Ladies and gentlemen, thank you all for standing by, and welcome to the full year results for 2016 conference call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I also must advise you that this conference is being recorded today, Tuesday the 31st of January, 2017. I would now like to hand the conference call over to your speaker, Mr. Nils Vinge. Thank you. Please go ahead.
Thank you, welcome to this telephone conference on the occasion of H&M's full year and fourth quarter results 2016. With me is our CFO, Jyrki Tervonen, we will be happy to answer your questions after the presentation. You will find the presentation slides to this telephone conference 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 three new markets, Puerto Rico, Cyprus, and New Zealand. We also rolled out H&M online store to 11 new markets. This means that H&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 fourth quarter, sales including VAT increased by 7% in local currencies. Translated into SEK, sales increased by 8% to SEK 61.1 billion. For the full year, sales including VAT reached SEK 223 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 brands COS, & Other Stories, Monki, Weekday, and H&M HOME, had strong online sales growth as well as very good store sales.
It's also positive that sales developed well for H&M in our well-established markets such as Sweden and the other Scandinavian countries, in Russia, Turkey, and Canada. We also had 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 methodically ensuring improvements. Please turn to the next slide.
Gross profit increased by 7% to SEK 30 billion in the fourth quarter, corresponding to a gross margin of 57% compared to 57.5% in the fourth quarter last year. Overall, the market situation as regards external factors such as cost inflation and purchasing currency, mainly the strong US dollar, continued to be slightly negative during the purchasing period for the fourth quarter compared to the corresponding purchasing period in the previous year. Markdowns in the fourth quarter had a negative impact of around 60 basis points. The increase in Q4 is mostly explained by increased markdown activities for autumn garments that did not sell as well as planned due to the warm start of the autumn. For the full year, gross profit increased to SEK 106 billion, which gave a gross margin of 55.2% compared to 57% in 2015.
For purchases made for the first quarter 2017, the overall market situation for the 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 fourth quarter, SG&A increased by 7% in local currencies and 8% in SEK to SEK 22.7 billion. For the full year, the increase was 8% in SEK and 9% in local currencies. The increase in SG&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 million for the year. Looking at profits, please turn to the next slide. For the full year, profits after financial items were SEK 24 billion.
The increase in markdowns during the year due to a lower sales increase than planned and the strong US dollar, which made our purchases more expensive, together had a negative impact on our profit development for the full year. However, in the fourth quarter, profits improved. In the fourth quarter, profits after financial items increased to SEK 7.4 billion. Net profit was SEK 5.9 billion in the quarter, up from SEK 5.5 billion the previous year and equaling earnings per share of SEK 3.57. With a tax rate of 22.5% for the year, net profit for the year was SEK 18.6 billion, compared to SEK 21 billion the year before. Looking at some key data. Stock in trade on the 30th of November amounted to SEK 31.7 billion, 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 fourth quarter did not increase as much as we had planned. This will lead to an increase in markdowns of approximately 50 basis points in the first quarter 2017. Apart from these factors, the composition of the stock in trade is, however, considered good. Cash flow from current operations was SEK 23.8 billion, compared to SEK 24 billion last year. Investments in terms of CapEx totaled SEK 13.3 billion, an increase from SEK 12 billion. For 2017, CapEx is expected to be in the range of SEK 14 billion-SEK 14.5 billion, mainly for expansion, but also for refurbishment, logistics, and IT. The financial position of the H&M Group remained good. Liquid funds were SEK 9.5 billion, compared to SEK 12.5 billion.
The board of directors will propose to the annual general meeting a dividend of SEK 9.75 per share to be paid out in two separate portions, one in May following the AGM and one 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 SEK 2.1 billion with a negative interest rate, which means we get paid by the bank. 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 161,000 colleagues in the group. Now, some words on our expansion and growth going forward. Please turn to the next slide.
We have a highly developed online business model. Today our online sales already represent a significant share of our total sales in several markets. Our industry is in an exciting development phase, where we are investing in digitalization and infrastructure in the following focus areas: omnichannel, our supply chain, and advanced analytics. We have a clear omnichannel 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 H&M 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 automated warehouses.
We're also adding new delivery options for customers, such as next day delivery, which we now offer in five markets. 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%-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&M group sales shall increase by 10%-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 huge 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 expanding to our brick and mortar network too. In 2017, we plan to open approximately 430 new stores net.
We will move into 5 new store markets, Kazakhstan, Colombia, Iceland, Vietnam, and Georgia, and 6 new H&M online markets, Turkey, Taiwan, Hong Kong, 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 H&M stores, and approximately 70-80 stores will be our other brands, including COS, & Other Stories, Monki, and Weekday. We also see great potential for further growth for H&M HOME. In addition, we plan to launch 1 or 2 new brands in 2017. Now, before we move on to the Q4 session, just some words on current developments. Looking at 2017, the market remains challenging in some places.
In December, which is the first month of our first quarter, sales were up 6% in local currencies, sales from the 1st to the 29th of January increased by 11%. For January as a whole, though, there is a negative calendar effect of around two percentage points, which occurs at the end of the month. 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 investment in the omni-channel offering, the supply chain, and advanced analytics, make us positive toward our opportunities for reaching our newly refreshed growth targets, both in 2017 and going forward. Now we are happy to take your questions. As usual, please remember to only ask one question at a time.
Ladies and gentlemen, as a reminder, should you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Should you wish to cancel your request, please press the pound or hash key. I also must advise you that please ask one question at a time. 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 the RFID technology to the stores? Also, in terms of the supply chain, are you also planning to take it closer to you? What would be the outcome in terms of lead times, where they would move from and to, please? Thank you.
Thank you, Chiara, that was a lot of questions. You start with the online omni-channel features, that was your first question, right? Yeah.
Well, my only question would be on all the initiatives you announced, across omni-channel and supply chain, if I may.
Right. When we talk about next day delivery, for example, we're now having five markets. 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 U.K., U.S., Germany, France, and Belgium, important markets. In Sweden, just any day now?
Yeah, any day now.
Followed by other big markets during the spring. That's full speed ahead. Online returns in store, we have now in 11 markets, including U.S., Netherlands, et cetera, and big markets will be rolled out now during the Spring 2017 as well. We have scan 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&M Club, in eight markets by now, and there is the continued rollout in the spring in all markets. 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 looks very good.
The plan to roll out 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 redeem both in stores and online, et cetera. It's three to have on many different features.
Great. Thank you. 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?
Um-
To announce a proximity?
Proximity, we already source, as you know, a big part in Europe, so that's mainly for proximity reasons. Of course, for our sales in Asia and the U.S., Europe is not proximity, hence it's more we split production to make it fast. It's also, we are investing in technology, in automatization of our logistic hubs and warehouses and all connected to the technology we are investing will make us faster and more flexible. 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.
You're welcome.
Your next question comes from the line of Anne Critchlow. Please ask your question.
Hello, Nils. My question is about incremental investments. I couldn't spot any guidance in the statement. Just wondering if there are any for FY 2017. Linked to that, I know you're going to announce one or two new brands, but is there some investment still to come through cost of goods sold, for example, opening new buying teams, taking on new people there?
Yeah. When it comes to incremental cost, the long-term investment that we have had during several years now, and they increased by slightly more than SEK 300 million 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. They will be on the same level, no increase.
Okay.
What was the second question?
Whether the investment in new brands, so launching one or two new brands, whether that has an impact on cost of goods sold, the gross margin over this year.
Yeah, we will come back to that in connection with the Q1 report, if it will be, yeah, one or two new brands. Of course, as always, when we are starting up a new initiative, that will have costs, but we estimate that those costs will be within our CapEx guidance and also within the long-term investment guidance that we gave now, that there will be no increase in the long-term investments hitting the P&L.
Okay. Thank you.
Otherwise, they will be within our normal CapEx.
Got it. Thank you. Could you give a figure for CapEx guidance, please?
Yeah. The CapEx for 2017 will be somewhere around SEK 14 billion-SEK 14.5 billion, and that's always when we state it, we have to remember it's in constant currency. Also there are a lot of projects not yet signed, so it can move during the year, but that's our best estimate today. That means that the increase in constant currencies will be between 5%-9% compared to 2016.
Okay. Thank you very much indeed.
Your next question comes from the line of Rebecca McClelland. Please ask your question.
Yes. Hi. Good afternoon. Can you hear me?
Yeah. Yes, we can hear you.
Hi. 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.
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 a tight cost control. We have the possibility to adapt. Of course, if we are having a really tough quarter, then of course some of the OpEx SG&A costs are a little bit fixed over time. We have a good control, we are confident that we will have it during 2017 as well.
Great.
OpEx will be in our control.
Excellent. 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, 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 estimate
market situation-
Yeah
how they are. We deem it to be slightly negative for Q1 and also for Q2. Longer than that, we haven't really sourced and sorry, of course, there's a lot of moving parts and currency, et cetera, that we don't know anything about yet.
Right. Is there anything that sort of screams at you as to be sort of particularly negative for the sort of beyond 2Q or is it-
No, nothing dramatic more than that. To rephrase that right now, the currencies are slightly negative, of course, because due to the recent strengthening of the dollar, of course it's very volatile.
Okay. Just finally, in line with the sort of improvements in the supply chain, would you expect some sort of tighter working capital management going forward?
Sorry, could you rephrase? I didn't quite get the last question.
You talked about improving the supply chain, the flexibility and et cetera.
Yeah.
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 better sales development and then just the other KPIs like working capital should improve. Yes.
Okay. Thank you.
Your next question comes from the line of Niklas Form. Please ask your question.
Yes, good afternoon. Can you hear me?
Yes. Good afternoon.
Yes. I'd just like to clarify the new target again. Implicitly, it reads like an upgrade since one new store is not necessarily the equivalent of one new SEK in sales terms, given space conversion. I think I recall over the past, say, 15 years, we've had a like-for-like averaging about 1%-1.5%. It would be very helpful if you could help us to build up the composition to that new 10%-15% sales growth ambition, please.
As we see it, we still have the same high ambition when it comes to increase our top line. 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 a good sales development in the online channel, both on total and in like-for-like. For us, it's more or less the same that we are saying. It's the same high ambition. When online and the brick and mortar is going together more and more, then 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.
One store there, of course, is producing less than a store in a capital city in Europe, for instance. That's the reason we think it's more relevant to handle all the aspects in our go.
Just a final comment from Niklas is that this is a guidance. I would say it's not a guidance, it's a target. I think that's the difference.
Yes. No, absolutely. Thanks for that. Final question. Could you comment how your performance with Monki on Tmall is, please?
Yes, that's correct. We launched Monki on Tmall last spring, and still new, learning, but the start so far is very good, promising.
Thank you so much.
You are welcome.
Your next question comes from the line of Cedric Lecasble. Please ask your question.
Yes, good afternoon, Cedric Lecasble from Raymond James. Thank you for taking my questions. Actually, a follow-up question. This change in wording, you said you might open some smaller stores in tier 3, tier 4 China, a new concept. Should we see a reconsideration of the kind of expansion pace that you had in the physical world with your brick-and-mortar stores previously? A follow-up of that is, could you maybe give us some color of the best surprises or best results on the testing you have 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 430 this year, which is more or less the same number, big number as 2016. It grossed of around just about 500. Of course, as we always relocate and do closures and that, 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. I think that's one of the points with the rephrasing of the target, that it's not just the physical stores, it's the total top line that's important. 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%-15% target. Okay?
Sure.
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.
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.
I think we did start this Q&A session with mentioning a lot of different features that we're rolling out with full pace. Of course, the reasons that we have tried, and we have very good results. To go into detail, we prefer not to do for competitive reasons, we say over and over again, that we're very pleased with the online development for all brands.
In general, the tests we are doing, they look promising, and we can see also when we are rolling out next day delivery, it's very popular. We get an effect, and that's good. Also, the RFID test that we have done is showing good progress. 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 in so many markets and brands and channels, we can do a lot of different tests simultaneously and try and test and develop and try and test. Some things might not work, then we don't continue, et cetera. This is a part of the culture that we do business with.
The line wasn't very good when you mentioned online returns in stores and different. You said online returns to store was possible in 11 markets, that you would be testing the click and collect in the U.K. in spring. Is this correct? 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 five markets, online returns in stores in 11 markets, scan and buy in all markets, click and collect pilot, as you mentioned, H&M Club in eight markets so far, mobile payment, improved checkout, RFID, Wi-Fi. Yeah, lots of different It's a long list.
Okay. No, got it this time. Thank you very much.
Your next question comes from the line of George Nowicki. Please ask your question.
Hi, good afternoon. Thanks for taking my questions. Germany is still your most important market. Obviously like for like in Germany is down. 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 TextilWirtschaft numbers, I think they're minus 2% for the year.
I would say our performance is more or less in line with the market.
Okay. Other than that, you don't see any bigger problem? I just heard that you were just opening two more stores in spring. 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 et cetera.
We still see a huge potential in the German market, 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. There we see a huge potential as well in a more mature market. 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 we can half an hour deliveries. We have a strength in our physical store network, and there we see a potential for Germany as well, for sure.
Mm-hmm, 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? Did you implement the new IT in all the bigger markets by now, or 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 all the new markets on. We still have the first online markets on the old platform. Yes, U.K. was the first country out more than a year ago, was very successful.
Okay.
A couple of weeks ago, we transformed the Netherlands to the new platform, also successfully.
Okay. The other markets are still to come?
Yes.
Mm-hmm, okay. You have to tell us something about the new concepts.
In due time, we will.
Okay. All right. That's it for the moment. Thank you.
Thank you, George.
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, in that you opened 75 new formats last year. You're only talking about opening 75 this year, including one or potentially two new formats. 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. I think, I don't know if I agree with you, because most of the brands will continue to grow in more or less in the same pace as last year, maybe even faster. Of course, we're cautious in guiding for the total number because there's still a lot of negotiations going on. If you take COS, for example, we have now close to 200 COS stores. Very, very successful. We have them in 33 markets as of today. We opened 41 stores last year. Next year we plan to open as much or even more.
If you take Monki, we have 118 stores now in 13 markets and also have a good momentum during the year. I would like to mention also & Other Stories 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&M brand. As we also mentioned, we have H&M HOME, which we see very great successful. We have roughly 270 H&M HOME stores in 41 markets, and we added around 50 last year and plan to add as many or more for next year, and also start to look at independent, separate H&M stores.
Just to be clarified. H&M HOME is a shop-in-shop at the moment, but we are planning, as we've said, to start to open own H&M stores here most probably in the beginning of 2018.
Okay. Can you just talk a little bit more about the long-term investment? Because at nine months out, I think you said it was about SEK 275. Guidance went, I think, from SEK 500 to SEK 400, to over SEK 300, through the course of the year. Now you're saying next year the incremental amount is going to be zero 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. Will not hit the P&L on the SG&A level. Also we have a high level of investment still. The incremental part doesn't mean that we stop to invest. We have a big base of investment, and some of the investments are, of course, done. We can add new areas of investment, but it's not on top as we have had now for many years. Some of the investments have been taken. We find new initiatives. The incremental part will be, as you said, zero during 2017.
Okay.
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. 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 SEK 4.6 billion. You haven't given us the amortization number on that, I kind of assume at some stage you're going to have to be amortizing that at, what, 20% per annum or so? That's quite a big step up.
If we talk about the backbone investments, I think we have started to depreciate one third of the investments. The investment in gross, I think it's SEK 4.8 billion. One third we have taken used and started to make depreciation funds during 2016. Of course, where we are rolling it out to new markets, the depreciation will start to increase.
Okay.
We did this earlier. It's just about SEK 150 million for nine from 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. You're now sitting on, what is it, around four months of inventory. How do you get that inventory flat, say, before spring, summer? If you're already sitting on so much and there's more coming in.
Well, this is the normal business of you always. I mean, we plan, we buy new orders every day. New products come into the stores. There's a flow of products. Of course, we don't always buy for positive LFL, we plan for it, because if you don't plan for it, you will never reach it. Of course, if, as this autumn, you don't reach the plan, you have to do something about it, and that's why you have to reduce the garments. Of course, in a balanced way. There's a lot of new product coming into the store. That's why we say, apart from this excess inventory is very good and strong collections coming into the stores and every day very exciting products coming in, both online and the stores.
Okay.
Your next question comes from the line of Stephen Wilmot. Please ask your question.
Oh, hello there. Stephen Wilmot here from The Wall Street Journal. Just a question about market share gains. You talked about them, can you clarify that was online? Can you give us a sense, given that you're running an omni-channel strategy, apparently, can you give a sense of what your market share did overall?
Market share is always difficult to talk about because how you define the market, etc. Still, even though we were not pleased with 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. Even in the markets that we mentioned, big markets where we're not pleased, we were more or less in line with the market as such. Of course, our online business, we are particularly pleased with, and there we feel really that we take market share, I would say, across all markets where we have online.
Just one other thing. Just picking up on the previously mentioned point about the re-platforming in the U.K. For the full year, the U.K. figures aren't noticeably better than they had been. Are you seeing any early gains towards the end of the year, or are you still waiting for the pickup that should result from the initiatives?
No, we're clearly happy, and the customers more so with the improvements we are doing, have been doing with online and in 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, etc., which wasn't possible before because we supplied the U.K. from Sweden. This is, of course, a big improvement for the customer experience.
Of course, it's given 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. This new platform will enable us to work in a very good way and adding features that we think that customers will appreciate.
Just to clarify, those initiatives, you've done the re-platforming, which will allow you to roll out these initiatives, but they haven't come into on stream yet.
Yeah. We do a lot of these features also in the markets with the old platforms. We've been investing for many, many years now in backend systems. Now, as we discussed in connection to Q2 and Q3, we start to accelerate the rollout. As I said, we are in the middle of rollout across all markets. When we speak next quarter, you will be more updated on where we are in the process, of course.
As we mentioned earlier, like in U.K., we'll start a pilot when it comes to click and collect. I think it will start now in spring. Hopefully that will give a positive result. Then we start to plan the rollout for that.
Okay, thank you.
Your next question comes from the line of Caroline Gulliver. Please ask your question.
Good morning, everyone.
Good morning.
I had a follow-up question on the gross margin and markdown performance in particular. Obviously, in the first quarter, there's the impact from the excess stock, but that comes on top of quite a poor performance on 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? 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. Of course, that we have identified things in hindsight that we could have done better during the year, connected to the customer offering, store experience, and the supply chain. We now, as I said, methodically trying to improve, it's a difficult word to say, make improvements that will hopefully make a difference going forward in connection with, of course, very strong collections. That's the key, of course.
Thank you.
Your next question comes from the line of Michelle Wilson. Please ask your question.
Hi, good afternoon.
Hi.
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 SEK 13 billion down to SEK 7 billion, and you've taken some debts 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 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 billion. Of course, we are investing still, and the net cash has gone down. As we said, during 2016, we borrowed from banks, from the money market. We see these investments as very important, and we are thinking long term. We still have a good financial position, and we will continue to invest in these initiatives that we have been mentioning today. 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. We are following a plan that we have had for many years, and we are looking into a three-year, four-year plan.
We are following our plan, of course, always making adjustments. We don't see any dramatic things in this. We will hopefully continue to perform strong, and we are confident that we will reach our new rephrased target when it comes to top-line performance. Hopefully there, also then able to increase the profitability.
You reach the target payout by improving earnings rather than cutting the dividend?
Yeah. 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, then the Board of Directors make their decisions. We think they have done a balanced decision of 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.
Your next question comes from the line of Richard Jalife. Please ask your question.
Thanks very much. 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?
Well, as I mentioned before, it is too high, absolutely. That's why we guide for an increase of around 50 basis points. There's still one month to go, of course, in the quarter, but we've done the bulk of it. December, as you know, is the biggest month, then January. I would say that, if you remember that last year, there was, as someone said, reminded there was a 140 basis points increase for the previous year. It is from a high base, to be honest. We feel pretty confident that around 50 basis points. It could be slightly more, slightly less, of course. The rest, good quality of the product.
Your next question comes from the line of Tony Charette. Please ask your question.
Hi. Afternoon, gentlemen.
Yeah.
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 underneath the plan. We don't give out exactly the numbers, no. Sorry.
Okay, fine. Secondly, if you look at what you've actually achieved in ex currency sales growth for the last nine years after the sort of boom year of 2007 when the quota finished. You've actually averaged about 10% per annum, ex currency. Now, you're talking about increasing the sales growth level by roughly 50% on what you've actually achieved for the last nine 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 of you're open to buy, and whether 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 rephrased the target. We hope, we plan, the target is to grow the business with 10%-15%, 10%-15%. As you say, we have been above 10% in the last eight years or so, which has been in an environment which has been extremely difficult at the H&M and others. You referred to 2007, that was before [Hennes], and yes, we had very strong sales. Long term, if you go even further back, we have averaged more than 10% since the IPO in 1974.
With all the initiatives we are making, have been doing, and with the strength of H&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.
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, we are continuously doing a lot of improvement. As I said, thanks to technology and improved processes, of course, we are changing, improving things by every day. That's again, why we feel so confident.
Will it be a material de-risking of the supply chain or is this just very slight increments from time to time?
We think we do considerable material improvements. Of course, it's not about making a big bang. Yes, there are things that we can improve. Again, we do a lot of things in a very good way, very efficient way. It's about fine-tuning and improving. We have, again, I remind you that all the investment 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, processes, et cetera.
Okay, fine. Thanks very much.
Thank you.
Your next question comes from the line of Charlie Lewis Sams, please ask your question.
Yes, good afternoon.
Good afternoon.
I've got, hi, a couple on the gross margin, firstly one on the dividend. I've read and understood your rationale for changing the payment of the dividend into two pieces, 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 SEK for six months? You alluded to negative interest rates, it doesn't really seem too logical to do that.
I think when looking, it's very common in other countries, in U.S., in U.K., a lot of peers are having twice a year or quarterly dividends or even monthly dividends. For us, it's mainly two reasons. It makes our cash flow and liquidity planning much easier, it's also cost efficient from where we see how to bring back money. We have a business and the company's subsidiaries in 60 countries. That will make that easier and more cost efficient, because as we mentioned before, we have some markets where we have more or less a little bit of trapped money that's quite expensive to bring back home. There are different tax withholdings connected to financial transactions. This will ease that part when we are dividing, it will follow more our cash flow in our business. That's the reason.
As I said, I think this is the way a lot of other companies as well in Sweden will go in the future.
Okay. My first of two questions on the gross margin is, your bought-in gross margin was actually a tiny bit up in the fourth quarter, even though you said that external factors was negative. Are you effectively increasing prices to protect your gross margins?
No, we are not increasing prices. We always, as you know, try to have the best offerings for in each market, best balance of fashion and quality, price, and sustainability. Of course, currencies move, the competition is different, and there are VAT, et cetera. There are also a lot of work going on with efficiency improvements, et cetera. Again, when we guide for the external factors, those are the external factors, market conditions. Of course, we can negotiate better or we can improve our processes and source in a different way that makes us more efficient. That's what you say. It's still, as I said, flattish. It's not a big dramatic change, is it? Just to be clear, when we are looking at the pricing, of course, we are following what's happening in different markets.
Of course, we are reacting, and in some markets it might be that we are going down on prices. In some other markets, we will increase prices, and in others, we will have flattish. Of course, we are actively working more or less during each season to have the best customer offering.
Okay. Understood. 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 and January sales numbers have been quite weak, I would be a little bit surprised if you clear that much inventory.
We don't want to guide, again, I stay to the 50 basis points. That's the best estimate we can give today, we come back in connection to Q1 about what we achieve. This is an ongoing process, it depends on sales development, et cetera.
Great. One very quick one on stores. Seemed to be mixed messages 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, depends on different formats, et cetera. Space as such, the square meter or square foot, if you have it in Regent Street or if for instance in China, it's very different.
Thank you very much.
Your next question comes from the line of Thomas Schwarzenbach. Please ask your question.
Yes. Good afternoon. You talked about having a new head of the H&M Brand, and I wondered what has changed in the way H&M Brand is managed since.
Yes, it's true. We've made a slight reorganization during the year. We have a brand manager now for H&M, just like we have for all the other brands, COS and & Other Stories, et cetera. More on that, nothing more to tell you that. We are of course, working very focused with the H&M Brand.
Okay. There's nothing that's changed in now focusing more on certain things than was the case before?
Nothing worth mentioning, I would say. Of course, their task is to grow H&M in a sustainable, profitable, and balanced way. Hopefully, we will see good results going forward.
Okay. Thank you.
Your next question comes from the line of Eric Jagerson. 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're opening a lot of new stores, obviously it appears to us that this is a big drag on your implied like-for-like globally. How are you performing with the older stores? How long does it take before the new stores are up and running at profitable level? How is online doing in those markets?
Well, we do say that the U.S. and China are very important markets for us, we are not pleased with their top-line development during the year. We still see big potential for both markets to continue to grow. If you start with China, we have grown extremely fast, as you know. We've launched the first store in China as late as 2007, I think. Now it's, in terms of stores, one of the most important markets already. I would say that it's been during the full year, we've talked about China not performing in top line as well as we'd planned. We have seen improvements from November and December and January, albeit, of course, we have 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, et cetera. According to the statistics we get from Retail Metrics, et cetera, we do more or less as the market. We have a very strong brand in the U.S. and very well appreciated by customers. We still get very good lease terms, we will continue to expand. Of course, especially in a market where a lot of other brands are closing down, it opens up interesting opportunities. As we say, very flexible contracts. Of course, together with the online and omnichannel, we still look very positive on the U.S. business. Of course, there are a lot of uncertainties right now with the present government. Okay.
When it comes to KPIs, payback, et cetera, they are very good, new stores actually have better terms than the average and in group, I can say.
Okay. Thank you.
Okay.
Your next question comes from the line of Grace Bowden. Please ask your question.
Hi. I was just wondering, I was looking through the results, it's a little bit scant on detail in terms of the U.K. performance. I was just wondering if it was possible to get a little bit more detail on the U.K. in terms of like-for-like sales and online sales as well.
No, I'm sorry. We are in 64 markets, we can't go into detail in every market. We are pretty pleased with our performance in the U.K., which, as you know, is also very challenging. After the Brexit, it's also a bit uncertain what's going to happen. Of course, the sterling has depreciated, it's put a lot of pressure on the buying costs for everyone in the U.K. We have a strong position and a strong team in place, our assessment is we do better than the market itself.
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, because 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 Brexit and the current fluctuations that 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. We are very long-term. Actually, we see perhaps even the weakening of the sterling as an opportunity.
Can you talk to me in a bit more detail about what kind of opportunity it would present in that case?
It's going to be tough for the general market as such. We are not so dependent on the U.K. market. That's just because we have so many different markets as well.
Okay. All right. You're more protected in terms of your international state. That makes sense. 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 can provide on your Oxford Street outlets? Are 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. My last question would be your outlets in Westfield Stratford. I know that they've taken on a store and then essentially there are two stores in that state now. Are there any plans to 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, we opened around 500 stores gross last year across all markets. On top of that, a lot of refurbishments and a lot of projects. As you mentioned, we have the new brands that we are working on, as well as all the other brands. I'm sorry, I can't give you any more details. We are, of course, increasing the store optimization, which means, as Jyrki said, closures and adding space, et cetera, and perhaps changing banners in some of the locations. We have a lot of opportunities there with all the different details now.
Okay. All right. Thanks very much.
Welcome.
Your next question comes from the line of Andreas Enders. Please ask your question.
Sorry, no further questions. Thank you.
Okay. Thank you.
Your next question comes from the line of George Nowicki. Please ask your question.
Yeah, just one quick follow-up question. You were mentioning the expansion plans of all your different brands, but you never mentioned Cheap Monday. What's the future of Cheap Monday going to be like?
Cheap Monday, it's a wholesale brand, first of all. We did say that we will not compete with performance in 2016. We have now a new brand manager for Cheap Monday and we, of course, hope that that will make a difference. There is, of course, a potential also for Cheap Monday.
Okay, you're going to focus on the wholesale business for Cheap Monday?
Yes.
Okay. All right. Thank you.
Yes.
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&M store sizes?
More or less in line, I would say.
Just another one on space. With all the H&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 stores or connected to new premises. For sure, there will be both of them.
Okay. A broad mix, maybe half and half?
I don't have that kind of a detail. Sorry. We have to come back. We can come back with that later on.
Okay, thanks.
Your next question comes from the line of Paul Washington. Please ask your question.
Good afternoon.
Good afternoon.
Well done on the numbers today.
Thank 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. With the various measures that you're investing in the business and the supply chain efficiency, is there a target inventory reduction relative to sales or a target stock turn, or is there 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.
Of course, we are always looking into how to be more efficient and not to tied up too much money in the stock. We have to remember that we have a strong expansion, both in the brick-and-mortar and online. We are broadening our online shop, the assortment is broadening. Of course, we are looking into always having a good balance with the stock turnover, how much money we are tying up in our inventory. At the end of the year, as we say, we see the stock a little bit too high, and that will cause some extra reductions, markdowns during Q1 this year. Then it's more or less dependent on our top-line performance. We see, apart from that we have a little bit too garments within Q4, we see that the composition of stock is good.
For sure, as Nils also said, we are working with the supply chain. We are looking into different efficiency things, how we buy, how we source, et cetera. Of course, we are working on it, and we feel that we are on 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 2016.
Also, if I may add, during these seven, eight last years, we have invested, as you know, materially, and we've gone from maybe 24 markets to 64. We've gone into the Southern Hemisphere in kind of pure multi-brand, multi-channel. It's much more complex, and we're still in the buildup phase in a way. Then, of course, don't forget that we have improved the invoicing process. Around 5% of inventory value is more an invoicing effect compared to two years ago.
Thank you. Thank you very much.
Welcome. Okay.
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 three-month earnings call in March. Bye.