Ladies and gentlemen, thank you all for standing by, and welcome to the Full Year Results for 20 16 Conference Call. At this time, all participants are in a listen only mode. I also must advise you that this conference is being recorded today, Tuesday 31st January 2017. And I would now like to hand the conference call over to your speaker, Mr. Denis Villiers.
Thank you. Please go ahead.
Thank you, and welcome to this telephone conference on the occasion of H&M's full year and 4th quarter results 2016. With me is our CFO, Jyrki Tiberonin, and we will be happy to answer your questions after the presentation. You will find the presentation slides to the teleconference on hm.com. Looking back at 2016, it was an eventful year, which included many positive things, but also challenges for us as well as for the industry. During the year, we opened 427 new stores net, worldwide and added 3 new markets, Puerto Rico, Cyprus and New Zealand.
We also rolled out H and M's online store to 11 new markets. This means that H and M is now present in 64 markets with e commerce in 35 of them. We continued integrating our store and online sales channels, and we continued investing for long term profitable growth. Please turn to the Slide sales. Looking at the 4th quarter, sales including VAT increased by 7% in local currencies.
Translated into SEK, sales increased by 8% to SEK61.1 billion. For the full year, sales including VAT reached SEK223 billion, an increase of 7% in local currencies and 6% in SEK. For the retail industry, this year was characterized by the ongoing shift into increasingly growing online market and digitalization. We are very pleased that our online business developed very well for all our brands, both as regards sales and profitability. From an already high level, we took further market share, which clearly proves that our investments in our online business have been successful.
Our brand Cross and Other Stories, Monkey, Leaf Day and H&M Home at strong online sales growth as well as very good store sales. It's also positive that sales developed well for H and M in our well established markets such as Sweden and the other Scandinavian countries and in Russia, Turkey and Canada. We also had a good sales development in our newer markets such as India, Australia, South Africa, Mexico, Chile and Peru. For Fashion Retail, 2016 was also a challenging year with various external factors, including geopolitical events having a negative impact in many markets. This was particularly visible in France, Germany, Switzerland and Italy, as well as in the U.
S. And in China. Since these markets represent a large share of our sales, this consequently had a large impact on our overall sales development. However, during the year, we also identified areas within our customer offering, store experience and supply chain where we could have done better and where we are now methodologically ensuring improvements. Please turn to the next slide.
Gross profit increased by 7% to SEK 30 1,000,000,000 dollars in the 4th quarter, corresponding to a gross margin of 57% compared to 57.5 percent in the Q4 of last year. Overall, the market situation as regards to external factors such as cost inflation and purchasing currencies, mainly the strong U. S. Dollar, continued to be slightly negative during the purchasing period for Q4 compared to the corresponding purchasing period in the previous year. Markdowns in the 4th quarter had a negative impact of around 60 basis points.
The increase in Q4 is mostly explained by increased marginal activities for auto environments that did not sell as well as planned due to the warm sky of the office. For the full year, gross profit increased to €106,000,000,000 which gave a gross margin of 55.2% compared to 57% in 2015. For purchases made for the Q1 of 2017, the overall market situation for external factors is again considered slightly negative compared to the corresponding purchasing period the previous year. Looking at selling and administrative costs. Cost control in the group remained good.
In the Q4, SG and A increased by 7% in local currencies and 8% in SEK to EUR 22,700,000,000. For the full year, the increase was 8% in SEK and 9% in local currencies. The increase in SG and A is mainly related to the expansion, but also to the long term investments within IT and online mainly, which increased by just above SEK 300,000,000 for the year. Looking at profits, please turn to the next slide. For the full year, profit after financial items were €24,000,000,000 The increase in markdowns during the year due to a lower sales increase than planned and a strong U.
S. Dollar, which made our purchases more expensive, together had a negative impact on our profit development for the full year. However, in the Q4, profits improved. In the 4th quarter, profits after financial items increased to $7,400,000,000 dollars Net profit was $5,900,000,000 in the quarter, up from $5,500,000,000 the previous year and equaling earnings per share of DKK3.57. And with a tax rate of 22.5 percent for the year, net profit for the year was $18,600,000,000 compared to $21,000,000 the year before.
And looking at some key data. Stock in trades on the 30th November amounted to €31,700,000,000 an increase of 28% in SEK. In local currencies, the increase was 26%. The increase in the stock in trade is mainly due to the expansion through stores and online, but also to the fact that sales in the 4th quarter did not increase as much as yet planned. And this will lead to an increase in markdowns of approximately 50 basis points in the Q1 'seventeen.
Apart from these factors, the composition of the stock in trade is, however, considered good. Cash flow from current operations was $23,800,000,000 compared to $24,000,000,000 last year. Investments in terms of CapEx totaled $13,300,000,000 an increase from 12,000,000,000 For 'seventeen, CapEx is expected to be in the range of INR 14,000,000,000 to INR 14,500,000,000 mainly for expansion but also for refurbishment, logistics and IT. The financial position of the H&M Group remained good. Liquid funds were SEK9.5 billion compared to SEK12.9 billion.
And the Board of Directors will propose the Annual General Meeting a dividend of $9.75 per share to be paid out in 2 separate portions, 1 in May following the AGM and 1 in November. The proposed dividend corresponds to 87% of profit for the year after tax. At the end of the financial year, short term loans amounted to SEK2.1 billion with a negative interest rate, which means we get paid by the balance. Return on equity was 31.2%. Our expansion continues to create new jobs.
During the year, the number of employees increased by more than 13,000, which means that we are now more than 161 1,000 colleagues in the group. And now some words on our expansion and growth going forward. Please turn to the next slide. We have a highly developed online business model. And today, our online sales already represent a significant share of our total sales in several markets.
Our industry is in an exciting development phase, while we are investing in digitalization and infrastructure in the following focus areas: omni channel, our supply chain and advanced analytics. We have a clear omni channel strategy in which we are integrating the digital and physical world to offer customers a more seamless shopping experience. This includes online purchases and online returns in stores, click and collect, mobile payments, as well as further development of our customer club and use of the mobile in store for increased service. We're also upgrading our supply chain to make it even faster and more flexible. This includes investments in technology such as RFID and automized warehouses.
We're also adding new delivery options for customers such as next day delivery, which we now offer in 5 markets, and we have also started with time slot delivery in Japan. Yet another focus area is advanced analytics, which provide an important support for our operations. The algorithms we have started to use will contribute to improvements within everything from product range planning to logistics and sales. Our investments in these areas ensure that we are well positioned for continued long term and profitable growth. This also builds on our strong expansion both through new stores and new online markets.
In the light of this development, it is natural for us to rephrase our growth target. This means that our previous target of increasing the number of stores by 10% to 15% per year will instead become a sales target that includes both stores and online sales. Our new growth target, which applies for 2017 and going forward, is that H and M Group sales shall increase by 10% to 15% in local currencies per year with continued high profitability. Today, we have a strong store portfolio with more than 4,300 stores, which give us a unique proximity to our customers. Being close to our customers is key to our success.
This proximity also becomes more and more important as the physical and the digital world becomes more and more integrated. The stores that we are opening have very favorable and flexible leases, are in good locations and are profitable with short payback periods. In view of this, it's only natural for us to continue standing through our brick and mortar network too. In 2017, we plan to open approximately 430 new stores next. We will move into 5 new store markets, Kazakhstan, Colombia, Iceland, Vietnam and Georgia and 6 new H and M online markets, Turkey, Taiwan, OCO, Macau, Singapore and Malaysia.
Alongside opening new stores, we will also continuously review the existing store portfolio to make sure that we have the optimal mix of brands, number of stores in each market. This means relocations, adding new store space and also closures. Most of the new stores in 2017 will be ATM stores and approximately 30 to 80 stores will be our other brands, including Koss and Other Stories, Monthly and Music. We also see great potential for further growth for H&Home. And in addition, we plan to launch 1 or 2 new brands in 2017.
And now before we move on to the Q and A session, just some words on current developments. Looking at 2017, the market remains challenging in some places. In December, which is the 1st month of our Q1, sales were up 6% in local currencies. The sales from the first to 29th January increased by 11%. For January as a whole, though, there is negative calendar effect of around 2 percentage points, the points which occurs at the end of the month.
But we believe in a strong 2017, we are looking forward to delivering strong collections and customer experiences and launching 1 or 2 new brands. This combined with ongoing improvements in our investments in the omni channel offering for supply chain and advanced analytics make us positive toward our opportunities for reaching our newly rephrased growth target, both in 2017 and going forward. And now we are happy to take your questions. And as usual, please remember to only ask one question at a time.
And your first question comes from the line of Chiara Battistini. Please ask your question.
Good morning. Hi. Thank you for taking my question. I have a question on the initiatives you're announcing this morning. What is the timing for the rollout of these initiatives like the Click and Collect and your FID technology to the stores?
And also in terms of the supply chain, are you also planning to take it closer to you? Pierre. But that was not a please? Thank
you. Thank you, Pierre. But that was not a question. If you start we start with the online omni channel features, that's what's your first question, right?
Well, it's my only question would be on all the initiatives you announced, so across omni channel and supply chain, if I may.
Right. So when you talk about next day delivery, for example, we now have in 5 markets. And there is a lot of new markets coming in during the spring 2017 as well. Some of the markets we have it now is in UK, U. S, Germany, France and Belgium, important markets.
And Sweden, just any day now. Yes, any day now. And followed by other big markets during the spring. So that's full speed ahead. Online returns in store, we have now in 11 markets, including U.
S, Netherlands, etcetera. And big markets will be rolled out now during the spring 2017 as well. We have scanned and buy now in all countries, and we are working on an improvement of that feature. We are doing tests with Click and Collect in the U. K.
During the spring. We have the loyalty club, H and M club in 8 markets by now, and there is the continued rollout in the spring in all words. We are also looking at mobile payments and make it easier for the customers to check out and pay with different mobile payment systems. RFID, making a huge test at the moment and several tests actually, and it's very, very good. And the planned rollout will be the big rollout start 2018.
We have Wi Fi in all our stores more or less. We have gift cards that we can bring in both in stores and online, etcetera, etcetera. Etcetera. So it's true to have on many different features. Great.
Thank you. And on the supply chain, you mentioned you're making it more flexible. Is it also part of your plans to bring it closer to you to announce the proximity?
Well, proximity, we already source, as you know, a big part in Europe. So that's mainly for proximity reasons. But of course, for our sales in Asia and the U. S, Europe is not proximate. It's more we split production to make it fast.
But it's also we are investing in technology and automation of our logistic hubs and warehouses and all connected to the technology we're investing will make us faster and more flexible. And on top of that, of course, we're developing these algorithms that I mentioned that will help us even further.
Okay. Thank you very much.
Welcome.
And your next question comes from the line of Ann Krichler. Please ask your question.
Hello, Niels.
My question is about incremental investments. I couldn't spot any guidance in the statement. So just wondering if there are any for FY 2017. And linked to that, I know you're going to announce 1 or 2 new brands, but is there some investments still to come through cost of goods sold, for example, opening new buying teams and taking on new people there?
Yes. When it comes to incremental cost, the long term investments that we have had during several years now, and they increased by slightly more than SEK 300,000,000 during 2016. For 2017, we estimate that there will be no increase, no incremental cost in the profit and loss when it comes to long term investments. So they would be on the same level, no increase. And then what was the second question?
Whether the investment in new brands, so launching 1 or 2 new brands, whether that has an impact on cost of goods sold, the gross margin over this year?
Yes. But we will come back to that in connection with the Q1 report. If it will be 1 or 2 new brands. And of course, as always, when we are starting up new initiatives that will have cost, but we estimate that those costs will be within our CapEx guidance and also within the long term investment guidance that we gave now, there will be no increase in the long term investments hitting the P and L.
Okay. Thank you.
They will be within our normal CapEx.
Got it. Thank you. And could you give a figure for CapEx guidance, please?
Yes. The CapEx for 2017 will be somewhere around SEK 14,000,000,000 to SEK 14,500,000,000, and that's always when we state it. We have to remember, it's in constant currency. And also, there are a lot of projects not yet signed. So it can move during the year, but that's our best estimate today.
So that means that the increase in constant currencies will be between 5% to 9% compared to 2016.
Thank you very much indeed.
And your next question comes from the line of Rebecca McClellan. Please ask your question.
Yes. Hi, good afternoon. Can you hear me?
Yes. Yes. We can hear you.
Good afternoon. Just a couple of points, please. Firstly, in terms of your like for like OpEx growth, I think it's been negative in the last couple of quarters. Can you confirm that?
Yes. As I said, we have a very good cost control. And yes, it's slightly down in comparable stores.
And would you expect that to be the case going through 2017?
We don't give any guidance when it comes to OpEx, but we have tight cost control. We have the possibility to adapt. But of course, if we are having a really, really tough quarter, then of course, some of the OpEx SG and A costs are
a little bit
fixed over time. So but we have a good control. So we are confident that we will have it during 2017 as well. And OpEx will be in our control.
Excellent. And I think you gave some sort of guidance about the short term impact of external factors on COGS. Do you have an idea as to where it might be on the full year as I. E. Sort of what the sort of evolution over the second half of the year might be?
First of all, it's not to guide on gross margin. Again, it's to give an market situation on how they are. And we deem it to be pretty slightly negative for Q1 and also for Q2. But longer than that, we haven't really sourced. And so of course, there are a lot of moving parts and currency, etcetera, etcetera, we don't know anything about yet.
Right. But is there anything that sort of screams at you to be sort of particularly negative for the sort of beyond 2Q or
is it not? No, nothing dramatic. More than that, I mean, to repeat that right now, the currencies are slightly negative, of course, due to the recent strengthening of the dollar. But of course, it's very volatile.
Okay. And just finally, in line with the sort of improvements in the supply chain, would you expect some sort of tighter working capital and flexibility and etcetera. Would you expect improvements in working capital management and perhaps inventory going forward as a result of that?
Well, we don't guide. But of course, the reason why the inventory has come up is, of course, as I said before, that the sales haven't increased as much as planned. But going forward, we, of course, plan for a better sales development and then other KPIs like working capital should improve, yes.
Okay. Thank you.
And your next question comes from the line of Nicholas Fawn. Please ask your question.
Yes. Good afternoon. Can you hear me?
Yes.
Yes. So I'd just like to clarify the new target again. I mean, implicitly, it reads like an upgrade since one new store is not necessarily the equivalent of 1 new krona in sales terms given space conversion. And
I think I recall over
the past, say, 15 years, you've had a like for like averaging about 1% to 1.5%. And it will be very helpful if you could help us to build up the composition to that new 10% to 15% sales growth ambition, please.
As we see it, we still have the same high ambition when it comes to increase our top line. So what we are doing, we are rephrasing it to make it more relevant. It's not only internally, we always had except for the new stores that we are adding each year, we always plan for a like for like increase in existing stores. We always plan for good sales development in the online channel, both on total and in like for like. So for us, it's more or less the same that we are saying.
It's the same high ambition. But when online and the brick and mortar is going together more and more, then it's not so it's less relevant to only focus on store expansion. We are adding new concept, which might have smaller stores, smaller units. We are going in China, 3rd tier, 4th tier cities. So one store there, of course, is producing less than a store in a capital fit in in Europe, for instance.
And so that's the reason we think it's more relevant to handle all the aspects in our growth.
And just a final comment from Natuzzi, this is a guidance. Obviously, it's not a guidance, it's a target.
Yes. No, absolutely. Thanks for that. Final question. Could you comment how your performance with Monke on Tmall is, please?
Yes, that's correct. We launched Monkey on T Mobile last spring and still new learning, but the start so far is very good, promising.
Thank you so
much. You're welcome.
And your next question comes from the line of Cedric Ocaspo. Please ask your question.
Yes, good afternoon. Cedric Lacapa from Raymond James. Thank you for taking my questions. Actually, a follow-up question. This change in wording doesn't imply you said you might open some smaller stores in Tier 3, Tier 4 China and new concepts.
Should we see a reconsideration of the kind of expansion pace that you had on your in the physical world with your brick and mortar stores previously? And a follow-up of that is, could you maybe give us some color of the best surprises or best results on the testing you've made on your different online initiatives or changes in the way you sell online? Thank you very much.
Well, I'll start with the first question. I believe it was regarding the pace of the new physical stores, right? Yes. We do guide for approximately 4.30 of this year, which is more or less the same number, big number as 16. So the gross of around just about 500.
And then, of course, we always relocate and do growth first. And that's, of course, moving targets, so to speak. And the best guess today would be approximately 430. Regarding 2018 and onwards, it's too early to say. We'll come back to that, of course.
But I think that's one of the points with the rephrasing of the target that it's not just the physical stores, it's a total top line that's important. And as Jyrki said, it's through adding stores, adding work rolling out more online markets, improving the online business and also existing stores like for like that all of these together comprise the sum of the 10% to 15% target. Okay?
Sure.
And then your other question was learnings from different e commerce initiatives. Could you rephrase it again, please? Sorry.
Yes. You told us in the previous quarters that you were running some testing, different testing in different markets. And I was just interested in having a feedback on your different initiatives and maybe telling us what has worked well, what could be rolled out and what you're most happy about?
Yes. I think we did start this Q and A session with measuring a lot of different features that we're rolling out with full pace. And of course, the regions that we have tried and we have very good results. Then to go into detail, we prefer not to do for comparative reasons, but we've stated over and over again that we're very pleased with the online development for all brands.
But in general, the tests we are doing, they look promising. And we can see also when we are rolling out next day deliver, it's very popular. So we get an effect, and that's good. And also the RFID test that we have done is showing good progress. So most of the tests we have done is promising, and now we start to roll out them in different markets.
That's, of course, one big advantage about having so many stores and so many markets and brands and channels, and we can do a lot of different tests simultaneously and try and test and develop and try and test and some things might not work, then we don't continue, etcetera. So this is a part of the culture that we do business with.
It was the line wasn't very good when you mentioned online returns in stores and different. You said online returns in store was possible in 11 markets that you would be testing that you can collect in the UK in spring. Is this correct? And you said something before that I couldn't hear well on your advancement of the different projects?
Well, I talked about next day delivery in 5 markets, online return in stores in 11 markets, stand and buy in all markets, Click and Collect pilot as you mentioned, H&M Royalty Club in 8 markets so far, mobile payments, through checkout, RFID, Wi Fi, yes, lots of different, it's a long list.
Okay. No, no. Got it. It's fine. Thank you very much.
And your next question comes from the line of George Nowicki. Please ask your question.
Hi, good afternoon. Thanks for taking my questions. First would be, I mean, Germany is still your most important market, but obviously, like for like in Germany is down. So my question would be, what's the problem in Germany?
Well, I think the German market, as such, is very challenging. If you look at the fixed dealership numbers, I think they are minus 2 for the year. I would say our performance is more or less in line with the market.
Okay. But other than that, you don't see any bigger problem because I just heard that you were just opening 2 more stores in spring. So are you actually opening less stores there?
Less than what?
Less than you used to open? Is the expansion going down?
Well, as you mentioned, Germany is our biggest market with close to 500 stores. And of course, the potential for new stores is not as great as in new markets like India or China or etcetera.
But we still see a huge potential in the German market. And it's not only by adding new store. It's like rebuilding stores, adding more space, sometimes closing down a store and move it to another location. It's optimization with the existing stores. They will see a huge potential as well in a more mature market.
And it's also important to remember that even though the online channel is growing rapidly, we see a strength in having this network of stores. When we are connecting, then we could start to deliver directly from stores, then you can half an hour deliveries. So we have a strength in our physical store network and there we see a potential for Germany as well for sure.
Okay. Last time on this telephone conference, you said that Great Britain was one of the first bigger markets that you implemented the new IT system. How is that developing in the other countries by now? Like did you implement the new IT in all the bigger markets by now? Or is that still are you still in the middle of it?
Just to clarify, we said we transformed to the new generation of the online platform that we have launched in the new markets on. So we still have the 1st online markets on the old platform. So yes, U. K. Was the 1st country out more than a year ago, it was very successful.
And a couple of weeks ago, we transformed the Netherlands to the new platform also successfully.
Okay. And the other markets are still to come?
Yes.
Okay. And then, I mean, you have to tell us something about the new concept.
In due time, we will.
Okay. All right. That's it for the moment. Thank you.
Thank you, Marty.
And your next question comes from the line of Simon Irwin. Please ask your question.
Hello, gentlemen. Could you just talk a little bit more about the new formats? And that you opened 75 new formats last year. You're only talking about opening 75 this year, including 1 or potentially 2 new formats. So why isn't there more of an acceleration in that?
I think there is a strong growth from a pretty small base. And you have to be very cautious when you launch new brands to get the DNA and the brand values right. But I think I don't know if I agree with you because most of the brands will continue to grow more or less in the same pace as last year, maybe even faster. But of course, we're cautious in guiding for the total number because there's still a lot of negotiations going on. But if you take costs, for example, we have now close to 200 cost stores, very, very successful.
We have them in 33 markets as of today. And we opened 41 stores last year. And next year, we have opened that much or even more. And if you take Moki, we have 118 stores now in 13 markets and also have a good momentum during the year. And then I'd like to mention also other stores where we have now 45 stores in 11 markets.
And we plan to continue this fast rollout in terms of percentage. Of course, it's much faster than H and M brand. And then as we also mentioned, we have H and M Home, which we now we see very great successful. We have 270 roughly 2 70 H and M home stores in 41 markets. And we added around 50 last year and continue to add as many or more for next year and also start to look at independent separate H and M stores?
Yes, just to clarify. So H and M Home is shop in shops at the moment. But we are planning, as Neil said, to start to open own H and M stores here in most probably in the beginning of 2018.
Okay. And can you just talk a little bit more about the long term investment? Because at 9 months out, I think you said it was about 275. So guidance went, I think, from €500,000,000 to €400,000,000 to €3,000,000,000 sorry, over €300,000,000 through the course of the year. And now you're saying next year's the incremental amount is going to be 0 increment year on year.
How is that the case when you appear to be accelerating a lot of initiatives?
Some of these are coming into the CapEx. We'll not hit the P and L on the SG and A level. And also, we have the high level of investment field. So the incremental part doesn't mean that we stop to invest. We have a big base of investments, and some of the investments are, of course, done, but then we can add new areas of investments, but it's not on top as we have had now for many years.
So some of the investments have been taken, then we find new initiatives, new so but the incremental part will be, yes, as you said, 0 during 2017.
And also, if I may add, for many years, we've invested a lot in the backbone system. And just to invest in the backbone doesn't add much value. But now we have the base, as I said, I talked a lot about in connection to Q2 and Q3, right, from which we can now do a lot of these features that we couldn't do before.
Okay. Presumably, though, there is an offset with amortization because your capitalized goodwill went up to €4,600,000,000 You haven't given us the amortization number on that. But I kind of assume at some stage you're going to have to be amortizing that at, what, 20% per annum or so. So that's quite a big step up.
Yes. If we talk about the backbone investments, I think we have started to depreciate onethree of the investments. The investment in gross, I think, is 4 point something €8,000,000,000 and onethree, we have taken used and started to make depreciations once during 'sixteen. And of course, when we are rolling it out to new markets, the depreciation will start to increase.
Okay. And we indicated it's just about €150,000,000 on IPO last year.
Okay. Sorry, can I just ask one final question on clearance? Given that, obviously, your year end inventory is very high and you say that you keep buying for a positive LFL. So you're now sitting on what is a bitter around 4 months of inventory. How do you get that inventory flat, say, before springsummer, if you're already sitting on so much and there's more coming in?
Well, this is the normal business of the always I mean, we plan with buying orders every day, new products coming to stores every day. So there's a flow of our products. And of course, we don't always buy for a trusted life like, but we plan for it because if you don't plan for it, you will never reach it. But of course, if as is often, you don't reach the plant, you have to do something about it, and that's why you have to reduce the garments, but of course, in a balanced way. And there's a lot of new products coming into the stores.
So that's why we say, apart from this excess inventory, the inventory is very good and store products, store collections coming into the stores and every day very exciting products coming in both online in the stores.
And your next question comes from the line of Stephen Wilmot. Please ask your question.
Hello, Stephen Wilmot here from
The Wall Street Journal. Just a question about market share gains. You talked about them. And can you clarify that was online? And can you give us a sense, given that you're running an omni channel strategy apparently, can you give us a sense of what your market share did overall?
Market share is always difficult to talk about because how you define the market, etcetera. But still, even though we went up pretty to the outcome for the year, we did grow with 7% during the year, which is more than most retailers did. Some markets, of course, were stronger than others. But even in the markets that we mentioned, big markets where we're not pleased, we're more or less in line with the market as such. And of course, our online business, we are particularly pleased with, and there we feel really that we take market share, let's say, across all markets where we have online.
And just one other thing. Just picking up on the previous Lee mentioned point about the replatforming in the UK. Did that I mean, the UK for the full year, the UK, for example, noticeably better than they had been. Are you seeing any early gains towards the end of the year? Or has are you still waiting for the pickup that should result from the initiatives?
No. I mean, we're clearly happy and the customers more so with the improvements we are doing, have been doing with online and particular in U. K, absolutely, because it means also that we can do a lot of these features that are mentioned like next day delivery, etcetera, which wasn't possible before because we supply the U. K. From Sweden.
So this is, of course, a big improvement for the customer experience.
And of course, this gives us the opportunity also to add more delivery options that are not only next day delivery. We are having time slot deliveries in Japan. And of course, that is one feature that we can add when it comes to delivery options to customers. So this new platform will enable us to work in a very good way and adding features that we think that customers will appreciate.
Okay. So just to clarify, these initiatives, you've done the replatforming, which will allow you to roll out these initiatives, but they haven't come into on stream yet?
Yes. I mean, we do the a lot of these features also in the market with the old platforms. But we've been investing for many, many years now in back end systems. And now, as we discussed in connection to Q2 and Q3, we start to accelerate the rollout. And as I said, we are in the middle of rollout across all markets.
And when we speak next quarter, you would be more updated on where we are in the process, of course.
And as we mentioned earlier, like in U. K, we'll start a pilot when it comes to Click and Connect. I think it will start now in spring. So hopefully, that will give a positive result. So then we'll start to plan the rollout for that.
Okay. Thank you.
And your next question comes from the line of Caroline Deliver. Please ask your question. Good morning, everyone. Good morning. I have a
follow-up question on the gross margin and markdown performance in particular. Obviously, in the Q1, there's the impact from the excess stock, but that comes on top of quite a poor performance from Markdown a year ago. Implicit within your target, if not guidance, is that the sort of continuing high level of profitability is that you think that the gross margin give or take will hopefully stabilize at some point. What confidence have you got that your markdown performance can improve through the year relative to last year? And is there some of the work that you're doing on data analytics and supply chain that gives you confidence you can get a better markdown performance?
Absolutely. That's one of the reasons. And of course, that we have identified things in hindsight that we could have done better during the year, connect to the customer offering, store experience and the supply chain. And we're now, as I said, methodologically trying to improve, to be difficult words to say, make improvements that we hopefully will make a difference going forward in connection with, of course, very strong collections. That's the key, of course.
Thank you.
And your next question comes from the line of Michelle Wilson. Please ask your question.
Hi, good afternoon.
Hi, Michelle.
I just had a question on your capital allocation. I just want to understand your priorities going forward. If I look at the net cash balance, it's gone from about €13,000,000,000 down €7,000,000,000 And you've taken some debt on the balance sheet. I just wanted to understand if you would be happy to go to a net debt position or if clearly, you've got a high dividend payout at the moment, about 80%, 90%. Should we expect that to start to come down towards the 50% target payout rate?
When it comes to our cash management and the net cash flow, we still have a cash flow from current operations almost SEK 24,000,000,000. Dollars And of course, we are investing still, and the net cash has gone down. But as we said, we had during 2016, we borrowed from banks, from the money market. And we see these investments as very important, and we're thinking long term. So we still have a good financial position, and we will continue to invest in these initiatives that we have been mentioning today.
And we are confident that we will have a better relation when it comes to top line performance and investment levels going ahead. And that's at least our ambition. So yes, we see this as we are following a plan that we have had for many years, and we are looking to a 3 year, 4 year plan. So we are following our plan, of course, always making adjustments. But we don't see any dramatic things in this.
So yes, we will hopefully continue to perform strong, and we're confident that we will reach our new rephrased target when it comes to top line performance. And hopefully, they're also then able to increase the profitability.
Okay. So you reached the target payout by improving earnings rather than cutting the dividend?
Yes. The dividend question is, of course, the question for the Board of Directors and finally for the Annual General Meeting. We give them some different scenarios. We are looking into our investment levels. We give them our thoughts when it comes to top line and the profitability.
And then the Board of Directors make their decisions, And we think they have done a balanced decision or proposal to the Annual General Meeting, which will safeguard us when it comes to that we have a position still where we have the freedom of action within the group to make those necessary investments that we are doing.
Okay, great. Thank you.
Thank you.
And your next question comes from the line of Richard Jaffray. Please ask your question.
Thanks very much. And just a quick follow-up on the inventory level and the content of the inventory. We're concerned that not only is the level high, but that it consists of a lot of product from the holiday season that will need to be liquidated perhaps more aggressively than the 50 basis points you had suggested. Could you give us some confidence about the content or the seasonality of the high inventory level?
As I mentioned before, it is too high, absolutely. But and that's why we guide for an increase of around 50 bps. There's still 1 month to go, of course, in the quarter, but we've done the bulk of it. December, as you know, is a busy month, and then January. And I would say that the remember that last year, there was as someone said reminded, there was a 140 bps increase for the previous year.
So it is from a high base, to be honest. But we feel pretty confident that's around 50 basis points. It could be slightly more slightly less, of course. But the last good quality of the product.
And your next question comes from the line of Tony Sherritt. Please ask your question.
Good afternoon, gentlemen. Couple of things. First of all, can you tell us what your budgeted sales growth was for 2015, 2016 compared with the 7% you actually achieved that's all ex currency?
We had, of course, higher, I believe, some plans as we don't give out exactly the numbers though. Sorry.
Okay, fine. Secondly, if you look at what you've actually achieved in ex currency sales growth for the last 9 years after the sort of boom year of 2007 when the quota finished, you've actually averaged about 10% per annum, ex currency. And now you're talking about sort of increasing the sales growth level by roughly 50% on what you've actually achieved for the last 9 years. I just wondered how you're going to manage the risk of buying the inventory for that, whether committing to buy 15% extra inventory every year is actually going to have to be managed by buying it differently in terms you're open to buy and you're going to try and rotate your stock quicker or what you're going to do to mitigate that risk?
Okay. First of all, Tony, we don't say that the plan is to increase by 15% every year. We rephrase the target. We hope we plan. The target is to grow the business with 10% to 15% 20% to 15%.
And as you say, we have been above 10% even the last 8 years or so, which has been in an environment which has been extremely difficult actively on others. You referred to 2007, that was before Lehman, and yes, we had very strong sales. So long term, if you go even further back, we have averaged more than 10% since the IPO in 1974. And again, with all the initiatives we are making have been doing and with the strength of H and M brand and the new brands and online and omni channel strategy, Yes, we feel there is an opportunity for us to reach the target already in 2017.
But in terms of actually how you buy, how much you commit, will you be running exactly the same model or will you be trying to do anything?
No, no, no. We are continuously doing a lot of improvement. And as I said, thanks to technology and improved processes, of course, we are changing and doing things every day. That's again why we feel so confident. But will it be
a material de risking of the supply chain or is this just sort of very slight increment to earn from time to time?
Well, we think we do considerable material improvements. But of course, it's not about making a big bang and yes, things that we can improve. But and then again, we do a lot of things in a very good way, very efficient way. So it's about pricing and improving. And we have again, I remind you, with all the investments we've been doing that hasn't perhaps paid off in the short term, we feel confident that we now can start to leverage in terms of a lot of new improvements and processes.
Okay, fine. Thanks very much.
Thank you.
And your next question comes from the line of Charlene Wirthanz. Please ask your question.
Yes, good afternoon. I've got a couple on the gross margin, but firstly, one on the dividend. Sort of read and understood your rationale for changing the payment of the dividend into 2 pieces, but it's deferring it retrospectively as it were, it strikes me as a bit unusual. Did you feel like you needed to perhaps strengthen the balance sheet by holding back a few billion kroner for 6 months? I mean, you alluded to negative interest rates, so it doesn't really seem too logical to do that.
Yes. I think when looking, it's very common in other countries in U. S. And in U. K.
And a lot of peers are having twice a year or quarterly dividends or even monthly dividends. And it's for us, it's mainly two reasons. It makes our cash flow and liquidity planning much easier, And then it's also cost efficient from where we see how to bring back money. We have business and companies, subsidiaries in 60 countries. So that will make that easier and more cost efficient because as we have mentioned before, we have some markets where we have more or less a little bit kind of a trapped money that's quite expensive to bring back home.
There are different tax withholdings connected to financial transactions. So this will ease that part when we are dividing, and it will follow more our cash flow in our business. So that's the reason. And as I said, I think this is the way a lot of other companies as well in Sweden will go in the future.
Okay. And then my first two questions on the gross margin is your bought in gross margin was actually a tiny bit up in the Q4, even though you said that external factors was negative. So did you are you effectively increasing prices to protect your gross margins?
No, we are not increasing prices. We are but we always, as you know, try to have the best offerings for in each market, but that's balance of fashion and quality price and sustainability. Of course, currently, the competition is different than their VAT, etcetera. But there are also a lot of work going on with efficiency improvements, etcetera. So again, when we guide for the external factors, those are the external factors, market conditions.
And then, of course, we can negotiate better or we can improve our processes and source in a different way that makes us more efficient. And that's what you say. But it's still, I mean, I would say flattish. It's not a big dramatic
change, is it? Just to be clear, when we are looking at the pricing, pricing, of course, we are following what's happening in different markets. So of course, we are reacting. And in some markets, it might be that we are going down in prices. In some other markets, we will increase prices.
And in others, we will have flattish. So of course, we are actively working more or less during each season to have the best customer offering.
Okay, understood. And in relation to markdown and Q1, by the end of Q1, do you expect to have inventory in a balanced position such that there will be no further markdown anticipated beyond that given that December January sales numbers have been quite weak, I'd be a little bit surprised if you clear that much inventory.
We don't want to guide. But again, stay to the 50 basis points, that's the best estimate we can give today. And then we come back in connection to Q1 about where we achieved. But this is an ongoing process. And of course, it depends on sales development, etcetera.
Great. And then one very quick one on stores. It seems to be mixed messages on in terms of the questioning, perhaps not the answers. Are your new stores going to be slightly bigger or smaller than in recent years and relative to your base of stores?
No big difference, I would say. Some will be bigger, some will be smaller and depends on different formats, etcetera. So and again, space as such, a square meter or square foot, if you have it in Regent Street or in Portuguese, it's very different.
Thank you very
much.
And your next question comes from the line of Thomas Schwertenberg. Please ask your question.
Yes, good afternoon. You talked about having a new head of the M and A brand. And I wondered what has changed in the way H and M brand is managed since?
Yes, it's true. We made a slightly reorganization during the year. We have a brand manager now for H and M just like we have for all the other brands, cost and resources, etcetera. But more than that, nothing more to tell you about. But we are, of course, working, very focused with the H&M brand.
Okay. So there's nothing has changed in now focusing more on certain things than was the case before?
Nothing worth mentioning, I would say. But of course, there is a path to grow H and M a sustainable, profitable and balanced way. And hopefully, we will see good results in Q4.
Okay. Thank you.
And your next question comes from the line of Erik Jagasson. Please ask your question.
Yes, good afternoon. I would like if you could comment a bit on the underlying performance in the U. S. And China in particular. In these markets, you are opening a lot of new stores.
And obviously, it appears to us that this is a big drag on your implied like for like globally. But how are you performing with the older stores? How long does it take before the new stores are up and running at a profitable level? And how is online doing in those markets?
Well, we do say that U. S. And China are very important markets for us, but we are not pleased with the top line development during the year. But we still see big potential for both markets to continue to grow. Let's start with China.
We have grown extremely fast, as you know. We've launched the 1st store in China as late as 2007, I think. And now it's in terms of stores, one of the most important markets already. And I would say that it's been during the year, we talked about China not performing top line as well as we've planned, but we've seen improvements from November December January, albeit, of course, we had a Chinese New Year effect in January, but it still bodes well for the future. The U.
S, it is a very tough market, a lot of uncertainty, as you know, due to the political situation. A lot of peers have huge problems, closing down stores, etcetera. And according to the statistics we get from retail metrics, etcetera, we do more or less as the market. But we have a very strong brand in the U. S.
And very well appreciated by customers. We still get very good lease terms and we will continue to expand. Of course, especially in the market where a lot of other brands are closing down, it opens up interesting opportunities. But as we say, very flexible contract. And of course, together with the online and the omni channel, we still look very positive on the U.
S. Business. But of course, there are a lot of uncertainties right now with the present government, okay? Then when it comes to KPIs, PayFac, etcetera, they are very good and new stores actually have better terms than the average and in group,
I can say.
Okay. Thank you.
Okay.
And your next question comes from the line of Grace Belden. Please ask your question.
Hi. I was just wondering, I was looking through the results and it's a little bit scant on detail in terms of the U. K. Performance. So I was just wondering if it was possible to get a little bit more detail on the U.
K. In terms of sort of like for like sales and online sales as well?
No, I'm sorry. We are in 64 markets, and we can't go into detail in every market. But we are pretty pleased with our performance in the UK, which, as you know, is also very challenging. And after the Brexit, it's also a bit uncertain what's going to happen. And of course, the sterling has depreciated.
So it puts a lot of pressure on the buying costs for everyone in the UK. But we have a strong position and strong team we face. And we perform our assessment will be better than the market as such.
Okay. All right. And in terms of talking about that sort of the effect of Brexit and the pressure that's put on the sterling and sort of talking about how various markets are going to change in terms of their pricing, some going up, some staying down, some staying the same. Do you foresee the U. K.
Being one of the markets where prices could potentially go up in the year ahead as a result of and the current fluctuations have resulted?
I don't want to talk about general price levels. For us, it's always about having the best offering. And it's not just price, it's a combination of fashion, price, quality and sustainability. And we are very long term. And actually, we see perhaps the retail business as an opportunity.
Can you talk to me in a bit more detail about what kind of opportunity it would present in that case?
Because it's going to be tough for the general market as such. And we are not so UK market. That's tough because we have so many different markets as well.
Okay. All right. So you're more protected in terms of your international state. That makes sense. And in terms of your sort of as you said, you're planning on reviewing the store estate as well in terms of opening new stores, potentially closing some as well.
Is there any comment you could provide on your Oxford Street outlets? Is there any plans to sort of review your outlets there potentially any closures on the horizon?
There's a lot of rumors going around. I'm sorry, we don't comment on rumors.
Okay. All right. That's fine. And my last question would be your outlets in Westfield Stratford. I know that they've taken on a store and then essentially there are 2 stores in that state now.
Are there any plans to kind of diversify and maybe trial some of the new formats that you've been talking about in one of those stores at all?
We will see. Okay.
Thank you very much.
I'm sorry, I can't give you more detail. But as I said, there's we have we opened around 500 stores across last year in various across all markets. And on top of that, a lot of refurbishments and a lot of projects. And as we mentioned, we have the new brands that we are working on as well as all the other brands. But I'm sorry, I can't give you any more details.
But we are, of course, increasing the store optimization, which means, as you said, closures and adding space, etcetera, and perhaps changing banners in some of the locations. So we have a lot of opportunities there with all the different details now.
Okay. All right. Thanks very much.
Welcome.
And your next question comes from the line of Andreas Ingerst. Please ask your question.
Sorry, no further questions. Thank you.
Okay. Thank you.
And your next question comes from the line of George Nowicki. Please ask your question.
Yes. Just one quick follow-up question. You were mentioning the expansion plans of all your different brands, but you never mentioned Cheap Monday. So what's the future of Cheap Monday going to be like?
Cheap Monday, we did say it's a wholesale brand, first of all. And we did say that we will not complete the performance in 2016. But we have now a new brand manager for Chief Monday, and we, of course, hope that, that will make a difference. And we there is of course a potential also for ChipMiner.
Okay. But you're going to focus on the wholesale business in for ChipMiner? Yes. Okay. All right.
Thank you.
And your next question comes from the line of Richard Chamberlain. Please ask your question.
Thanks very much. Just a couple of quick follow-up questions, if that's all right, on space. I wonder if you can say over the past year, has space growth been running in line with store growth? Or has it been running slightly ahead given increased H and M store sizes?
More or less in line, I would say.
More or less in line. Okay. And just on another one on space. Will the H and M home departments, are they going to be mainly located in new stores this year? Or are you going to be taking space away from clothing in existing stores?
I think it's a mix of both. I don't have the exact figure if it will be more in existing store or connected to new premises. But for sure, there will be both of them.
Okay. So a broad mix, maybe half half?
I don't have that kind of a detail, sorry. So we have to come back. We can come back with it later on.
Okay. Thanks.
And your next question comes from the line of Paul Waffington. Please ask your question.
Good afternoon.
Good afternoon.
Well done on the numbers today. Could you I just got a question about your year end inventory position. It seems to have pretty much increased as a percentage of sales just about every year since 2007, 2008? And with the various measures that you're investing in the business and the supply chain and efficiency, are you actually is there a target inventory reduction relative to sales or a target stock term? Or is this something that you can point towards, which leads to believe that we should see some more efficiency in your working capital going forward?
Thank you.
Yes, of course. We are always looking into how to be more efficient and not to tie up too much money in the stock. But we have to remember that we have a strong expansion, both in the brick and mortar and online. We are broadening in our online shop. The assortment is broadening.
So of course, we are looking to always having a good balance with the stock turnover, how much money we are tying up in our inventory. But at the end of the year, as we say, we see that stock a little bit too high, and that will cause some extra reduction in markdowns during Q1 this year. So but then it's more or less dependent on our top line performance. We see, apart from that we have a little bit too much of a difference within QA. We see that the composition of stock is good.
But for sure, as Niels also said, we are working with the supply chain. We are looking into different efficiency, how we buy, how we source, etcetera. So of course, we are working on it, and we feel that we are in the right way even though you are right that we have increased as a percentage of sales, but that's also that we have planned for more sales than we actually are performing for like 2016.
And also, if I may add, during these 7, 8 last years, we have invested, as you know, materially. And we've gone from maybe 24 market to 64. We're going into the Southern Hemisphere, become the pure multi brand, multichannel. So it's much more complex, and we're still in the buildup phase in a way. And then, of course, don't forget that we have changed the improved invoicing process.
So around 5% of the inventory value is more an invoicing effect compared to 2 years ago.
Thank you. Thank you very much.
Welcome. Okay.
And there are no further questions at this time. Please continue.
Thank you all very much for participating in this conference call. And I look forward to speaking to you again in connection to the 3 month earnings call in March. Bye.