimized in geographical location, but also in size and the automation levels. That's the work we are doing with external consultants and our own experts, and the work is proceeding very good. We will have some small changes probably in the warehouse setup the coming years, but no dramatical.
We have a quite good roadmap already. That's good when we got that confirmation from the external consultants.
It does sound that you do have quite a few hints. Hence my question. You do say that there's going to be quite a big impact in the lead times from automating these three. If these three are just three out of 50, let's say, or 40, it just doesn't sound that big.
They will have an impact. For instance, when we are estimating the amount of European customers that we can give the next day delivery in 2019, it could be up to 90% of European customers that we will be able to cater next day delivery. Those will be, of course, important for the German online market with a huge warehouse planned in Wrocław in southern Poland, which is catering not only Germany but also Poland. They will have an impact in the customer offering and our efficiency, as Karl-Johan said.
Okay, thank you.
Thank you.
The next question comes to line with Nick Farm from SEB Enskilda. Please ask your question.
Thank you. Good morning. I'd like to start by asking you on the like-for-like development in the quarter. I know it's a non-disclosure number, but irrespectively of what it actually is, could you give us an idea of how that breaks down into sort of store footfall and perhaps price and mix, please?
Price and mix, Niklas, could you please explain what you mean? As you said, we don't disclose like-for-like. Clearly, it's been negative, and we have stopped disclosing the like-for-like number for various reasons. Of course, we don't break it down in price and mix.
One thing, with the shift in the market, we have had a negative footfall to many locations around the world for a number of years, and that I think happens to have been something we see in the market. During second half last year, we saw a bigger drop in like-for-like than that and also during quarter one, that's connected to our mistakes, and it's a combination of converting less and the average purchase. We don't want to dig into too many details about that, because then we have to talk about every quarter. It's an indication again that the second half last year was connected to the mistakes that we made.
Yes. Just for the record, it looks like, or the way I interpret you, it seems like even though your markdowns have probably had a negative mix effect on like-for-like sales, you're also confirming a still negative footfall trend across the retail network.
Yeah.
Yes. My second question would be, how did like-for-like costs develop in Q1, please?
Like-for-like costs?
Yes.
Like cost. Okay. Cost.
SG&A.
Yes. Okay. They were down compared to last year in comparable stores.
Would you care to give us a number?
I don't have the number, but of course, when we are looking into the comparable SG&A, when we have a like-for-like decline in turnover, of course, we react. I can't remember if it was down 3% or 4%, but it was quite good cost control during the Q1.
Excellent. Thank you. If I interpret you right, I'm not sure, though, but let's just assume that the U.S. dollar will have a fairly large positive impact in gross margins in the second half. Would it be a fair interpretation to say that you still expect markdowns to be sustained in the second half, but net net, you're expecting a positive development in gross margins in H2 this year?
Well, as Karl-Johan just said in the previous question, yes, we expect, first of all, that the U.S. dollar is helping us as we state in the report. In part of that, we could, of course, invest in an even stronger offering, but also in terms of stronger bottom margin. When it comes to markdowns, we said that during the latter half or Q4 there is the potential to have lower markdowns than last year.
My final question then, summing it all up. If you have continued pressure on store footfall, you hope to maintain a fairly unchanged, maybe even slightly increase in gross margin. Yes, you have good cost control, but what is the implicit assumption you're making in terms of net sales like-for-likes in order to achieve "some profits growth" this year?
Well-
What are you basing that guidance on?
Sorry, can you say that again? I didn't get it.
What is the actual like-for-like that you need to see that you base your forecast or your guidance for earnings growth in this year? What level is that?
We don't want to go into exact figures on what our forecast, what we're aiming for. If you combine our online targets, the new business, our new stores, the like-for-like sales, the actions that we have connected to all parts of our focus areas, we believe we have a good chance of reaching the 35% trust for new business, global online, and that we will have a moderate increase in profits for the year.
Okay. Thank you so much for taking all these questions.
Thank you, Nick.
Thank you. Next question comes to line of Michelle Wilson from Berenberg. Please ask your question.
Hi. Good morning. I've got three questions. First of all, just on the knock-on effect from the inventory overhang, I guess we're now expecting higher levels of markdown in Q2, and I think you've previously said that when we have higher markdown in the quarter, it can negatively affect the following quarter because some of the sales are brought forward. Should we expect some weakness in Q3 now? My second question is on selling and distribution costs. If we look at the cost per store, it's actually been declining for the last two years now. Just wondering how much you can continue to cut costs without impacting service levels in stores. Finally, on online, you mentioned most of H&M's websites have now been transferred onto the new platform. Can you give any indication of the impact that's having on conversion rates?
Yeah. If it comes to markdowns, yes, markdowns will be higher in Q2. Then we see for the second half year, we believe we will see an improvement so that the full year will be flat or show a slight increase, compared to 2017. It's too early to say anything about the third quarter. When it comes to cost control, we have a good cost control. We believe we will continue to have so, and that we will show a small increase in operating costs for this year and for the coming years. The third question was, online, the new platform. We will soon, as you said, have transformed or transferred all markets to the new platform. It's showing good, the KPIs are good.
I think that's one part, but the main part is that we will have a better, more robust and scalable platform that will enable more development and innovation that will benefit many years to come. Maybe I could add, when it comes to SG&A and cost control, of course, it's always a balance not to go and cut in areas that would hit the service levels or the top line. That's always very important that we don't just work by cutting all the hours in the stores, for instance. We are pretty good on that. Of course, when the top line is declining, it's getting tougher, of course. So far, and we are convinced that we will also manage it in the coming quarters.
Okay, thank you. Just on the Q3, is there anything particular about this Q3 that means we shouldn't see any knock-on effect from Q2?
Well, it's too early to say anything about Q3, so we will come back to that by the end of Q2.
It all depends how Q2 develops, really.
Okay. Thank you.
Thank you.
Thank you. Next question comes to line of Anne Critchlow from Societe Generale. Please ask your question.
Thank you. Good morning, all. I've got two questions. I'll ask the first one. The first one is about click and collect in the U.K. and the trial that you've done. What % of the online orders that were made were picked up in store so far?
Yes, it's true. We have it in the U.K. It's been very well received. Although I don't think we want to disclose all the KPIs, but it's promising, so we have scaled up the rollout now for a number of markets made in Europe during 2018 already.
Okay, thanks. Then my second question was going to be about.
Yeah. Of course, we'll continue with the global rollout after. Sorry.
Okay, thank you. My second question was going to be about returns to store, because I believe you have that in a number of markets. Please could you update on the number of markets and also what percentage of online orders are returned to store, if you're prepared to give that?
Yes, we have returns to stores, which is, of course, an important feature in our offering. We have it in around 15 markets by now, and of course, continue the rollout. In parallel, we are improving the processes and make it even easier and frictionless for the customers to do it. Actually, the share of returns vary quite a lot from market to market, depending on different reasons. It's a very appreciated feature.
Okay, thank you.
Thank you. Next question comes to line of Andrew Hughes from UBS. Please ask your question.
Hi, yes. Good morning, everybody.
Good morning.
I have a couple of questions. Firstly, going back to the inventory level. You got SEK 35 billion of stock. Can you say how much of that is over 12 months old? That's the first question. The second question is, when you're talking about your belief that full year results will be up, are you including the tax credit within that or any additional one-off credits, in your assessment for the full year? Thanks.
Right. Starting with the inventory. Well, of course, the vast majority of the products in the inventory are new products for the spring As we've been in a bit that store releases are full up now, prepare for the season. Very small part of the inventory is older than 12 months. It's marginal, I would say. When it comes to the tax, we estimate still 22%-23% for the year as preliminary. This is a one-off for popular.
Yeah, this in Q1, it's based on the U.S. tax reform, from December 2017, when we revalued and recalculated the deferred tax liabilities and deferred tax assets in our subsidiary in the U.S. That's a one-off amount of almost SEK 400 million. We also use the 23% tax on the results in Q1, and that we will do also for Q2 and Q3. Q4, it will be balanced from the actual taxes calculated after the full year. We will use 23% in Q1, Q2, and Q3.
Right. Effectively, when you say the full year may well be up, you're talking effectively about pre-tax profit being up?
Yeah.
Yeah.
The tax rate is estimated to be somewhere between 22% and 23% on a yearly basis.
Okay. Yeah. Can I just go back to the tax credit that was in the balance sheet last year, the SEK 2.4 billion, your tax receivable. I think at the Q4 stage, you said that was a result of you sort of overestimating the profit you would make during the year. To actually get a tax credit that high on a 22.5% tax rate, is it fair to say you missed your profit estimate last year by about SEK 10 billion?
No. In many countries, it works like that, the tax authorities are sending out tax payments based on the previous year's results plus an upgrade. As you said, we had a tax receivable of around SEK 2.3, SEK 2.4. We paid too much preliminary taxes during 2017, and that we have received back. As you can see in the cash flow statement, we have a positive effect of SEK 250 million something in our cash flow statement. That's the rationale behind it in many markets. Of course, one thing that we could have done maybe a little bit better in Q4 is that we could have corrected it already then, instead of waiting for the year-end results, because of course we saw quite well where the full-year result was heading. That's the rationale.
Right. Okay. We need to hope that the tax authorities are a bit more conservative in their expectations for sector earnings growth.
Yeah, or maybe we should be more alert as well.
Yeah. Okay, great. Thank you for that.
Thank you.
Thank you. Next question comes line of Darmender Jan from Vanda Analytics. Please ask your question.
Hi. My question has been answered. Thank you.
Okay. Your next question comes line of Daniel Schmidt from Danske Bank. Please ask your question.
Yes. Hello. Good morning, everyone. I just wanted to ask you about the incentive or the introduction that you did when it came to free deliveries and free returns for club members as of the start of February, in many markets in Europe. What impact has that had on online sales and profitability so far? I know it's been a very brief period, but still, if you have any comments on that.
Again, sorry, we don't want to disclose any exact figures. As with most new things that we believe a lot in, we pilot it first to see what effect it has, and it showed really good effect, and now we are just rolling it out to club members with good effect. It's something that just started. Yeah, we're happy with the start, and it will help the company going forward.
Okay.
Sorry, I can't.
You can't say anything about sort of average order value versus order frequency, for instance?
Yeah. We can see a lot of things, exactly what we were looking at when we did the pilot, and we see the same thing now that we have rolled it out. We don't want to go into exact details. Yeah, obviously we're happy with it and the results that has been shown. We will continue.
All right. Okay. Thank you.
Thank you.
Thank you. Once again, if you'd like to ask a question, please press star one on your telephone keypad. Thank you. Your next question comes line of Fredrik Ivarsson from Kepler. Please ask your question.
Thank you. Just another follow-up on the questions regarding your expectations of a small earnings growth for the full year. Since you also guide for mid-single digit growth in SG&A, do you actually assume that sales growth will outpace that, or is it rather the increased gross margin that's driving?
We don't want to give an exact mean sales estimate. We gave our view in the Capital Markets Day. We have the same view today. It's what we comment on now. Sorry, we can't give more at this point.
Fair enough. Thank you.
Thank you.
Thank you. There are no further questions at this time.
Well, thank you all very much for participating in this conference call, and we wish you all a good day.
Thank you. That does conclude our conference for today. Thank you for participating, and now I'll disconnect.