Good afternoon, ladies and gentlemen. Thank you all for standing by. Welcome to today's full year result 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 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 call is being recorded today, Wednesday, the 31st of January, 2018. We've been joined by our CEO, Karl-Johan, and our CFO, Jyrki Tervonen. I would now like to hand over the call to our first speaker, Nils Vinge. Please go ahead.
Hello, everyone. Thank you all for joining us today. You are very welcome to this telephone conference on location of the H&M group's full year and fourth quarter results 2017. 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 our performance in 2017. Nils will take us through the financial details. 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, we'll be happy to answer your questions. You will find the slides to this telephone conference on hm.com. As most of you know, fashion retail is changing rapidly. At the heart of this development is the digitalization. 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, the 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 are able to reach customers in a way that they would not have been able to, say, 10 years back. As a result, 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. This results also in reduced traffic to a lot of physical stores around the world. Mobile has also become central for customers to research, explore, and shop fashion, as well as for sharing content and inspiration with friends.
This increased transparency is of course, a good thing for customers. It boosts their expectations. Therefore, customers are also expecting much more from us all in everything from the assortment, the design, value for money to personalization, newness of products, sustainability and convenience. It's a different competitive landscape, changed consumer behavior. All companies are one way or another affected by this. All companies are in different phases of adapting. Many are having a tough time. In that process, price pressure is growing as well. While the shift brings a lot of challenges, we also see a great deal of opportunities ahead. We believe that we are well positioned to seize these opportunities. I will tell you more about this shortly, but first, a few words on 2017.
Sales, including VAT, amounted to SEK 232 billion, an increase of 3% in local currencies and 4% in Swedish krona. This was clearly below our own and the market's expectations. There are also quite a few bright spots. Several parts of our business performed well during the year. The H&M Group online sales developed well. The new business portfolio with our newer brands such as COS, Monki, Weekday, & Other Stories, and H&M Home also continued to perform well both in physical stores and online. We also launched a new brand, ARKET, in a successful way, thereby adding to our platform of brands to grow with in the future. Sales were also good in our new H&M stores, which have delivered according to plan. In comparable H&M stores, however, performance was weak in many of our large, maturer markets.
This development mirrored the shift in the market from offline to online. Also, we have to say that we have not improved the shopping experience as quickly or as the rapidly increasing customer expectations require. In addition, in the fourth quarter, there were some imbalances in parts of the assortment of the H&M stores, that also affected our performance. 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, I will tell you more about this in a moment. First, I hand over to you, Nils.
Thank you, Karl-Johan. Looking at some profit numbers. Gross profit was SEK 28 billion in the fourth quarter compared to SEK 30 billion last year. This corresponded to a gross margin of 55.4% compared to 57% in the fourth quarter in the previous year. Due to the weak sales in the autumn at H&M's comp stores, markdown costs increased by 130 basis points as 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 fourth quarter compared to the corresponding period the year before. Gross profit for the full year was SEK 108 billion, corresponding to a margin of 54%.
For purchases made for the first quarter of 2018, the market situation for the external factors was considered to be neutral overall compared to the corresponding purchasing period the previous year. Looking at selling and administrative costs. Cost control in the group remains good. In the fourth quarter, SG&A increased by 2% to SEK 23 billion. In local currencies, the increase was 4%. For the full year, SG&A increased by 6% in SEK and 5% in local currencies. For the fourth quarter, profit after financial items was SEK 4.9 billion. For the full year, profit after financial items amounted to SEK 21 billion compared to SEK 24 billion in 2016. Net profit was SEK 4 billion in the fourth quarter, equaling earnings per share of SEK 2.41 compared to SEK 3.57 in the corresponding year earlier period.
With a tax rate of 22.2% for 2017, net profit for the year was SEK 16.2 billion compared to SEK 18.6 billion the previous year. Earnings per share was SEK 9.78 compared to SEK 11.26. Looking at some key data. Stock in trade on the 30th of November amounted to SEK 33.7 billion, an increase of 6% in SEK. 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 first quarter 2018, this is expected to lead to an increase in markdowns of around 150-200 basis points in the first quarter of 2018, compared with the same quarter last year. Cash flow from the current operations was SEK 21.6 billion, compared to SEK 23.8 billion.
Investments in terms of CapEx totaled SEK 2.5 billion, compared to SEK 13.3 billion. For 2018, CapEx is expected to be in the range of SEK 12 billion-SEK 12.5 billion, with a big shift from new physical stores to digital. Liquid funds amounted to SEK 9.7 billion, compared to SEK 9.4 billion. At the end of the financial year, short-term loans amounted to SEK 9.7 billion, with an interest rate of 0-7 basis points. SEK 9.3 billion of this is in the Nordic countries, while SEK 425 million is spread in various local markets outside the Nordic countries. For in some H&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 to the Annual General Meeting a dividend of SEK 9.75 per share to be paid out in two separate portions.
In view of continued high investment 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&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 AGM. If the reinvestment plan is introduced, the H&M Group's largest shareholders, the Stefan Persson 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 H&M Group, and this translates to 123,178 employees full-time. Now back to you, Karl-Johan.
Thank you, Nils. We are a company with a lot of strengths, one of them is our size. Despite us being a big company, we still have a relatively small share of a large and growing market. Another strength is our portfolio of brands. We have eight unique brands today with business models that are proven offline and online, all of them scalable. We also have a strong company culture and very competent employees, our long-term approach is another strength. Our way is to always focus on our customers, stay true to our business idea, invest for the long term. Of course, we also want to perform well in the short-term perspective, lately, we haven't done this well enough. Now we are accelerating our transformation work, we have three main action areas connected to this.
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. It is also to invest in driving growth and expand in new ways. If we can just say a few words on these areas, we will talk more about them in detail during the Capital Markets 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. This goes mainly for the H&M brand, and this we need to change. We must always have the best customer offering for all brands. The most important part is our assortment, our products.
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. 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 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 physical 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 offerings. The first area there is to improve our supply chain. 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. We will also continue to prioritize investment 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 eight online markets, nine including Kuwait, via franchise. Today, the H&M brand has e-commerce in 44 markets, and in 2018, India will become a new online market for H&M, as well as Saudi Arabia, the United Arab Emirates via franchise.
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&M and H&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. Monki has showed very good performance in China. 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&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&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&M Group. 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&M Group, we are developing and launching new brands for new needs and segments. We have eight brands today. In addition to H&M, the group includes COS, Monki, & Other Stories, Weekday, Cheap Monday, ARKET, and H&M Home.
All of them are unique, all are scalable, they combine the advantages of being small players with the backbone and economies of scale offered by the H&M Group. By testing new things small scale, they can also provide learnings to the rest of the group. Soon we will launch our ninth brand, Afound. 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&M Group. Afound will launch with both digital and physical stores during 2018, starting in Sweden. The first Afound store will open in Stockholm. In parallel, we're also working on new ideas, new business models that will drive us forward, there are many interesting ideas in our pipeline for 2018 and the years to come.
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&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. We have also made mistakes which slowed us down, these we are correcting, at the same time, we're speeding up our transformation agenda. The ongoing industry changes are challenging everyone, this will continue in 2018, this is clearly visible in our sales at the start of the first quarter of 2018. The growth target of the H&M Group is to increase sales in local currencies by 10%-15% per year, with continued high profitability. 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. 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, a great company culture, and we have our long-term perspective. We have a clear action plan that we're now implementing at full speed. We look optimistic. We are optimistic when looking ahead. We would also like to remind you about our Capital Markets Day on the 14th of 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. Now we're happy to take your questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will all take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star 1 if you wish to ask a question. Our first question comes from the line, 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. What kind of cost we should be thinking of going through the P&L from 2018? Going back to your comment on the expectations for growth for 2018 not being a 10%-15% medium-term target. Should we, though, expect like for like to return to positive territory in 2018, would you say? Thank you.
Yeah. I'm not sure if I got it correctly, 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&M Club. The H&M Club, the plan is to roll it out to all the countries. 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 club customers. If that's the case, happy customers will lead to good performance for H&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 market stage. We feel very confident that this is the right thing to do.
When it comes to 2018, I'm not sure, again, if I heard you correctly, but 2017 was a year below our expectations and the market's expectations. Partially due to the shift in the market, but also that we haven't improved enough. Also we made some mistakes, connected to the assortment mix for the H&M brand, which has affected the quarter four selling, and also the start of quarter one. 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. 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 2017, and we are gradually improving.
We believe that we will at least see better sales and better profit second half 2018 compared to second half 2017.
Q2 should still be a transition quarter?
Quarter one has started below expectations, and we have higher reductions as well. Quarter two, I think part of this will continue. I don't expect a big change. I think we have a lot of improvements as well. We'll see. What I can say is gradual improvement, and I believe second half 2018 will be stronger than second half 2017.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Cedric Lecasble. Please ask your question.
Yes, good afternoon, gentlemen. Cedric Lecasble from Raymond James. I have a follow-up question on your assortment issues. You mentioned assortment mix problems in Q4 and at the start of Q1. Could you be a little more precise and explain to us what happened? Beyond this, what are you currently doing on your assortment to make it more attractive? 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, first of all, I think it's important to say, we are developing nicely online. We still have a strong sale. We do customer surveys in all markets, and we have a good position for the H&M brand and a much-appreciated assortment. If you compare quarter four to quarter four the year earlier, we made some mistakes. That's not to say that the assortment can always get better, but it's more connected to the assortment mix. We had too much of certain products and too little of that we shouldn't have had, and too little of products that we should have had. This is always the case, but you always want more of the best and less of the least good ones. It was more evident, and we made some mistakes connected to this.
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 four, 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. 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. The most important part is to constantly improve the assortment, and we will focus a lot on this to make it even better, even more relevant. We will also invest in this, to improve quality, improve prices, improve speed of buying, and with this comes newness as well.
Part of it is connected to investments as well.
How does the online assortment compare to the physical assortment? How do you play with both proposals?
We're developing nicely online. We're expanding, we're improving the store. We're also broadening the assortment online, and that we will continue to do. Where we have had a weak development, as I mentioned earlier during the year, is in H&M's comparable physical stores. We are exploring new concepts around the world, and the good thing is that we have some really good receipts from customer feedback on the shopping experience and also good sales, selling receipts. Now the next step is to just test a little bit more to verify and then to scale it up.
This mix issue on your-
But-
Sorry. Excuse me.
No, you go. You go. Yeah.
Just this mix issue on the assortment that you've had, is it phasing out towards the end of Q1?
It is. Part of it is connected to the higher reductions that we're expecting now or that we will have in quarter one. We'll see how February goes, and then hopefully we are in a better situation entering quarter two when it comes to the stock situation. Again, I believe we will see gradual improvements over the year.
Thank you. We follow up at today.
Our next question comes from the line of Charlie Muresan. Please ask your question.
Yes, good afternoon. My first questions are on the inventory position and your markdowns. I appreciate you still have one month left to go in Q1. 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? 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&L as opposed to the reinvestments you alluded to, particularly around price and quality? Thank you.
Yeah. We went into quarter one with too high inventory, as we said. This is something that leads to higher reductions in quarter one, and then hopefully we will be in the better situation entering quarter two. It's too early to say anything about the second quarter. At the same time, we are also improving our work in the supply chain to become even faster and more flexible. We're buying later. We have quicker deliveries or quick lead times from design to sales, which is good. What was the second question? Sorry. It was connected to
The potential tailwinds you will experience.
Yeah
in input cost pressures.
Yeah. Normally we comment on the big external factors influencing the purchasing costs, such as currency, cotton prices, transports, production capacity and so on. 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. That, of course, is a good thing. There are so many other factors influencing the gross margin as well. We don't want to give a guidance, but of course that helps.
Thank you. If I may ask one final cash flow question. You've given us the guidance on your CapEx for the year, which is effectively 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 2017, SEK 12 billion to SEK 12.5 billion, with the same currencies 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, the direction is that we are shifting more to online digitalization, AI, and et cetera, as Karl-Johan mentioned earlier.
Exactly. At the same time, we have these tests for the physical stores that are looking really positive. If we continue to get the same receipts, I think our aim is, and we will be in a great position to ramp up the rebuilds of the H&M stores. Yeah. That's a good thing.
Yeah. As in previous years, this is the moving target, of course. There are a lot of negotiations not ended. This CapEx will probably be something else during the year, we will, in normal order, give a new guidance maybe in the half year report or in connection with the Q3. This is what the estimate is at this time.
Great. Thank you very much.
Thank you.
Our next question comes from the line of Richard Chamberlain. Please ask your question.
Yeah. 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 220 stores net, which is growth, I think, of around 4.5% for the year in terms-
Yep
of store terms. Should we expect the net space, though, to be open to be a little bit lower, more like maybe 3%-4%? Because presumably you'll be closing larger H&M stores, and I think you've said that you're opening almost 100 non-H&M stores. 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. Just a more sort of financy one. Why was the cash tax paid, I think it was higher than the P&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, it's normally based on the results from the previous years and also an upgrade in the result. What we have, if you look in the balance sheet, we have a tax receivable, approx SEK 2.3 billion. A lot of countries, they use a preliminary tax schedule and the companies are paying it in during the year. In our case, when we went down in result, we have paid too much prep tax, and that's a tax shown in the cash flow statement. If you look also in the balance sheet, we have a tax receivable, as I said, amounting to SEK 2.3 billion. That's the reason.
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&M brands into Afound? If so, will you ship them from local warehouses to a central stock position?
Well, yes, maybe, 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 is growing, I think we have a great opportunity to take a big part of that. 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. A lot of external brands from different price segments, a lot of well-known brands. Of course, also our own brands. The Afound team will choose what products to offer to the customers. It will be a great wide assortment and at fantastic deals. If you want stylish products and do great deals, that's the place to go to, we believe.
We'll start in Sweden, and we'll see how it goes.
Okay, thanks. I'll ask it another way. Will it be current season product or previous season product from the external brands as well as H&M?
A mix. It will be current season, it will be last season, it will be vintage clothing, it will be a combination.
Okay, thank you. One question, please, also on Nyden. 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, we said earlier today that we have two new ideas that we're looking into, two business models with great potential if we do it well. We will talk more about that later. Nyden is something different. It's a small test. It's a small team working on it. It's something that we will test during the year. It's not one of the two business models that I mentioned earlier today.
Okay. Thank you.
Thank you.
Our next question comes from the line of Simon Irwin. Please ask your question.
Hello, gentlemen. How much damage do you think you're doing to your brand by the constant clearance and markdown? It seems to me you've got yourself stuck in a cycle of ever-increasing inventory, ever-increasing markdown, and declining full price sales. I'm wondering why this year is going to be any different to the last three.
Yes. 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 setup. We're mapping out and making investments in the whole logistic networks to have more optimal garment 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. 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. Those things in combination will help us to come down in inventory level to better levels in relation to sales.
But relative to--
Yeah.
Carry on.
Yes. We also, of course, do 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. We still have a really good position in all markets. Still a good position, a strong brand name, but of course we want to improve.
Right. Relative to historic levels, your inventory levels are probably about 30% higher.
Yeah.
Therefore, you've got a huge amount of inventory, which clearly people didn't want to buy at full price.
Yes
which you're trying to sell through the business. How much damage do you think that is going to do to full price sales over the next six months or so as you try and sell this through?
Yeah
Why are we not going to get into the same problem in six months' time as we've been going through for the last 18 months then?
Yeah. I see what you mean. Obviously, we're not happy with the inventory level going into Q1. Sales did not reach our plans, as a result of that, we have a too high level. The reductions will be higher in Q1, as we said, 150-200 basis points higher in relation to sales. By doing that, I think we will enter Q2 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. I don't want to give an estimation of exactly what levels we will reach in a certain quarter.
Okay. 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?
Yeah. I think the things we have spoken about, the shift 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. We have two giants in Alibaba and Amazon growing a lot in those two markets. We also have the mistakes that we have done during end of Q3 and Q4 in the assortment mix, affecting all markets, but actually affecting those two markets more than the average. Then, as I said earlier also, I think we, looking back and to reflect on what we should have done better, we should have improved the store experience more than we have. We are working actively on that, in finding these new concepts that hopefully we can scale up. That's a combination of various things.
In terms of the in-store experience, how far advanced are your trials, and when do you think that there will be something that's really noticeable at a group level?
Sorry, the trials, the store concepts? Yeah, it's mainly for the H&M brand. We have a lot of tests done around the world. The aim is to get the receipt 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. During 2019, hopefully we have all the receipts we need to start the rebuild program.
Right. Thank you very much.
Thank you.
Our next question comes from the line of Andrew Uge. 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 question.
Yeah. You mentioned that in terms of the product ranges, there were imbalances, so you didn't have enough of your best sellers and you had too many 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%. 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. Is it clogging up new stock actually getting through to the stores?
No, that's not the case. If we look at this, the whole H&M Group world has gotten more complex. 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. We need a quicker, more flexible supply chain, and that's why we are investing a lot in this, and we will see improvements connected to that. In Q4, we did some mistakes as well in the assortment mix. That affected the selling negatively, and that resulted in a higher inventory level that we now have to deal with and work with. We are correcting that, and hopefully we won't do the same mistakes again.
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 don't have that figure here. It's more connected to Q3 and Q4. We have excess inventory, that we are dealing with now in Q1.
Right. Okay. Yeah. Just one other small question while I'm on that. You have a small amount of debt, which you say is from institutions outside the Nordic region. You're paying at least 8.75% interest on that. Why are you doing that?
Yeah. The reason is that it's more favorable for the group because we are entering countries with local regulations and currency restrictions. Some countries we financed it with equity, for instance, then we locked 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. 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 startup of a country. That's the main reasons.
Right. Okay. 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 SEK 30 billion and the fact that your dividend presumably will halve from the SEK 16 billion payment. I'm just working out why you think net debt might actually get anywhere near that one times EBITDA if you're paying half your dividend.
Yeah
in equity.
No. Yeah. Okay. 1.0 in net to EBITDA is not a goal in itself. It is 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. One shouldn't look into that we are aiming for 1.0 as an optimal capital structure. It is more about to show that we have a conservative view when it comes to leverage ratios.
Okay. All right. Okay, thanks very much.
Thank you.
Our next question comes from the line of Geoff Ruddell. Please ask your question.
Yeah, good afternoon. Thank you. Could 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. The percentage increase net store openings will come down.
Come down further from the sort of, I guess, 4%-ish this year.
Yeah. Not a big drop for 2019, but it will be a gradually lower percentage increase from net new stores.
That's very helpful, thank you. In which case, how are you going to get back to the sort of 10%-15%, I know it's a longer-term target, but how are you going to get to 10%-15% sales growth if new space is giving you, say, 3% contribution to sales?
Yeah.
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. 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. That will, 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 convinced about strong growth for many years to come. 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. It's important to say, we have a strong belief in the H&M physical stores as well. The trend now has not been great.
We haven't reached the goals that we set up. 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, there's opportunity there as well. 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.
Good afternoon.
As you think about your expense structure, you mentioned about renegotiating leases, what are the opportunities in 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? 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, there are certain minimum levels, of course. We have certain flexibility, of course, with certain store operation costs. 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 they are quality locations that we believe in for the long term, and that we get great deals, flexible deals. Otherwise, we will not open. Your second question was about the improved customer experience. Well, with online sales growing, it's becoming easier to buy online, and 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. We're looking into a wide range of things that we are exploring in a lot of different locations. Some are working out well, and some are not working out, and we're taking out the best and putting that together in a package. Again, it's something that we're looking forward to scale up during 2019.
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. 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 Amy 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 U.K., what kind of brands will be a good fit for Afound, and who you expect the customer to be.
Well, we haven't decided. We'll start in Sweden, we'll see how it goes. We have strong belief in it, if it is successful, we'll look to other markets. U.K. is a market that will be. It's a big market. It's a market that we know well, we started COS there, it's one of the markets that will be next in line. I can't tell you about all the brands that we have signed, there are a lot of external brands, great brands. There are many brands, I think, that would fit well to Afound. Customers, people liking great designs at very attractive prices, I think that group is quite big. It is a huge market. It's a huge segment, it is growing.
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&M group, or bring a new customer to 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 Rossington. Please ask your question.
Good afternoon, gents.
Good afternoon.
I've got a couple of questions. The first one, please. You've 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 % 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 point. It is hard to quantify and give any specific numbers. Of course, it is helping us. We have a bigger open-to-buy and more flexibility, as Karl-Johan talked about. We're also investing a lot in specific distribution centers and more automatization, which gives much better and faster KPIs and more efficiency. We can deliver not just next-day delivery, but even same-day delivery in some cases. We have stores, for example. We will talk more about this on the capital market day.
Okay. Thank you. On the non-H&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 mix.
Again, this is information. We have to save some things for the capital market day. We'll talk a little bit, probably about that the 14th of February.
Okay. I have one last question, which I don't think is about the capital market then.
No. Great.
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 scrip offer than a reinvestment plan to me. I just wonder the fact that if you're issuing new shares, this will actually be dilutive to EPS, if I read that correctly.
Yeah, the recommendation from the board, it's more for them to comment on, but they are exploring it further. The idea is to offer existing shareholders the opportunity for either the full dividend or to reinvest in newly issued H&M shares. For us as a family, we intend to reinvest the full dividend into the company because we believe in what we're doing.
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 Tommaso Palassi. Please ask your question.
Hi. I would like to ask you about the Afound 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. You forecasted a percentage on your turnaround that this should represent, in your opinion?
Was the question how many brands we have?
Yes. As Afound is going to be about distributing brands, not just the H&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.
Yes.
The other question is about how much do you think it's going to impact in your business, as it's more a business of a distributor rather than the traditional H&M business, as far as I understand that.
Yeah. Plenty of external brands. The majority of the brands that we will offer in Afound will not be our own brands. Afound will carry the H&M group brands as well. Plenty of brands in the process of hopefully adding more brands. And how much it will affect the turnover is too early to say. 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, then we take it from there. 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&M brand?
Yes, for the H&M brand. Yeah.
Yes. 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. We have some interesting ideas.
Thank you very much.
Thank you.
Our next question comes from the line of Adam Cochrane. Please ask your question.
Hi, good afternoon. A couple of questions from me, if that's all 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 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 core business practices are maybe being missed? Secondly, you talked about fixing the range issues. 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 ranging mistake again, but it could be another one next season? Thanks.
First of all, I would like to say 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, more of a controlling, making sure that we have a better balance than we've had during the quarter. Obviously, we're correcting that. When it comes to the team, we have had a lot of growth over the years for the H&M brand and for the group in total. I think we 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&M brand. It's not worse. It's at a good level still, apart from the mistakes made in quarter four, but we haven't improved enough during the last couple of years.
This we are correcting, and that's why we are focusing extra much on this. We have also strengthened the management team for the H&M brand by bringing in Madeleine Persson, who is a great colleague, and I know will be a great addition to the H&M brand. A new Creative Director in Samuel Fernström. Just to mention two new colleagues who have joined the team.
In terms of thinking about the online growth in the period, you set out your 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?
Yeah, exactly. We know how many people come to the stores. We know in the whole market, there's a traffic decline. We have customer counters and so on, it's easy to see. We have done, during the last couple of years, roughly in the physical stores, in line with the traffic decline. In quarter four, we did worse than that. That is connected to the imbalances in the assortment. It affected the online sales a bit as well in quarter four. We have had a good online sales development throughout the year. It was also good in quarter four. It affected the stores more than the online store.
Okay, fine. The last one is, when you think about what investments you're going to make, both the digital side, and you're talking about store refurbishment program maybe accelerating in 2019. Is there every chance that your
As we look at 2019, you were going to finish the investment within the online and the digital piece. 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 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 many stores, when we get to that situation, how many stores we decide to refurbish during the year. Also, the net new stores will come down. That's likely to happen in 2019 and 2020, and we don't know the numbers for that yet. Then we will continue to invest a lot in the connected to the online business.
Okay, 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&M store?
Well, there might be periods where there are some differences, but we want to keep the same offering. 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. Our stores and our own online store.
Okay. Thank you.
Thank you.
Our next question comes from the line of Simon Bowler. Please ask your question.
Good afternoon. Three hopefully quick ones from myself. Firstly, can you talk a bit about where the store closures are located?
Yeah.
Secondly, can you put any sort of number on what you would view a desirable level of inventory relative to sales to be? Thirdly, you've shown some extraordinarily good cost control over the past 12 months. Is that something that becomes harder to do as you look to invest more into the store experience, or are those investments purely kind of CapEx and reallocation of existing costs?
Yeah. Store closures, there are approximately 170 for the year. It 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 U.S.A., some locations in China. We take it market by market, and we look at if it's a center or location we believe in. We look at their rent deals that we have, and we take a full view, and then we try to optimize the portfolio market by market. It will be in most markets. What was your second question? Sorry.
Inventory levels desirable.
Okay. Yeah, exactly. Sorry about that. We don't want to put a number on it, but 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. That's the aim. When it comes to cost control, yes, it has been good. We still can improve further. When it comes to the new customer experience, 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. It's early days. We're still exploring these tests. 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 Omer 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 the 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, I think it's more for the board to comment on that. They proposed this. They are exploring it. From my role as the CEO, I think it's a good thing. Part of that dividend will stay in the company and where we can use it for good investments, 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.
Hello. Hi. Sorry, actually, that was my question, but 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 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.
That does conclude our conference for today. You may all disconnect. Thank you all for participating.