Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to your half-year results for 2017 conference call. After today's presentation, you will be invited to ask questions by pressing star one on your telephone keypad. I must also advise you, your conference is being recorded today on Thursday, the 29th of June 2017. I'd now like to hand over to your host, CEO for H&M, Karl-Johan Persson. Please go ahead.
Hello, everyone. Thank you all for joining us today, and a very welcome to this telephone conference on the occasion of the H&M Group's six months and second quarter results 2017. With me today is our CFO, Jyrki Tervonen, and our Head of Investor Relations, Nils Vinge. Normally, I participate in the media and analyst conference here in Stockholm, now I'm also looking forward very much to taking part in this telephone conference. I will start with a short introduction, Nils Vinge will take us through the financial details before I continue the presentation. I see this as a good opportunity to sum up where the H&M Group stands today and share with you our thoughts on the future. As many of you know, our industry is going through a big shift. Rapidly increasing digitalization is bringing challenges, also a lot of great opportunities.
I would like to share the investments and initiatives that we are making, and we will try to give you a clear picture of how we see our long-term growth opportunities going forward. After the presentation, we will be happy to answer your questions, and you will find the presentation slides for this telephone conference on hm.com. I would like to start with some words on our sales. In the second quarter, sales including VAT increased by 10% to SEK 69.5 billion. In local currencies, sales grew by 5%. Sales developed well in many markets, including the U.K., Scandinavia, Eastern Europe, as well as in many of our growth markets. In some of our large established markets, however, it was more challenging. For example, in the U.S., China, the Netherlands, and Switzerland. H&M's online sales developed very well and continued to grow its share of total group sales.
For COS, & Other Stories, Monki, Weekday, and H&M Home, sales remained strong in the quarter, both in physical stores and online. That was a short introduction. With that, I will hand over to you, Nils.
Thank you, everyone. Looking at some profit numbers. Gross profit increased by 9% to SEK 29.3 billion in the second quarter, corresponding to a gross margin of 57.1% compared to 57.6% in the second quarter last year. Markdowns had a negative impact of 70 basis points. Overall, the market situation as regards to external factors such as purchasing, currencies, raw material prices, was slightly negative during the purchasing period for the second quarter compared to the corresponding period the year before. For purchases made for the third quarter 2017, the overall market situation for the external factors remains slightly negative compared to the corresponding purchasing period last year. Looking at selling and SG&A costs. Cost control in the group remained very good. In the second quarter, SG&A increased by 4% in local currencies and 8% in SEK to SEK 21.7 billion. The increase is mainly explained by our expansion.
In comparable stores, costs were down. For the second quarter, profit after finance items increased by 10% to SEK 7.7 billion. The increase is explained by sales growth driven by profitable expansion in combination with tight cost control. Net profit was SEK 5.9 billion in the second quarter, up from SEK 5.4 billion last year, and equaling earnings per share of SEK 3.56 compared to SEK 3.24 last year, an increase by 10%. Looking at some key data. Stock in trade on the 31st of May amounted to SEK 32.1 billion, an increase of 27%, and a 22% increase when currency adjusted. The increase in the stock in trade is explained partly by our continued expansion, partly by too much inventory going into the quarter, and by lower sales than planned. Even though the level of stock in trade was higher than planned, the rate of increase slowed down during the second quarter.
To give the autumn season the best possible start, the third quarter, which is always the clearance quarter, will most likely have higher markdown levels compared to the third quarter last year. Cash flow from current operations was SEK 10.9 billion compared to SEK 12.6 billion. Investment in terms of CapEx totaled SEK 5.5 billion compared to SEK 5.6 billion. The financial position of H&M Group remains good. Liquid funds amounted to SEK 10.7 billion compared to SEK 8.4 billion. Return on equity was 37.7% rolling 12 months. Now back to you, Karl-Johan.
Thank you. The H&M Group has invested heavily for a number of years to build a digital infrastructure based on the latest technology in order to secure long-term growth. This has been costly but necessary, now we have set a solid platform that is flexible and scalable. Going forward, a smaller share of our investments will be related to infrastructure, the larger share will benefit the customers directly. I would like to share some examples of the areas that we are focusing on. One area that we're investing heavily in is to continue to improve, broaden the assortment, and expand our online offering. This means, among other things, more and faster delivery options, more payment alternatives in all our online channels. Improvements also include giving customers a more inspiring, easier, and convenient shopping experience online.
We are also broadening the range of products for all our online channels and for all brands. Of course, we are also expanding the online channels to more new markets. Over the past few years, the traffic to hm.com has tripled. Both this year and next, we will add several new online markets for H&M, including India in 2018. In parallel to improving, broadening the assortment, and expanding with the online channels, we are also investing heavily into integrating our physical and digital stores to give the customers a smooth shopping experience across the channels. Here, our global store network we see as a great asset, which gives us an important advantage over pure online players.
Our store network gives us a unique proximity to customers. It allows us to offer our customers more shopping alternatives, where the physical stores also become hubs for faster deliveries, pickups, and returns in addition, of course, to being places where you can get inspired by fashion and shop. Some of these initiatives and features are already in place. Some are on the way, while others are still in their test phase. It's a long list of good things for our customers that we are rolling out at a fast pace. We are also investing significantly in advanced analytics. This will allow further improvements in areas such as product range development, quantification, and allocation of the assortment, as well as more personalized communication with our customers. In short, advanced analytics will help us to develop and individualize our customer offering.
The world of the H&M Group has become more complex compared to, say, 10 years ago. Today, we have more brands, we are present in more markets, we have more channels. At the same time, it is as important as ever to always ensure that we have the right products at the right time in the right place. Therefore, we are reviewing our entire supply chain in order to increase speed and become more efficient and flexible. This includes optimizing our lead times. It involves product development, as well as the purchasing, transportation, and allocation of our products. It will also mean that we will make changes to our logistical setup. The number of logistical hubs, the size of them, the location of them, it will also include optimized logistics solution.
With these changes, we see great potential to improve sales, reduce stock levels, and lower the markdowns. The result of this work will not come overnight, but it will bear fruit gradually. We're also investing in the expansion of new stores. We see continued great demand for physical stores as well as for the online channels, especially in our growth markets. The stores that we are opening have favorable and flexible leases, are in good locations, and are profitable and with a short payback period. In these circumstances, it is natural for us to continue expanding through physical stores as well. We plan the net addition of approximately 400 new stores in 2017. In more established markets, we will focus more on optimizing our store portfolio. This means that we will rebuild more stores, and in some places, we will add space.
In other cases, we will move our stores to new and better locations, and in some cases, we will also close down stores if we see that the shopping pattern has changed in a shopping center or city center. In parallel to this, we are also developing and testing two new versions of the H&M stores that we will test during the autumn, that we believe will strengthen the shopping experience. This is something that we will test during the autumn, and then we see how it goes. If it's successful, we will, of course, roll it out many more stores in the years to come. An important part of the H&M Group strategy is to develop, launch and build new global brands and concepts. This is something that we believe we do well, and COS is a good example of this.
COS will reach revenues of around SEK 10 billion already this year, along with the profitability that is in line with the H&M brand. The value of COS today already by far exceeds the amount we have invested so far, even though COS is only at the beginning of its journey. We believe that our other brands are well-positioned to make the same great journey as COS. By continuing to do good things for the customers, the other brands, the smaller brands, will continue to grow substantially for many years to come and account for an increasing share of the growth and value of the H&M Group. After the summer, we are looking forward to launching yet another new brand, ARKET.
ARKET has received very good media reviews at the press days during the summer, and we believe strongly in this new brand too, and we hope that ARKET will be well-received by the customers. ARKET will open its first store on Regent Street in London, and at the same time open online sales at arket.com in 18 European markets. During the autumn, we will also open a second store in London, as well as stores in Brussels, Copenhagen and Munich. In the spring of 2018, ARKET will also open a store in Stockholm. Before we move over to the Q&A session, just some words to round up. These are very exciting times. We operate in an industry going through a major change, where more and more shopping is taking place online. The online business of the H&M Group continues to develop very well.
Already today, our online sales account for 25%-30% of total sales in some of our more established markets. Looking ahead, we see H&M Group online sales growing by at least 25% per year with the profitability in line with our store operations. We are convinced that the investments we have made and are making will lead to continued profitable growth for many years to come. Our clear focus is to continue developing our business with quality and at a fast pace, and by doing so, we will strengthen H&M Group position even further in a growing and rapidly changing market. Thank you very much, and now we're happy to take your questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question today, please press star one on your telephone keypad and wait for your name to be announced. To cancel this request, please use the hash key. Once again, that's star one if you do have a question, and you can use the hash key or pound key to cancel your request. Your first question today comes from the line of Chiara Battistini from JPMorgan. Please go ahead. Your line is now open.
Good morning. Hello. Thank you for taking my question. The first question I have is on your OpEx control. I found it very impressive in the second quarter. I think when you adjust for the store rollout growth, OpEx is actually down per store in the quarter. Can you give us more color on what cost savings you are achieving, in which areas you are achieving cost savings, please? Also how we should think about OpEx development going forward, please. The second question would be on whether you could provide more color on what's happening with U.S., China and Netherlands specifically, please. Thank you very much.
Okay. When it comes to SG&A development in Q2, it's based on our cost-conscious DNA we have. We have always the focus on cost controlling, and especially even more focus when we have a little bit tougher with the top line. There are no one-offs in the Q2, but good cost control and a focused work in the countries and here in Stockholm. When it comes to the development in the, I think you said U.S., China and the Netherlands, if I remember correctly. It's been our view and what we have seen in the market figures, it's been a challenging quarter for the whole market in the U.S., as well as in Netherlands and in China. I think the main thing is connected to, especially in the U.S. and in Netherlands, the main thing is connected to the people are buying more and more online.
There are a lot of store closures in the U.S. Traffic is down to many shopping centers. That's one big factor. We have developed roughly in line with the market in those markets. We're not happy with that, as we want to improve all the time. We are, of course, looking into what we can do to improve further. A lot of the improvements are connected to, I mean, things we are as I mentioned earlier, things that will benefit all markets. We're also looking into market-specific initiatives to see if we could
Become better in all markets. One example is China, which is a little bit different to many other markets. We are looking into if we could make localized adaptations to the assortment to be even more relevant in China. We are also looking into how to improve, even though we have good online sales in all markets, China is a little bit different to many other markets, with Tmall standing for a big share of total online sales in China. We are exploring that opportunity as well. We have different initiatives going on.
Thank you for your answers. Can I have two follow-up, please? One on the first question, can you actually give us some tangible examples of what you are doing in terms of cost savings? On the U.S., would you include U.S. in those established markets where online already accounts for 25%-30% of sales, please?
Okay. The SG&A, of course, it is more accurate function transfer in the stores, adapting to lower top line and the performance in comparable stores. Also, as we have said in the beginning of the year, in connection with the year-end report, in many years, we had an increase of our long-term investment that also affected the SG&A. This year, we do not have any increase incremental in these long-term investments. They are still there, but they are more or less in the same level as last year. Also for sure, all the investment we have done will also give us efficiency gains. The second question, I think the question was if it is one of the established markets where online sales account for 25%-30% of the total sales. It is not one of the markets. We quite recently entered the U.S. with the H&M online store.
The online store in the U.S. is developing very nicely, but it does not yet account for 25%-30%. It will get there and probably higher than that. We still have a business model that works well with the physical stores. That is important to remember in the U.S., and we still see great expansion opportunities for all the brands in the U.S. with physical stores as well. It is a special market, and total, I think it is a bit overdeveloped with physical store space. We have to be really cautious going forward and really, it goes for all markets, but especially in the U.S., to really expand wisely in quality city locations and in quality centers.
Perfect. Thank you very much.
Thank you.
Thank you. As a reminder, ladies and gentlemen, it is star one to ask a question, and we do advise you ask one question at a time. Your next question today comes from the line of Nick Farm from SEB Equities. Please go ahead. Your line is now open.
Yes, good afternoon. Hello. From a strategic perspective, if we assume that pretty much 25% or 30% of your business is being performed in the online channel, what do you think that actually means in terms of shrinking your store base in the future? Or would you argue that one plus one would equal more than two, please?
I didn't get the beginning. We said that it stands for 25%-30% in some more established markets. Quite recently, the last two years, we have entered almost 20 new markets. There, we are not yet at 25%-30%. As I said, we believe that the online sales for all the brands will grow by at least 25% for the coming years as a result of investments that we have done and will do. That we feel very confident in. We also will open new stores, 400 net new stores this year. That's because we have a business model that works with physical stores. There's still a lot of great opportunities in the markets where we are present and in new markets.
We believe that it's a great advantage to have both physical stores and online stores, and that the two channels complement each other, and that one plus one is more than two.
Just a final follow-up question then. What would you say is the main reason for why your margin online is so much higher than the pure online retailers currently?
I think the main reason is, I read somewhere or in the media that H&M is behind when it comes to online sales, I don't think that's an accurate picture. I think that the 25%-30% in some established markets on a very high base is good, we're growing rapidly, we will grow by at least 25% or more for many years to come with the profitability in line with the physical stores. I think few can match that. I would actually argue that we are ahead. I think one of the main reasons why we have good profitability is lots of investments. The main thing is that we have a good customer offering that customers like. We could increase the marketing and buy a lot of traffic, but it's down to returning customers because they like the offering. That's the main reason.
Thank you so much for taking these questions.
Thank you.
Thank you. Your next question today comes from the line of Richard Chamberlain from RBC. Please go ahead. Your line is now open.
Thanks very much. Good afternoon, gents. I've got another question on costs, please. Obviously we've had sales below plan, but very strong cost control in the second quarter. With that in mind, do you expect costs now to go up on a same-store basis short term as you have to clear through excess inventory? Longer term, do you think you'll need to put more full-time staff in stores to drive sales through improving service for customers, particularly with things like click and collect being introduced? It's really the outlook for staff costs, short and long term. That's my question. Thanks.
I think, as Jyrki said before, our cost control is good. It will continue to be good. Again, if you look isolated at the inventory levels, they are higher than what we planned for. Even though the increase compared to last year is lower going out at quarter 2 than quarter 1.
There is a risk that the inventory will, or the markdowns will be higher during quarter 3. We have a good, nothing dramatic. We have a good plan for it. We believe that we will enter the autumn with a nice stock situation. Also I think it's important to mention all the investments and work that we're doing with our supply chain to optimize the lead times. A lot of work being done there, which we believe will also help sales, also reduce markdowns and us coming down in stock levels in relation to sales. We are optimistic when it comes to that as well. Coming back also to, in a little bit longer perspective, staff costs in the stores. I think a lot of new technology, RFID, self-checkout, et cetera, can handle the returns in stores.
It's shifting just the way we are working in the stores. We don't see that that should be driving even more staff in the physical stores. It will help the sales. In relation to sales, it should actually be a good business case connected to a lot of the new investments.
Right. Okay. Thank you. Just a quick follow-up. On the June sales for, which I think you said will probably be up around 7%. Is the overall calendar shift in the month, is that around -1%? It would've been 8% if there weren't some calendar effects?
Yes, more or less 1%. That's correct.
1%. Okay. All right. Thanks very much.
Thank you.
Thank you.
As a reminder, ladies and gentlemen, it is star one if you do have a question today. Your next question comes from the line of Adam Cochrane from UBS. Please go ahead. Your line is open.
Good afternoon, guys.
Afternoon.
The question I've got is really involving some of the comments you made around the sort of speed of change within the organization. Is it something, given how quickly trends are changing and things are moving, that you need to increase the pace of change from the top down within the organization? Do you think some of these initiatives will have a beneficial impact on the consumer in a sort of shorter period of time maybe than they would've done a few years ago? Thanks.
Well, speed is very important. I would say that we are quite speedy given the size of the company. A lot of the investments that we have done during recent years, as I mentioned, has been connected to setting a good infrastructure to actually being able to scale and to be flexible and to have speed in a lot of the investments that are more customer-facing. That is being rolled out at a high pace now. The speed of change in the industry, with the online shift, is rapid, probably even more rapidly than a lot of us could have foreseen. Therefore, we need to be very, very fast as well in everything that we do. Yeah. That's something that we will focus a lot on.
In terms of the sort of inventory build that we've seen over the last few quarters, is it something that we can sort of expect, now that you want to make the changes happen, you obviously want to start the autumn/winter with a clearer stock position.
Yeah.
Have you got the resources, the ability to start to clear through that inventory more quickly than we've seen so far?
When it comes to shifting out excess stock, I think it's always about being a salesman, salesmanship, and do it in a balanced way. We try to do it as balanced as possible. I think in Q2, we shifted out a lot of stock and increased the reductions compared to last year as a share of sales by 70 basis points. I think that's so important to not go too deep, too broad, but still being aggressive enough. Our aim is to find that balance also in Q3. Hopefully we will be there in Q3. I'm convinced that we will be there. That's, of course we could more or less sell the excess stock much quicker to really, really low prices. It's always about finding the right balance. Yeah, and I would like to come back to what I said twice there as well.
A lot of investments and changes and improvements in the supply chain as well, which we really believe will benefit already now this autumn and a lot during 2018.
Thank you.
Thank you.
Thank you. Your next question today comes from the line of Charlie Newlands from Deutsche Bank. Please go ahead. Your line is open.
Good afternoon. Thank you. I have got a number of questions. The first one is on your bought-in gross margin or your gross margin before the impact of markdowns rising despite you talking about the external factors for the industry still being slightly negative. Have you been raising prices or can you talk about where you are managing to outperform industry on sourcing? Thanks.
We normally comment on that, as you said, the big major external factors being capacity, salaries, currencies, material prices and so on, and transport costs. They are slightly negative for the period bought into quarter two. There are so many other factors influencing the gross margin and the bought is slightly better if you adjust for markdowns. We haven't increased prices. It's more efficiency gains in our sourcing. It's a slight, it's not a major difference. Small improvements in sourcing efficiency.
Understood. Sorry, briefly, one more time on the inventory. You're saying that by the end of Q3, you will have inventory where you want it, we shouldn't be expecting further markdown pressures after the next quarter?
We will see. I don't want to give a forecast. As Jyrki said before, we are higher now. There's a risk for increased markdowns in quarter three. Still two months to go, it's too early to say anything. We have it under control. We increased the markdowns in quarter two. We still had a good profitability. We believe that we will be in a good situation going into quarter four. We also have to look at what we're doing in the supply chain as well to further improve accuracy and efficiency there. All in all, we believe that we are in a good situation and on our way to improve.
Great. One final quick question, if I may.
Yep.
You've slightly lowered your net store opening guidance. I wondered if you clarify. Is that you're going to close more stores than previously anticipated, or you will open less? Linked to that is the CapEx guidance of SEK 14 billion-SEK 14.5 billion still standing.
Yeah. Exactly. That's right. The number of openings remain the same. We're closing slightly more. The new figure is net 400, around 400. The CapEx is coming down slightly. The best estimate now is SEK 13.5 billion.
Yeah. We gave a guidance in the beginning of the year. I think it was SEK 14 billion-SEK 14.5 billion. Now it's heading more to SEK 13.5 billion in current currency.
Right. Thank you.
Thank you.
Thank you. Your next question today comes from the line of Simon Irwin from Credit Suisse. Please go ahead. Your line is open.
Good afternoon, gentlemen. Few quick questions for you. Firstly, can you just talk a little bit more about the 100 store closures? Do these include a material number of flagships? I know you've closed a fairly prominent store in Milan. I was wondering if there were any others and whether this has had a material impact on your SG&A.
Yeah. Slightly more closures. Mostly it's connected to moves, actually, where we have found a better location. One example is the one that you mentioned where we closed a flagship store and actually opened up a bigger one close to that one. It's a closure, yes, but we opened one 100 meters away from that one, a bigger store. Connected one new flagship, and we closed the flagship. That's one example of the move. It's down as one closure, but it's also one new store, so to say.
Okay.
Yeah.
Has this had a material impact on SG&A in the quarter, or is that down to other things?
No, it's down to other things.
Okay. Just going back to clearance. If we went back to stock levels of two years ago, which would be kind of 90 something days of COGS, for example, you'd have about SEK 10 billion less of inventory at the end of the quarter. Do you think you can get through the bulk of that excess inventory in a single quarter, given that you've only got SEK 25 billion of COGS with it that you'd normally put through the business in that quarter? Does that imply that the stock coming into the business in the quarter will be significantly lower than usual?
We didn't say that we will clear out everything into the end of the Q3. We are clearing out as balanced as possible, and finding a good balance to get into the Q4 and the autumn season with good-looking stores, with good garment levels, et cetera. Of course, all the initiatives, as Johan mentioned, what we are doing in the supply chain, they are aiming for much more efficient sourcing, allocation, distribution. In the long term, but already now, we start to see the development. As we see the increase compared to last year was 22% in local currency. In Q1, I think it was
28 up. We are in the right direction, but it will not come overnight. We are so confident that we will, with all the investments, all the changes we are doing in the way we are sourcing, distributing, allocating. We will be really a positive development ahead.
Do you think medium term, once you've cleared this overhang, you can run the business on fewer stock days than you have done in the past?
Yes. For sure.
Okay. Just going back to your points about online, you mentioned that the U.S., for example, was a relatively recent market. The markets that you opened for online before that was basically Scandinavia, Austria, Netherlands, Germany. Do they make up the bulk of the markets where you were saying you've got 25%-30% of online sales?
Yeah, we don't say exactly which markets, but, yeah, the more established markets where we have been present for quite a long time, they stand today for 25%-30%. We see growth there as well. We see growth in all markets, and the markets we recently have entered will get to a 25%, 30% level and higher over the years as well.
Yeah.
We're very confident that total online sales development for the group will be at least 25% for the years to come.
Right. Does that impact your-
With the exception of
Does that impact your plans for stores? I've noticed that you have, over the last couple of quarters, noticeably reduced net store openings in what we'd probably call developed markets for you now.
Obviously, it's something that we have to see the channels together. We have to look at it all the time, we plan it from year to year. We still see a great opportunity to expand with the physical stores. That's why we are opening 400 net new stores this year. We will open a lot of new stores next year as well. Our best guess today when it comes to physical stores is in line with or slightly below the net 400 that we're opening now. The online sales will stand for a bigger share of the total, and we will have a very high online growth, which will contribute to total growth in a very good way.
Okay.
We still see a great potential.
I'm sorry. Could I just repeat? Did you say you think next year will be slightly below the 400 that you're planning on this year?
Not a big shift, but our best guess today is slightly below.
Okay. Thank you very much.
Thank you. As a reminder, ladies and gentlemen, it's star 1 if you do have a question today. You can use the hash key to cancel that request. Once again, it's one question at a time. Your next question comes from the line of Anne Critchlow from SG. Please go ahead. Your line is open.
Thank you. Good afternoon. My first question is about a statement you make in the release, where you talk about very favorable conditions for the 500 new store openings. By very favorable conditions, does that include increased payments from landlords or perhaps increased rent-free periods when you go into new stores?
Yeah, we look at the total package when it comes to what we believe in sales, what we believe in profit, what the investment levels are. There are different things to take into consideration there. All the stores that we open, otherwise we wouldn't sign them. We believe strongly in them, long-term and also short-term profitability. There are a lot of opportunities now where the demand is going down. Not all companies have lots of resources or business models that work in physical stores all over. We see a great opportunity also to get good deals.
That presumably is reflected in the cost control that we're seeing?
Yeah.
Yeah. The second question I have is about the increased speed of the supply chain. What % of your product for the group as a whole, let's say, at the moment is sourced on lead times of a few weeks as opposed to, say, a few months? Where would you like to get to in that?
We don't want to disclose the exact %. We're more talking about optimizing lead times for different parts of the assortment. A bigger part or a bigger share of the assortment will be connected to more speed buying. There we see an opportunity to improve.
Okay. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Geoff Lowery from Redburn. Please go ahead. Your line is open.
Yeah. Hi. Afternoon, team. One question, please. You've talked about changes you're making in terms of supply chain, your ambitions in terms of inventory and digitization and so on. Are you making many changes to the creative functions? I'm thinking particularly about what generates more absolute sales growth for the business going forward, and why you don't seem to think price, to the consumer, is part of the top-line challenge for you at the moment.
What would you say about price? I'm just not sure.
Why do you not think price is part of the top-line weakness, as it were? Why are you comfortable with your price proposition given the persistent weakness of top line?
Well, going back to the creative part, that's the core of the business. We highlighted some new areas that we are investing heavily in. Obviously, a lot of the work is down to the collections, the store experience, our communication. That's normal business, and we're working a lot on that. That will continue. I believe we have great teams for all the brands developing very nice collections. When it comes to creativity, part of this is also some of the new stores that we are testing during the autumn to further enhance the store experience for the customers. When it comes to prices, obviously, it's a very important part of the total customer offering. Super important. Our business idea is to have the best offering when it comes to fashion, quality, price, and sustainability.
It's something that we're constantly investing in to improve all of that, and also, of course, the value for money. We have a very strong offering for all the concepts. Otherwise, we wouldn't have improved so strongly with our online sales and with the physical stores in many markets. It's a very strong offering, and we will continue to invest in it. Very important, I totally agree.
Thank you.
Thank you.
Thank you. Your next question today comes from the line of Andreas Inderst from Macquarie. Please go ahead. Your line is open.
Yes. Hello, everyone. I have one question on your speed to market initiative. Maybe you can elaborate a bit more. For which parts can you actually reduce the lead times? Will it be by shifting sourcing from Asia to Europe? Will it be in the design process? Where will it be exactly? That's my first question. Second question will be, how much is actually online contributing for your total business as a percentage of sales? Maybe you can answer these questions. Thank you.
When it comes to optimizing lead times and speed, we see improvement opportunities in all parts of the process. In the product development phase, we have some initiatives that looks very promising. Some of it is connected to new technology. Some of it is connected to the investments that we do within advanced analytics. We also see opportunities to improve lead times when it comes to the production phase, and also when it comes to the distribution phase. Part of that is connected to where we source from. More sourcing will be from proximity markets. That's a little bit on lead times and speed. When it comes to online sales as a share of the total, we don't disclose that, but it's at a good level. It's growing steadily.
One of the reasons why we don't is because I believe going forward that it will be increasingly difficult to say what's online sales and what's physical stores, as we are integrating the channels a lot.
You still grow 25% every year online.
Yeah
Somehow you must have it in the budget.
Yeah, exactly. We know, of course. I'm just saying that going forward, it will be increasingly difficult to say. 25% is how we view it today, and we will guide going forward. Next year, we will give an indication if we are above that or in line with it or below. We will give our best estimate on that.
When it comes to the growth, not as a share, right?
Yeah.
Okay.
Yeah, exactly.
Okay. For your inventory position, the gap between inventory growth and sales growth has been extremely wide over the last one and a half years or so. I'm just wondering, how much is actually within your inventory position still very old stuff compared to, let's say, current season stuff, maybe as a % of the total offerings? I just want to get a feeling how much is really old inventory.
The most important part is to say that the new products coming in every day for the summer is very strong. We will be launching it. Of course, we have a bigger overhang than last year, but that doesn't mean that it's old and bad. This is something we still believe in, but it's going to need probably more markdowns to clear out.
Yeah. Would you expect more markdowns than in the second quarter, so more than minus 70 basis points?
It's too early to give an indication so far. Very likely there will be more than last year in Q3. I don't want to compare it to Q2. Yeah, can't give any more indications. It's too early in the year, of course.
Okay. Thank you.
Thank you. Your next question today comes from the line of Peliswa Mloisu from Black Star. Please go ahead. Your line is open.
Hi. I just want to inquire about the South African retail market. I know that it remains muted in terms of growth.
Sorry, we cannot hear you that well.
Can you repeat and speak closer to the microphone?
Can you hear me now?
A little bit better, yeah.
Hello. Is that much better?
Yeah.
Yeah. Okay. I just wanted to inquire about the South African retail market. I know that it remains muted, H&M is a new entrant into this market. We are in a time position with continued spending as low. Do you have any strategies or plans to mitigate against the[inaudible] of this?
Sorry. The line is very bad. Could you please try to speak slow and very clearly state your question, please?
Yes. Can you hear me now?
If you speak slower, we can try to hear you.
Something strange with the line.
Yeah.
The connection, it's-
It's wobbling a bit, yeah.
Sorry. Yeah, try again, see if we can
Sure. I'm asking about the South African retail market, and we understand that-
What market? What market?
South Africa.
South Africa?
Yes.
Okay. It's very hard to hear. Sorry.
Okay. Okay, no, it is fine. I will send you some [questions] via email.
Yeah, okay. Please do that. We will come back to you with the answers. We are so sorry.
Sorry.
Thank you. Your next question comes from the line of Michelle Wilson from Berenberg. Please go ahead. Your line is open.
Hi, good afternoon.
Hello.
Just a couple of questions from me. First of all, just on your 10%-15% revenue growth target, I think you've already mentioned it'd be challenging to hit that for the current year. Just wondering when the target is to get back to that kind of level. It sounds like there's a lot of initiatives that you're currently investing in that may take some time to come through. Is that a target we can expect you to hit in 2018, or will that be coming through in later years?
We believe that we will get there in 2018.
How do you envision that being made up? I guess we can see from the online guidance that you've given this morning that about four to five percentage points of that growth could be coming from online. Is the expectation that like-for-likes can spring back to positive territory in 2018?
Yeah. It is a combination of several things. We believe that we will have a good development online. As we said, we will open new stores as well. Partly, part of that will be from expansion. We have a nice development for the other brands that continues to grow rapidly. We believe that we will have a better like-for-like improvement as a result of many of the initiatives that we mentioned now. It's ambitious. We have a big base that we are growing from. We believe it's realistic as well that we will get back during 2018.
Okay, thank you. Just another question, just picking up on the comment you made earlier on Tmall in China. Is there potential to work with Tmall with the H&M brand in China? What's your general view of selling H&M through the aggregators? I know you sell some of the other brands through Zalando and ASOS. Is there any change in view of potential to sell H&M through those kind of aggregator models?
What we are looking at, we have tested some of the smaller brands, as you mentioned, on ASOS with Monki. We sell Monki on Tmall. We have Zalando or we're selling Weekday and Cheap Monday on Zalando. We are actually exploring Tmall for H&M. It's an exception because China is special. Otherwise, we don't have any plans to sell the H&M products or the H&M brand on external platforms. I think for us to even consider something, it's very important to make sure that we control the customer experience and the customer data as well.
Okay, great. Thank you.
Yeah, thank you.
Thank you. Your next question comes from the line of Cédric Lecasble from Raymond James. Please go ahead. Your line is open.
Yes, good afternoon. Thank you for taking my questions. I had a follow-up on your initiatives to speed your supply chain. You had a lot of focus on your answers on the benefits of these moves and investments. Should we expect something pretty equal year after year in terms of benefits, or do you expect a sudden acceleration at some point because you invested over the last couple of years, a little more maybe than before? Could you help us understand the dynamic and if it will be something consistent year after year, or if suddenly we will have a stronger improvement?
No, we will see some improvements during the autumn now as a result of some of the initiatives that we have taken. Even more improvements during 2018. 2019, a lot of the initiatives should be completed. A lot of the initiatives that we are looking at now. A lot of improvements in 2018, some during autumn 2017.
Understood. Of all the moving parts you mentioned earlier, is there one which is much more important than the other ones in shifting product?
Sorry, can you say that again?
Yes. You mentioned different factors like sourcing more proximity, speeding a certain number of things, product conception and development, things like that. Is there one particular factor which accounts for the bulk of the improvement, or is it a sum of pieces?
It's a sum of pieces. There are small and big things that connects the different parts of this. When it comes to product development, there are certain initiatives connected to that part. There are certain initiatives connected to the production phase, and there are certain initiatives connected to the distribution phase as well. There are many different things. It's the sum.
Maybe just to finish, is this speed sourcing or faster supply chain dedicated to online, with a priority to online, or does it go also to stores?
Both. Definitely both. The speed part also online connects to the deliveries. We are introducing more and better delivery options, time slot deliveries, next day deliveries. We are testing same day deliveries, one-hour deliveries from city stores. There, the benefit from having physical stores becomes pretty obvious, that they also can become hubs for distribution and returns and collects and so on.
Thank you very much.
Thank you.
Thank you. Your next question today comes from the line of Fredrik Ivarsson from Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you. Quick one, just trying to understand the difference in performance between the markets. You grew quite nicely in some mature markets where the expansion rate is quite low and, well, I guess online is being a strong driver of that. Have you launched any new initiatives in some markets that you see is working very well and that you are yet to launch in other markets?
No, I wouldn't say that explains the differences in the markets now. It's roughly the same offering in all markets, we see a big difference in performance. We have very good development in online in all markets, in the physical stores, we have a very good development in some markets where it's definitely more challenging in some other markets. It's more connected to the market situation.
Thank you.
Again, we have a lot of initiatives that are global that are helping us to improve, of course.
Of course. Thank you.
Thank you. Your next question today comes from the line of Stephen Wilmot from The Wall Street Journal. Please go ahead. Your line is now open.
Hello there. I just had a follow-up question about on the U.S., because you talked about a problem in the U.S. being a rapid shift to online. You've also said that you're ahead with your online business. Why isn't the shift to online an opportunity for you?
Well, it is. I mean, well,
Why haven't you been, I suppose, because obviously the like for like, your sales are up 1% local currency whilst you open 28 new stores net. Obviously it hasn't been an opportunity yet. Why is that?
Well, it's definitely an opportunity. What I said is that we're not yet at 25%-30% of online share of the total, but we're developing nicely with the online store. It's at a good level. It's profitable and it's growing. When it comes to the physical stores in the U.S., in many centers around the country, I think it's well documented that traffic figures are down. It is affecting us as well. We have to be really work with the existing portfolio and try to optimize that, but we also see a big opportunity to continue to grow with physical stores. We see a great opportunity with physical stores in the U.S. and definitely with the online store as well.
Great. Just one follow-up, just standing back slightly. It's not clear to me entirely what you think that the problem has been with the business over the past year and a half whilst same store sales have been so weak. How would you boil it down? Obviously, you've made all these changes, we suggest in the supply chains, just that's been something you've been looking at and online as well. Can you just-
Yeah.
What are the key things that you think have been problematic?
Yeah, absolutely. What I think is happening is a big shift in the market, resulting in tough market conditions in many big markets for us. Although we have the same offering in all markets and we're doing very nicely in many markets, we're doing nicely online. We haven't improved enough to reach the ambitious goal of 10%-15% growth. We are growing, but we're not improving enough in the tough market situation to grow more than the figures that we're growing with. Obviously we need to improve further to get to the 10%-15%.
Great. Thank you very much.
Thank you. Your next question comes from the line of Geoffrey Ruddell from Morgan Stanley. Please go ahead. Your line is open.
Hi. Thanks very much. Just one question, please. I realize the dividend is a matter for the board, but I was wondering as a management team, do you still consider the business to have excess liquidity? Obviously, the official dividend policy is a 50% payout ratio, but you distribute excess liquidity as well. I was wondering as a management team, do you think there is still excess liquidity in the business?
As you said, when it comes to the dividend, it's a question for the board of directors. Today in the market conditions we've been seeing in the money market, strong companies, financially strong, healthy companies like H&M with a strong balance sheet, we can regain and use that opportunities to borrow money and get paid for it. That's of course we are doing. We have so many good initiatives ahead to investing with really good business cases. That situation is talking in our favor. We can see that we have the financial strength to continue to invest and take opportunities that comes along. We are very confident that we will do that in the coming years as well. If the situation on the money market will change, then of course, we will look into other sources.
Does that mean you are sort of comfortable with taking on additional leverage?
We are not excluding anything as long as we get fantastic terms as a financially strong company. Our net debt to EBITDA ratio is negative still. We don't exclude anything, but we have a healthy financial position. We have a strong cash flow from current operations, it's almost SEK 11 billion. We have a good situation to further invest and develop our company strongly. We have no plans now for doing We have the RCF that we have mentioned, and we are having an external loan of approx SEK 6 billion, and that's short-term loans where we get paid.
That's great. Thank you very much.
Thank you. We have a follow-up question from the line of Charlie Newlands from Deutsche Bank. Please go ahead. Your line is now open.
Thanks very much. I had a question about your 10%-15% growth corridor. Not whether you think you'll achieve it, but why you stick with that corridor given it's what you've had for many years, but over those many years, your return on capital has come down quite a lot. I wonder at what point would you decide, we've got to scale that back until we fix the brand proposition, get that infrastructure, get that supply chain to where we want it to be, rather than pursue perhaps what might be an unsustainably high growth rate for such a large company?
No, we believe it's realistic, otherwise we wouldn't have it. We believe that we have had it for many years, 10%-15% growth, and we've seen that growth, not last year and not the start of this year, but we will get back there, and we will do it with maintained good profitability and a strong customer offering. Also doing all the investments that we're doing. If we believe it's not possible, then we will change it.
Thank you.
Yeah. Thank you.
Thank you. We have another follow-up this time from the line of Adam Cochrane from UBS. Please go ahead. Your line is open.
Yes, good afternoon. It's actually Andrew Hughes.
Hello.
Here. Hello.
Yeah.
I just start off looking at the segmental reporting page by region. I know we're not sure externally how you calculate that, but the U.S., or actually I say the Americas region, has actually deteriorated by 440 basis points and the other two regions are up. Is that a fair reflection of what has happened to profitability in the U.S., and is it now quite significantly below the group average?
When it comes to segment reporting, it's more to IFRS rules to have a segment reporting, and it's not reflecting the underlying operating result. It's more based on the OECD guidelines when it comes to transfer pricing, and so when we do this and have our transfer pricing model, then it's based on a budget, so there can be timing differences, but it's not reflecting the underlying operating margin.
All right. If the format is broadly the same between the two years, it does look like that.
Yeah
America's margin has come down quite sharply.
Yeah, there are timing differences, how we invoice the goods to the subsidiaries, and also it's difficult always to assess the budget correctly, et cetera. It has nothing to do with the total operating margin.
Right. Okay. Perhaps if I could just ask a follow-up on the markdown situation. I mean, looking at the last, I think five years, the worst quarter you had for markdown was down 150 basis points, and that, I think, was in the third quarter of last year. Can you rule out it being worse than that in the third quarter this year?
Again, as I said, it's too early to comment. I'm sure we will handle it in a controlled and balanced way.
All right.
Let's come back to the levels later.
All right. Okay. Thank you.
Thank you.
Thank you. We have a new question from the line of Simon Bowler from Exane. Please go ahead. Your line is open.
Hi, I'm on my mobile in the middle of a thunderstorm, so I hope you can hear me okay. Just had one quick question. I think on the opening comments, you made some remarks around changes being made to your logistics setup at the moment, and I was just wondering if you could share some more details on what exactly your plans are there. I presume you're referring to your national warehousing setup.
Sorry, what's the question? What changes we're making to the logistical setup?
Yes. Yeah, exactly so.
Yeah. We can't go into all the details, of course, but it's one important part for us to optimize the lead times, given the new world that we are in with the online sales growing. We have more channels, more brands, and are present in more markets. We have gone through that and looked at the amount of logistical hubs that we need, the size of them, the perfect location for them, how many we need for the physical stores, how many we need for the online channels, how many we need that could be combined, and so on. It's a big work, a lot of calculations. We have worked with some great people internally and also some external experts also to make sure that we have the perfect setup also when it comes to the logistics.
Can you give us any sense in terms of what's the direction here then? Is this you needing more bigger warehouses? Are you going to be shutting warehouses down? Can you give us any sense over the timeframe that you expect this piece of work might take?
No, I think, sorry, again, like the other things, some of the changes we can make immediately, now, and some will be new warehouses. Some bigger ones, some smaller ones. There will be optimization, of course, connected to more warehouses. It's a combination of things, and I can't go down into all the details for competitive reasons, but improvements will be made.
Okay, thanks.
Thank you.
Thank you. Your next question today comes from the line of Thomas Brenier from Lazard. Please go ahead. Your line is open.
Yes, good afternoon. Thank you very much. I understand that CapEx is going to be a bit lower than what you were expecting at the beginning of the year. I was wondering if you could comment on what we should expect for the coming years. Should we expect this level to be quite stable? When we look at analyst expectations, there is expectation that CapEx will continue to rise. I was wondering if you could comment on that.
Yeah. We are giving a new guidance for this year, 2017. We guided from the beginning of the year, SEK 14 billion to SEK 14.5 billion. Now we are giving a new guidance, most probably SEK 13.5 billion with this constant currency. It's far too early to give any guidance for 2018 and ahead. We will come back to that in connection with the full year report and give you a guidance.
Okay, thank you. I have a second question, which is more about the organization of stores. When you walk around in an H&M store, it seems like staff is more occupied sorting things and doing the checkout and stuff like that, but they don't give much advice, and you don't feel that the staff is here to drive sales, which is quite different in some of your competitors' stores. I was wondering if, going forward, to drive sales in the stores, you are planning to use staff in a different way and maybe use them to advise all your customers and potentially drive sales higher in the stores.
Yeah, absolutely. I'm sat here. I would like to know what store you're talking about, because obviously, we would like our colleagues to treat the customers in a really nice way, to run the stores nicely, and the most important part is to serve our customers. That we want to be the case in all stores going forward with integrating the stores with the online channels. It will be extra important, of course, to show our customers what we have online and to help them with the cross-channel experience. It's already important now with great customer service, and it will be even more important going forward. Yeah, I totally agree.
Thank you.
Hello.
It appears we have no further questions at this time. Please continue.
Well, thank you all very much for participating in this conference call, and we wish you a good day and a nice summer. Thank you very much.
Ladies and gentlemen, that does conclude your presentation for today. Thank you all for participating. You may now disconnect.