Afternoon, ladies and gentlemen, and thank you all for standing by. Welcome to today's Full Year Results for 2017 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. I must advise you that this call is being recorded today, Wednesday, 31st January, 2018.
We've been joined by our CEO, Karl Yuan and our CFO, Jerky Carvanen. And I would now like to hand over the call to your first speaker, Niels Binsch. Please go ahead.
Hello, everyone. Thank you all for joining us today. You are very welcome to this telephone conference on occasion of the H&M Group's full year and 4th quarter results 2017. With me is our CFO, Jyrki Tervonen and our Head of Investor Relations, Niels Vinge. I will start with a short introduction about the market and our performance in 2017.
Nils will take us through the financial details, and then I will talk a little bit about our digital investments and how we accelerate our transformation to meet customer expectations in a rapidly changing market. After that, I would be happy to answer your questions. And you will find the slides to this telephone conference on h and m.com. As most of you know, fashion retail is changing At the heart of this development is the digitalization, and it is driving the need to transform and to rethink faster and faster. The competitive landscape is being redrawn and is looking different today and very different than just 10 years back.
There are examples, I mean, new big players like Amazon and Alibaba, new business models are emerging. And in an ever connected world. A lot of niche players are entering the scene, e commerce players that are able to reach customers in a way that they would not have been able to, say, 10 years back. As a result, the customer behavior is changing fast also. With the digitalization, more and more shopping is moving online.
Mobile shopping has grown a lot in recent years, and this results also in reduced traffic to a lot of physical stores around the world. And the mobile Hello has also become central for customers to research, explore and shop fashion as well as for sharing content and inspiration with friends. So this increased transparency is, of course, a good thing for customers, and it boosts their expectations. And therefore, customers are also expecting much more from us all in everything from the assortment, the design, value for money, the personalization, newness of products, sustainability and convenience. So it's a different competitive landscape, changed consumer behavior and all companies are, one way or another, affected by this, and all companies are in different phases of adapting.
And many are having a tough time, and in that process, price pressure is growing as well. And while the shift brings a lot of challenges, we also see a great deal of opportunities ahead, and we believe that we are well positioned to seize these opportunities. And I will tell you more about this shortly, But first, a few words on 2017. Sales, including VAT, amounted to SEK 232,000,000,000, an increase of 3% in local currencies and 4% in Swedish kroner. This was clearly below our own and the market's expectations, but there are also quite a few bright spots.
Several parts of our business performed well during the year. The H and M Group online sales developed well. The new business portfolio with our newer brands such as Koss, Monkey, Weekday and other stores and H and M Home also continued to perform well both in physical stores and online. And we also launched a new brand, Arket, in a successful way and thereby adding to our platform of brands to grow within the future. Sales were also good in our new H and M stores, which have delivered according to plan.
In comparable H and M stores, however, performance was weak in many of our large mature markets. And this development mirrored the shift in the market from offline to online. And also, we have to say that we have not improved require. In addition, in the Q4, there were some imbalances in parts of the assortment of the H and M stores, and that also affected our performance. And this is obviously this is something that we are correcting.
In parallel with these developments, during the year, we also continued investing for the future within a number of important areas, and I will tell you more about this in a moment. But first, I hand over to you, Nils.
Thank you, Karl Johan.
Looking at some profit numbers. Gross profit was SEK 28,000,000,000 in the 4th quarter compared to SEK 30,000,000,000 last year. This corresponded to a gross margin of 55.4% compared to 57% in the Q4 in the previous year. Due to the weak sales in the autumn at H and M's comp stores, markdown costs increased by 130 basis points as fair sales. Looking at the market conditions for external sourcing factors such as capacity, transport costs, salaries among suppliers, currencies and raw material prices.
Taken together, they were slightly negative during the purchasing period for the 4th quarter compared to the corresponding period for the year before. Gross profit for the full year was SEK108 billion, corresponding to a margin of 54%. For purchases made for the Q1 of 2018, the market situation for the external factors is considered to be neutral overall compared to the corresponding purchasing period of the previous year. Looking at selling and administrative costs. Cost control in the group remains good.
In the Q4, SG and A increased by 2% to $23,000,000,000 In local currencies, the increase was 4%. For the full year, SG and A increased by 6% in kroner and 5% in local currency. For the Q4, profit after financial items was 4,900,000,000 dollars And for the full year, profit after financial items amounted to $21,000,000,000 compared to $24,000,000,000 in 'sixteen. Net profit was DKK 4,000,000,000 in the 4th quarter, equaling earnings per share of DKK 2.41 compared to DKK 3.57 in the corresponding year earlier period. And with a tax rate of 22.2 percent for 2017, net profit for the year was DKK 16,200,000,000 compared to DKK 18,600,000,000 the previous year.
Earnings per share was $9,78,000 compared to $11,260,000,000 Looking at some key data. Stock in trade on the 30th November amounted to SEK 33,700,000,000 an increase of 6% in kroner. Currency adjusted, the increase was 7%. The stock level was higher than planned as a result of sales development during the autumn being considerably below the group's sales plan. Combined with the weak sales at the beginning of the Q1 2018, this is expected Cash flow from the current Cash flow from the current operations was $21,600,000,000 compared to 23,800,000,000 And investments in terms of CapEx totaled $2,500,000,000 compared to 13,300,000,000 And for 2018, CapEx is expected to be in the range of DKK 12,000,000,000 to DKK 12,500,000,000 with a big shift from new physical stores to digital.
Liquid funds amounted to SEK 9,700,000,000 compared to SEK 9 point 4,000,000,000. At the end of the financial year, short term loans amounted to SEK 9,700,000,000 with an interest rate of 0 to 7 basis points. DKK 9,300,000,000 of this is in the Nordic countries, while DKK 425,000,000 dollars is spread in various local markets outside the Nordic countries. And some H and M sales markets, local rules and currency restrictions make it more favorable for the group to use local funding. The Board of Directors will propose the Annual General Meeting a dividend of SEK 9.75 per share to be paid out in 2 separate portions.
However, in view of continued high investments in areas such as digitalization, the Board of Directors will investigate the possibility of offering all shareholders an opportunity, but not an obligation, to reinvest the dividend received by the newly issued H and M shares. This is known as dividend reinvestment plan. Further information on this, including the timetable, will be communicated at a later stage before the H&M. If the reinvestment plan is introduced, the H&M Group's largest shareholders, the CFM Parisien family and related companies intend to reinvest the dividend received in 2018 in the plan. Return on equity was 26.8%.
Our global expansion continues to create new jobs. During the year, the number of employees increased by approximately 10,000, which means we are now more than 171,000 colleagues in the HCM Group. And this translates to 123,000 and 178 employees full time. And now back to you, Karl Johan.
Thank you, Niels. We are a company with a lot of strengths, and one of them is our size. But despite us being a big company, we still have a small share of a large and growing market. Another strength is our portfolio of brands. We have 8 unique brands today with business models that are proven offline and online and all of them scalable.
We also have a strong company culture and very competent employees, and our long term approach is another strength. Our way is to always focus on our customers, stay true to our business idea and invest for the long term. Of course, we also want to perform well in the short term perspective, and lately, we haven't done this well enough. And therefore, now we are accelerating our work, our transformation work, and we have 3 main action areas connected to this. And one is to improve the core of our customer offering for all our brands.
It's also to invest in enablers for an even better customer offering, and it is also to invest in driving growth and expand in new ways. And if we can just say a few words on these areas, we will talk more about them in detail during the Capital Market Day. Our first and most important action area is to improve the core of our offering, and this goes for each brand, of course. We have grown rapidly in the past years, and I believe we haven't focused well enough on our customers. And this goes mainly for the H and M brand, and this we need to change.
We must always have the best customer offering for all brands, and this the most important part is our assortment, our products. And so the best offering and to improve and to have more relevant assortment when it comes to the mix of the products, the design of the products, value for money and also to sustainability. We also need to improve our physical stores. They need to be more inspiring and more convenient customer experience and be more customized to local needs. We have tested a number of new things in various locations globally with successful results in the form of positive customer feedback and sales.
And based on these learnings, we're setting a plan to be able to scale this up. At the same time, there is a need to constantly optimize the store portfolio in order to secure that each market has a store network that fits customer demand and the new shopping patterns. We're also developing the digital store to make shopping easier and more inspiring, and this includes, I mean, improving things like navigation and making it easier for customers to explore our assortments, offering better payment options and fast and convenient delivery options. In parallel, we are also integrating our physicals and digital stores to offer our customers a great seamless shopping experience with services ranging from click and collect, online returns in stores, scan and buy opportunities, mobile payments and also better deliveries. The second area is to invest in enablers or new technologies and new ways of working to improve the customer offering.
And the first area there is to improve our supply chain, and we are investing a lot to become even faster, more flexible and more responsive, all the way from product development and design through logistics and sales. Connected to this, we will also invest even more in AI and advanced analytics, and we see big potential here across the board from assortment planning to supply chain and sales. And we will also continue to prioritize investments in our tech foundation, and this includes rolling out our scalable and robust platforms, but we also need to invest a lot in having faster development of consumer facing apps and also broadening our use of technologies like cloud, RFID and 3d. Our third action area is to drive growth. We are expanding in both new and traditional ways.
We are expanding our online presence. In 2017, we added another 8 online markets, 9 including Q8 via franchise. Today, H&M brand has e commerce in 44 markets, And in 2018, India will become a new online market for H and M as well as Saudi Arabia, the United Arab Emirates via franchise. And looking ahead, we will expand online to all markets where we have stores and more markets added to that. We will also broaden our assortment and roll out our online stores to more markets as well as linking new platforms.
In March 2018, both H and M and H and M Home will launch on Tmall in Mainland China. Tmall is the world's largest e commerce platform, where we already offer our brand, Monki, And Monki has showed very good performance in China. And Tmall, which is owned by the Alibaba Group, will be an important complement to our existing physical and digital stores in China. We are also in far advanced talks with Alibaba to extend our collaboration to include the other brands of the H and M Group on Tmall. At the same time, we still see room for expanding the physical stores in many regions and countries.
Emerging markets are a main focus for new H and M stores going forward, markets with strong underlying growth, but we also see potential for new stores in other places. For 2018, our best assessment is that we will open around 390 new stores and close approximately 170, resulting in a net addition of approximately 220 new stores for the H and M Group, and this will also mean a lot of renegotiations. Our other brands will also be part of the expansion. Building new brands is an important part of the growth strategy of the H and M Group, and we are developing and launching new brands for new needs and segments. We have 8 brands today.
In addition to H and M, the group includes Kos, Monkey and Other Stories, Weekly, Chip Monday, ARKF and H and M Home. All of them are unique and all are scalable, and they combine the advantages of being small players with the backbone and economies of scale offered by the H and M Group. And by testing new things, small scale, they can provide also provide learnings to the rest of the group. Soon, we will launch our 9th brand, Efthound. Afound will be an off price marketplace, offering a carefully selected, broad and diverse assortment of discounted products from well known quality brands, external as well as brands from the H and M Group.
EFound will launch with both digital and physical stores during 2018, starting in Sweden. The first DeFun store will open in Stockholm. In parallel, we're also working on new ideas, new business models that will drive us forward, and there are many interesting ideas in our pipeline for 2018 and the years to come. So this was a short overview of 2017 and an introduction to our main action areas and expansion plans. Before we move over to the Q and A session, some words on current trading and the outlook for 2018.
All in all, we feel 2017 was a year where we made many steps forward and did more groundwork for the future. But we have also made mistakes, which slowed us down, and these we are correcting. And at the same time, we're speeding up our transformation agenda. But the ongoing industry changes are challenging everyone, and this will continue in 2018, and this is clearly visible in our sales at the start of the Q1 of 2018. The growth target of the H and M Group is to increase sales in local currencies by 10% to 15% per year with continued high profitability, and this is our long term target.
In view of our transition work to meet the major shift in the industry, we do not expect the growth target to be reached in the current financial year. But we have what it takes to navigate through the turbulent times that our industry is going through. We have the experience needed. We have great colleagues, great company culture, and we have our long term perspective. We have a clear action plan that we're now implementing at full speed.
So we look optimistic when we are optimistic when looking ahead. We would also like to remind you about our Capital Market Day, Capital Markets Day on the 14th February, where we will present more details about our brands and business as well as our action plans to drive further future growth. We're looking forward to go into more details on this at the Capital Markets Day, where we will have plenty of time to elaborate. Thank you. And now we're happy to take your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from the line of Chiara Battistini. Please go ahead.
Good morning. Hi. Thank you for taking my questions. My first question would be on the cost of the online and convenience initiatives you are implementing, especially following your announcement last weekend that you're introducing free delivery and returns. So what kind of cost we should be thinking of going through the P and L from 2018?
And then going back to your comment on the expectations for growth for 2018 not being at the 10% to 15% medium term target. Should we though expect like for like to return to positive territory in 2018, would you say?
Yes. I'm not sure if I got it correctly, but the cost connected to our online store and the introduction of free returns and delivery, it is something that we are introducing to club members in the countries where we have the H and M Club. And the H and M Club, we are rolling out to the plan is to roll it out to all the countries. So I mean, it's an ongoing work. We don't know what the demand will be for this, but we have a strong belief in it that it will be very much appreciated by cloud customers.
And if that's the case, we I mean, it's happy customers will lead to good performance for H and M. And we have a strong profitability in our e commerce parts of the company, and this we're looking forward to show and talk more about during the Capital Markets Day. So we feel very confident in that this is the right thing to do. When it comes to 2018, I'm not sure again if I heard you correctly, but we had 2017 was a year below our expectations and the market's expectations and partially due to the shift in the market, but also that we haven't delivered or we haven't improved enough. And also, we made some mistakes connected to the assortment mix for the H and M brand, which has affected the quarter four selling and also the start of quarter 1.
So a tough start to the year, below our expectations, but I believe we will gradually improve during the year. We will see by how much. It's also uncertain times for the whole industry, as I have said. So I don't want to give an exact figure. But the gradual improvement and we're not meeting the best figures for the second half year twenty seventeen, and we are gradually improving.
So we believe that we will at least see better sales and better profit second half twenty eighteen compared to second half twenty seventeen.
So Q2 should still be a transition quarter?
I don't I mean, quarter 1 has started below expectations. So we have higher reductions as well. Quarter 2, I think part of this will continue. So I don't expect a big change. But I mean, it's I think we have a lot of improvements as well, but we'll see.
But what I can say is gradual improvement, and I believe second half twenty eighteen will be stronger than second half twenty seventeen.
Okay. Thank you very
much. Thank you.
Our next question comes from the line of Cedric Lacambal. Please ask your question.
Yes. Good afternoon, gentlemen. Cedric Lacazmo from Raymond James. I have a follow-up question on your assortment issues. And you mentioned the assortment mix problems in Q4 and at the start of Q1.
Could you be a little more precise and explain to us what happened? And beyond this, what are you currently doing on your assortment to make it more attractive? And don't you think that you could eventually make a little more with less rationalizing the number of SKUs? Could you elaborate a little bit on that? Thank you very much.
Well, I mean, first of all, I think it's important to say, I mean, we are developing nicely online. We still have a strong, strong sale. We do customer surveys in all markets, and we have a good position for the H and M brand in a much appreciated assortment. But if you compare quarter 4 to quarter 4 the year earlier, we made some structural or we made some mistakes. That's not to say that the attract the assortment can always get better, but it's more connected to the assortment mix.
We had, I mean, too much of certain products and too little of that we shouldn't have had and too much too little of products that we should have had. And this is always the case, but it was more we always want 4 of the best and less of the least good ones. But it was more evident, and we made some mistakes connected to this. So the structure or the mix of the assortment connected to prices, connected to fashion level, connected to product type without going into too much details. Normally, we're quite good at this, but we made some mistakes during quarter 4, and that affected the selling and also leads to higher reductions.
Now the good part is we know what it is, and it is something that we can correct. But at the same time, as I've said earlier, one of the prioritized areas is for all brands to improve the core, that is to say, the customer offering. And the most important part is to improve constantly improve the assortment. And we will focus a lot on this to make it even better, even more relevant. And we will also invest in this to improve quality, improve prices, improve speed of buying, and with this comes newness as well.
So part of it is connected to investments as well.
And how does the online assortment compare to the physical assortment? How do you pay with both proposals?
I mean, now we're developing nicely online. We're expanding. We're improving the store. We're also broadening the assortment online, and that's what we'll continue to do. So but where we have had a weak development, as I mentioned earlier, during the year is in H and M's comparable physical stores.
So we are exploring new concepts around the world. And the good thing is that we have got we have some really good receipts from customer feedback on the shopping experience and also good sales selling receipts. So now the next step is to just test a little bit more to verify and then to scale it up. And this means to sorry, excuse me. Or you go.
No, no, Jess. This mix issue on the assortments that you've had, is it phasing out towards the end of Q1?
Yes, it is. I mean, part of it is, I mean, connected to the higher reductions that we're expecting now and or that we will have in quarter 1. And then we will see how February goes, and then we hopefully, we are in a better situation entering quarter 2 when it comes to the SOX situation. And then again, I believe gradual we will see gradual improvements over the year.
Our next question comes from the line of Charlie Muir Sands. Please ask your question.
Yes, good afternoon. My first questions are on the inventory position and your markdown. I appreciate you still have 1 month left to go in Q1. But given that your inventories continue to rise faster than your sales and it appears that you're not buying as much inventory. Presumably, the age of it must be getting a bit longer.
Do you think that you will be carrying too much inventory by the end of Q1 and therefore be expecting further markdown in the second quarter? And then the second thing is that now we seem to be swinging at least from negative input cost pressures to neutral. And perhaps given where currencies are, you might be enjoying a tailwind later in the year. How should we be thinking about your priorities there in terms of supporting the P and L as opposed to the reinvestments you alluded to, particularly around price and quality? Thank you.
Yes. It's we went into quarter 1 with too high inventory, as we said, and this is something that is the higher reductions in quarter 1. And then hopefully, we will be in a better situation entering quarter 2. It's too early to say anything about the Q2. At the same time, we are also improving our work in the supply chain to become even faster and more flexible.
So we're buying later. We have quicker deliveries or quicker lead times from design to sales, which is good. And what was the second question? Sorry, it was connected to
The potential tailwinds you will experience in the cost pressures.
Normally, we comment on the I mean, the big external factors influencing the purchasing costs, such as currency, cotton prices, transports, production capacity and so on. And now we have a favorable situation connected to the dollar versus the selling currencies, and that has been against us for quite a while now. But now it's in our favor. And of course, is a good thing. And then we'll but there are so many other factors influencing the gross margin as well.
So we don't want to give a guidance, but of course, that helps.
Thank you. And if I may ask one final cash flow question. You've given us the guidance on your CapEx for the year, which is effectively still for it to remain high even though you're opening much fewer stores. I appreciate the investment in areas like digital. Do you think that this is an area where you're spending harder to catch up?
Or even with slower store openings perhaps next year, the capital expenditure will remain high?
When it comes to the capital expenditure for 2018, we estimate it to be around the same level as dollars to $12,500,000,000 with the same currencies used exchange rates than 2017. As you said, we are shifting the investments more towards the digital, and the share for brick and mortar is going down. When it comes to 2019, it's too early to say, but the direction is that we are shifting more to online digitalization, AI and etcetera, as Kallieva mentioned earlier.
Yes, exactly. But at the same time, we have these tests for the physical stores that are really looking really positive. And if we continue to get the same receipts, we I think we're on where we are or the aim is, and we will be in a great position to ramp up the rebuilds of the H and M stores. But yes, then that's a good thing.
And as in previous years, this is the moving target, of course. There are a lot of negotiations not ended. So this CapEx will probably be something else during the year, but we will, in normal order, give a new guidance maybe in the half year report or in
connection with the Q3.
But this is what the Great
Great. Thank you very much.
Thank you.
Our next question comes from the line of Richard Chamberlain. Please ask
your question. Thanks very much. Can I ask a question on Space guidance, please? You said, I think, in the statement that you're planning to open 2 20 stores net, which is growth, I think, of around 4.5% for the year in terms of store terms. Should we expect the net space, though, to be open to be a little bit lower, more like maybe 3% to 4% because presumably you'll be closing larger H and M stores.
And I think you've said that you're opening almost 100 non H and M stores. So should the space growth be a little bit lower than that for the coming year?
A little bit lower, yes.
Okay. All right. Thanks. A little bit lower. And just a multifinancy one.
Why was the cash tax paid? I think it was higher than the P and L charge for last year. What was the main difference for that?
That's normally in a lot of countries, you have a preliminary tax, and it's normally based on the results from the previous years and also an upgrade in the result. So what we have, if you look in the balance sheet, we have a tax receivable, approx SEK 2,300,000,000. So a lot of countries, they use a preliminary tax schedule and the company stopped paying it in during the year. And in our case, when we went down in the result, we have paid too much for Kreilskap, and that's tax in it's shown in the cash flow statement. But if you look also in the balance sheet, we have a tax receivable, as I said, amounting to SEK 2,300,000,000.
That's all it is. Okay. Got it.
Okay. That's clear. Thanks a lot.
Thank you. Thank you.
Our next question comes from the line of Anne Critchlow. Please ask your question.
Thanks. Good afternoon. My question is on Afound. Are you planning to put clearance products for the H and M brands into a found? And if so, will you ship them from local warehouses to a central stock position?
Well, yes, maybe, but that's not the main idea. The main idea is to bring something new to the off price market. It's a huge market. It's a market that it's growing, and I think we have a great opportunity to take a big part of that. And to do that well, we have to bring something new, and that is by bringing in a well curated assortment of carefully selected products from a lot of brands.
So a lot of external brands from different price segments, a lot of well known brands, but of course also our own brands. But the found team will choose what products to offer to the customers. So it will be, I mean, great wide assortment and fantastic deals. So it's if you want stylish products and the great deals, that's the place to go to, we believe. So but we'll tell it started to start in Sweden, and we'll see how it goes.
Okay. I'll ask it another way. Will it be current season products or previous season products from the external brands as well as H and M?
A mix. It will be current season. It will be last season. It will be vintage clothing. So it will be a combination.
Okay. And then one question, please, also on Niden. I read in the trade press that this was a brand you were planning online only premium aimed at millennials. Is this something that is actually happening? Or was it a sort of fake story?
No, it's actually we said earlier today that we have 2 new ideas that we're looking into, 2 business models with, I mean, great potential if we do it well, and we will talk more about that later. Naidan is something different. It's a small test that we are I mean, it's a team, small team working on it, and it's something that we will test during the year. But it's not one of the 2, I mean, business models that I mentioned earlier today.
Okay. Thank
you. Yes. Thank you.
Our next question comes from the line of Simon Irwin. Please ask your question.
Hi, gentlemen. How much damage do you think you're doing to your brand by the constant clearance and markdown? Because it seems to be you close or stuck in a cycle of ever increasing inventory, ever increasing markdown and declining full price sales. And I'm wondering why this year is going to be any different to the last 3.
Yes. Well, of course, we have to improve. As I said earlier, we're investing a lot in the supply chain to become even faster, more flexible, more responsive. We're looking into our production capacity and production sets up. We're mapping up and making investments in the whole logistic networks to have more optimal garments flow.
We believe that, that will help us a lot. The investments in AI will help us to quantify even better and allocate the assortment even better. But then, of course, the most important thing is to continue to develop products that our customers like for all brands, and that I believe we will do. And those 2 those things in combination will help us to come down in inventory level to better levels in relation to sales. We do We also, of course, do we constantly monitor.
We do anonymous surveys in all markets to see where we stand, our brand strength and what the customer feedback is for our assortment and so on, and we still have a really good position in all markets. So still a good position, strong brand name, but of course, we want to improve.
Right. But relative to historic levels, your inventory levels are probably about 30% higher. Therefore, you've got a huge amount of inventory, which you didn't want to buy at full price, which you're trying to sell through the business. I mean, how much damage do you think that is going to do to full price sales over the next 6 months or so as you try and sell this through? And why are we not going to get into the same problem in 6 months' time as we've been going through for the last 18 months then?
Yes. Yes. I see what you mean. Obviously, we're not happy with the inventory level going into quarter 1. Sales did not reach our plans.
And as a result of that, we have too high level. The reductions will be higher in quarter 1, as we said, 150 to 200 basis points higher in relation to sales. By doing that, I think we will enter quarter 2 in a better situation, and gradually, we will improve over the year. With a better assortment and some of the other improvements connected to our production and supply chain work, we will come down to better levels. But I don't want to give an estimation of exactly how what levels we will reach in the Q2.
Okay. And looking through the country mix of your sales, there are some markets, obviously, which stand out as being particularly weak. Can you just talk us through the performance of the brand in China and the U. S. In particular?
Yes. I think the things we have spoken about, the shift from online to from physical stores to online with the general decline in customer traffic is something that we see in most markets. We see it in China. We see it in U. S.
I mean, we have 2 giants in Alibaba and Amazon growing a lot in those two markets. We also have the mistakes that we have done during end of quarter 3 quarter 4 in the assortment mix affecting all markets, but actually affecting those 2 markets more than the average. And then as I said earlier also, I think we're looking back and to reflect on what we should have done better. We should have improved the store experience more than we have. But we are working actively on that and finding these new concepts that hopefully we can scale up.
So that's a combination of various things.
And in terms of the in store experience, how far advanced your trials and when do you think that there will be something that's kind of really noticeable at a group level?
Sorry, the trials, the store concepts. Yes, it's mainly for the brand. We have a lot of tests then around the world. We are I mean, the aim is to get the receipts before the end of 2018 and have the opportunity to ramp up the rebuilds in 2019. Exactly when in 2019, we don't know yet.
But during 2019, we want to start hopefully, we have all the seats we need to start the rebuild program.
All right. Thank you very much.
Thank you.
Our next question comes from the line of Andrew Yuzh. Please ask your question.
Great. Thank you, everybody. Just going back to the stock issue that we just talked about. Was that really the cause of the imbalances that you mentioned across the ranges that you had too much old stock sitting in distribution centers affecting the flow of new stock to the stores? Or were those imbalances caused by other factors?
Sorry, I'm not sure if I understand the correct the question.
Yes, yes. You mentioned that within terms of the product ranges, there were imbalances. So you didn't have enough of your best sellers and you had too many sort of poorly performing lines. Was that a direct result of just having too much stock in the business? Because just thinking that your main competitors are probably sitting at about 11% stock to sales ratio, and you're up at 17%.
So it just feels like it's perhaps making it more difficult for you to function properly as a business with just that level of stock sitting somewhere within the business? I assume it's within your distribution pipeline somewhere. And is it clogging up new stock actually getting through to the stores?
No, that's not the case. I mean, if we look at it, we I mean, the whole H and M Group world has gotten more complex. We're pressing we're multichannel today compared to 10 years back. We're present in many more markets, a lot of differences in customer groups and so on. So we need a more quicker, more flexible supply chain, and that's why we are investing a lot in this, and we will see improvements connected to that.
But in quarter 4, we did some mistakes as well in the assortment mix. And I mean, that is I think that affected the selling negatively, and that resulted in a higher inventory level that we now have to deal with deal with and work with. But we are correcting that, and hopefully, we won't do the same mistakes again. And in addition to that, I hope we see a lot of other improvements in the assortment and as a result from the investments that we're doing in the supply chain.
Can you identify how much stock is over 12 months old?
No, we don't. I mean, we'll I don't have that figure here. But I mean, it's more connected to quarter 3 and quarter 4, and we have excess inventory. But that, we are dealing with now in quarter 1.
Right. Okay. Yes. And just one other small question while I'm on. You have a small amount of debt, which you say is from institutions outside the Nordic region, and you're paying at least 8.75% interest on that.
I mean, why are you doing that?
Yes. The reason is that it's more favorable for the group because we are entering countries with local regulations and currency restrictions. Some countries, if we finance it with equity, for instance, then we lock in a lot of money. It's very expensive or more or less impossible to get it back. Other countries, if we give an internal loan, then we can't deduct the interest from those loans.
So in each case, when we are entering a new market, we are looking into what's the most favorable way of financing the expansion and the start up of the country. So that's the main reasons.
Right, right. Okay. And the debt position overall with your I suppose you're saying that net debt shouldn't exceed one times EBITDA. That obviously gives you quite a lot of headroom with EBITDA at DKK 30,000,000,000 and the fact that your dividend presumably will halve from the DKK 16 billion payment. I'm just working out why you think net debt might actually get anywhere near that one time EBITDA if you're paying half your dividend in equity?
No. Yes. Okay. 1.0 net to EBITDA is not a goal in itself. It's just to clarify that we have a conservative view when it comes to leverage ratio.
And the goal and what we are aiming for is, as always, to have a strong capital structure, which means basically that we have a strong liquidity and the financial flexibility to, as in the past, to be able to expand and invest in continued growth. So one shouldn't look into that. We are aiming for 1.0 as an optimal capital structure. It's more about to show that we have a conservative view when it comes to leverage ratios.
Our next question comes from the line of Jeff Roehl.
Can I just ask a slightly longer term question about your space growth plans or store number plans? Obviously, you're slowing the space growth quite significantly this year. Is that something we should think of as a sort of temporary reaction to events or something that we should see as happening ongoing?
We will have net openings for the coming years as well, but the percentage increase net store openings will come down.
Come down further from the sort of, I guess, 4% -ish this year?
Yes, yes. But not a big drop for 2019, but it will be gradually lower percentage increase from net income stores.
That's very helpful. Thank you. In which
case, how are you going to get to back
to the sort of 10% to 15% long I know it's a longer term target, but how are you going to get to 10% to 15% sales growth if new space is giving you, say, 3% contribution to sales? I mean, do you really have to do double digit
like for likes every year?
No, it's a longer term sales target. We will talk more about this during the CMD when we can go more into details about our plans. I mean, most of our growth focus will be connected to the online stores, where we have had a good growth, where we believe we will have a good growth for the coming years. And that will I mean, year by year, it will take a bigger share of the total, same with the new business portfolio, not huge as a part of the company today, but it's convinced about strong growth for many years to come. And year by year, that will take a bigger share of the group.
We have new business models with great potential that we are exploring as well. And then I mean, it's important to say we have a strong belief in the H and M physical stores as well. The trend now has not been great. We haven't reached the goals that we set up. But if we just take one example, if we can get the receipts we want from the new concept stores that we're testing, which are showing really good selling receipts, and we can ramp that up to many more stores.
I There's opportunity there as well. But we don't want to say exactly when or if we will reach the target by 2019 or 2020. We're aiming for it, and we're working very hard to get there. Okay. Thank you very much.
Thank you.
Our next question comes from the line of Dana Telsey. Please ask your question.
Good afternoon, everyone. As you think about your expense structure and you mentioned about renegotiating leases, what are the opportunities and expense structure given the lower sales to get some leverage? What are the push and pull, whether it's labor, whether it's occupancy costs? And secondly, on stores, you mentioned improved experience. What are you looking to do that we should look for over the year?
Thank you. Well, when it comes to the expense structure, I mean, there are certain minimum levels, of course. We have certain flexibility, of course, with certain store operation costs. But one of the great opportunities that we see is to renegotiate rents and that we are doing, and we will focus a lot on that. We see a big shift in the market.
New stores that we open, we will, of course, be picky as always, but maybe even more picky to ensure that there are quality locations that we believe in for the long term and that we get great deals, other flexible deals, otherwise, we will not open. And your second question was about the customer improved customer experience. Well, with online sales growing, we are most that it's becoming easier to buy online. The stores need to offer something more and more of a great experience, not only as a place for buying garments, maybe offering other things as well and also packaged in a nicer interior, easier to shop, easier to return, easier to get maybe other services as well. So we're looking into a wide range of things that we are exploring in a lot of different locations.
Some are working out well, some are not working out, and we're taking out the best and putting that together in And as
And as the business gets a bigger online component, does the profitability of the business adjust because of an increased rate of online sales?
We have a good profitability in our online stores, and we will go into again about this in more detail during the Capital Markets Day.
Thank you.
Thank you.
Our next question comes from the line of Emily Sutherland. Please ask your question.
Hi. My question is about Afound.
I'm just wondering if you're able
to give any detail on when we'll see Afound in the UK and what kind of brands will be a good fit for Found? And who you expect the customer to be?
Well, we haven't decided. We'll start in Sweden, and we'll see how it goes. We have strong belief in it. And if it is successful, then we'll look to other markets. And U.
K. Is a market that will be I mean, it's a big market. It's a market that we know well and it's more we started cost there and that's
one of the markets that
will be next in line. I can't tell you about all the brands that we have signed, but we there are a lot of external brands, great brands. And so there are many brands, I think, that would fit well to our pound. Customers, people liking great designs at very attractive prices. And I think that group is quite big.
It is a huge market. It's a huge segment, and it is growing. So we'll see if we are successful, and then we have a really good opportunity to capture a big part of that segment.
Are you expecting the customers to already be shopping elsewhere within the H and M Group or bring a new customer to the business?
Both. I think it's a combination of giving existing customers something, offering them something else and also attracting new customers.
Great. Thank you very much.
Thank you.
Our next question comes from the line of Paul Raffington. Please ask your question. Good afternoon, gents.
Good afternoon.
I've got a couple of questions. But the first one, please. You talked about investing in the supply chain to deliver or source products on shorter lead times. Can you actually give us some quantification or examples of what you've done? Have you materially improved your open to buy ratio?
Or what percentage of the revenue base do you expect to be able to benefit in this way? Just some kind of quantification or gauge of what you've done there. Thank you.
Good part.
It is hard to quantify and give you the specific numbers, but of course, it is helping us. So we have a bigger open to buy and more flexibility, as Colin talked about. We're also investing a lot in specific distribution centers and more automatization, which gives much better and faster KPIs and more efficiencies, so we can deliver not just next day delivery, but even same day delivery. In some cases, we have stores, for example. But we will talk more about this on the Capital Market Day.
Okay. On the non H and M brands, can you just remind us actually what they represent as a proportion of sales as of today? I imagine it's still relatively small within the
Right. We will again, this is more information. We have to save some things for the capital markets, but we'll talk a little bit probably about that in September.
Okay. I have one last question, which I don't think is about the Capital Markets Day then. On the dividend reinvestment plan, are you actually purchasing shares or issuing new shares? It looks like you're issuing new shares, which sounds more like a script offer than a reinvestment plan to me. I just wondered that the fact that if you're issuing new shares, this will actually be dilutive to EPS, if I read that correctly or maybe?
Yes. The recommendation from the Board, it's more for them to comment on, but they are exploring it further. But the idea is to offer existing shareholders the opportunity for either the full dividend or to reinvest in newly issued H and M shares. And for us as a family, we intend to reinvest the full dividend into the company because we believe in what we're doing.
But it's definitely it's newly issued shares, just to clarify.
Yes.
Yes. Okay. Thank you.
Thank you.
Our next question comes from the line of Thomas Pallasse. Please ask your question.
Hi. I would like to ask you about this, the ATHOUND project, if you already have a number of brands you're going to sell and how much you think it's going to impact on your revenues? Do you have you forecasted a percentage on your turnaround that this should represent, in your opinion?
How did you what's the question? How many brands we have?
Yes. As A band is going to be about distributing brands and not just the H and M brands, but also other brands that do not belong to the company. You already have a portfolio, a number of brands you can mention. And the other question is about how much do you think is going to impact in your business as it's more a business of a distributor rather than the traditional H and M business as far as I understand that?
Yes. So but I mean, plenty of external brands. The majority of the brands that we will offer in Afound will not be our own brands. Then we will carry Afound will carry the H and M Group brands as well. But so plenty of brands in the process of hopefully adding more brands and how much it will affect the turnover is too early to say.
I mean, we have a strong belief in it, but we haven't launched yet. So as always, when we launch a new brand, we launch them, we learn and we adjust and then we take it from there. But again, it's a huge market. And if we do this well, we have really got good opportunities to add a lot of turnover to the group.
If I may ask a
last question, do you have any plans of other collaborations with well known fashion designers as you did in the past?
You mean for the H and M brand?
Yes, for the H and M
brand, yes.
Yes. I mean it's something that we I mean it's a small part of the business, but something that we have done well over the years. And there's good excitement from customers and interest from designers as well. So we have some interesting ideas.
Our next question comes from the line of Adam Cochrane. Please ask your question.
Hi, good afternoon. A couple of questions for me, if that's right. Firstly, when you think about what actually went wrong in the design process, the ranging in Q3 and Q4, is there any correlation between what seems to be going on with some of your sort of fashion misses and the increase in markdown at the same time as you're trying to make a fundamental transformation within the business, are you actually taking on so much behind the scenes that some of the sort of core business practices are maybe being missed? And then secondly, you talked about fixing the range issues. Have you what changes have you actually made?
Is it personnel changes? Is it process changes? Are these things put in place that you're happy that things are going to be different going forward? Or just that we won't make that same range mistake again, but it could be another one next season?
Yes. First of all, I would like to say it's not a I mean, it's not fashion mistake or design mistakes. We could have done things better there as well. It's more securing the balance in the assortment and more of a controlling, making sure that we have a I mean, better balance than we've had during the quarter. So obviously, we're correcting that.
And when it comes to the team and when yes, but we have had a lot of growth over the years for the H&M brand and for the group in total. And I think you have to be self critical and learn. And a little bit, we have lost the focus on the core, the customer offering for the H and M brand. It's not worse. I mean, it's at a good level still apart from the mistakes made in quarter 4, but we haven't improved enough during the last couple of years.
And this, we are correcting, and that's why we are focusing extra much on this. And we have also strengthened the management team for the H and M brand by bringing in Madeline Persson, who is a great colleague, and I think will I know will be a great addition to the H and M brand and the new creative director in Sommel van Straum. So just to mention to 2 new colleagues who have joined us since.
In terms of thinking about the online growth in the period, you set out your sort of 25% per annum target. With the online channel, are you seeing the same level of discounting and customer behavior online over the last couple of quarters as you saw in store? And hence, that's how you worked out it was a range and a balance issue rather than just people not coming to your stores.
Yes, yes, exactly. I mean, we know how many people come to the stores, and we know there's underlying I mean, in the whole market, there's a traffic decline and we have customer counters and so on. So it's easy to see. I mean, we have done during the last couple of years roughly in line with in the physical stores, in line with the traffic decline. But in Q4, we did worse than that, and that is connected to the imbalances in the assortment.
It affected the online sales a bit as well in quarter 4, but we have had a good development, online sales development throughout the year, and it was also good in quarter 4. But it affected the stores more than the online store.
Okay. That's fine. So the last one is when you sort of think about what investments you're going to make based on the digital side and you're talking about store refurbishment program maybe accelerating in 2019. Is there every chance that you're in sort of as we look at 2019, you're going to finish the investment within the online and the digital piece and you have to layer on a large store refurbishment CapEx charge on top of that?
Sorry, I lost you there. Can you say that again?
If you look at 2,000 or FY 2019, are you going to have to continue to invest what you're currently investing in terms of digital and online and you're going to have to put a CapEx in for store refurbishments as well?
We'll see how I mean, how many stores when we get to that situation, how many stores we decide to refurbish during the year. And also, the net new stores will come down. I mean, that's likely to happen in 2019 2020. We don't know the numbers for that yet. And then we will continue to have invest a lot in the connected to the online business.
Okay. So and one final one. When you think about Tmall in China, if I'm a Chinese consumer, will I see the same price on Tmall as I would see in an H and M store?
Well, it will be I mean, there might be periods where there are some differences, but we want to keep the same offering. I mean, I think that's good for us as well to try to keep it in line with the rest of the offering in the country, I mean, our stores and our own online store. Okay. Thank you.
Thank you.
Our next question comes from the line of Simon Bauer. Please ask your question.
Good afternoon. 3, hopefully quick ones for myself. Firstly, can you talk a bit about where the store locations sorry, where the store closures are located? Secondly, can you any sort of number on what you would view a desirable level of inventory relative to sales to be? And thirdly, you've shown some extraordinarily good cost control over the past 12 months.
Is that something that becomes harder to do if you look to invest more into the store experience? Or are those investments purely kind of CapEx and reallocation of existing costs?
Yes. Store closures, I mean, the approximately $170,000,000 for the year is I mean, will be in many markets, mostly more mature markets for us, where we have a lot of stores, mainly around Central Europe, Northern Europe, Southern Europe, also a little bit in the USA, some locations in China. So it's I mean, we take it market by market and we look at if a center or location we believe in, if we look at their dentals that we have, then we take a full view, and then we try to optimize the portfolio market by market. So it will be in most markets. And what was your second question?
Sorry, it was Inventory level, the time. Okay, yes, exactly. Sorry about that. It's we don't want to put a number on it, but we will we would like to see improvements quarter by quarter by the work that we do, the improvements we make and also the supply chain work. So that's the aim.
And when it comes to cost control, yes, it has been good. We still can improve further. And when it comes to the new customer experience, I mean, it's too early to say, but the tests that we have are showing good sales increases. Yes, their costs are higher, but the sales justifies that and the profit levels are good. But it I mean, it's early days.
We're still exploring these tests. But selling and profit wise, it looks really promising. Okay. That's very clear. Thank you.
Thank you.
Our next question comes from the line of Omar Saad. Please ask your question.
Thanks for taking my question. Good afternoon. Just one follow-up on the dividend. Could you elaborate and maybe expand upon some of the statements in the press release about the rationale behind the decision to make this offer on the dividend. I think there were some comments around taking into consideration financial position and freedom of action of the parent company and the capital structure targets.
Help us understand how this strategy addresses some of those concerns. Thanks.
I'm sorry, but I think it's more for the Board to comment on that. I mean, they proposed this. They are exploring it. I mean, from my role as the CEO, I think it's a good thing. Part of that dividend will stay in the company and that we can where we can use it for good investments.
And but it's something for the board to comment on really.
Okay. Thanks. Thank you.
Our next question comes from the line of Chiara Battistini. Please ask your question.
Sorry, actually, that was my question. Maybe just a very quick follow-up on the dividend. On the exchange ratio, what value per share would be used? Would it be the share price the level of the share price or any other value, please? Thank you.
We'll come back about all the details
that we are investigating right now. Sorry.
Okay. Thank you.
Thank you.
No further question at this moment. Please continue.
Okay. Thank you all very much for participating in this conference call, and we wish you all a good day. Thank you.
So that does conclude our conference for today. You may all disconnect. Thank you all.