Ladies and gentlemen, thank you for standing by, and welcome to the full year results for 2015 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 and one on your telephone. Please be reminded to ask only one question at a time. I would like to advise you the conference is being recorded today on Thursday, January 28, 2016. I would now like to hand the conference over to your speaker today, Mr. Nils Vinge, Head of Investor Relations. Please go ahead.
Thank you. Hello, everyone, and welcome to this telephone conference on location of H&M's full year results 2015. Our CFO, Jyrki Tervonen, is with me today, and we will be happy to answer your questions after the presentation. You will find the presentation slides to this telephone conference on hm.com. Please look at the slide 2015 in brief. 2015 was a very expansive year for the H&M Group. We opened 413 new stores net, as well as 10 new online markets, and we successfully established stores in five new markets. We continued developing our customer offering based on the idea of giving customers the best combination of fashion, quality, sustainability and price. Among other things, we made substantial long-term investments in view of the opportunities presented by the growing digitalization in our business, and we continued broadening our product range.
With well-received collections from all Group brands, we continued taking market share in a highly competitive market. Please turn to the slide, sales. Sales developed well for all our brands, H&M, COS, & Other Stories, Monki, Weekday, and Cheap Monday. For the full year, sales including VAT totaled SEK 210 billion, an increase of 19% in SEK and 11% in local currencies. Looking at the fourth quarter, sales were good in September and October, but in November, sales were negatively affected by unseasonably mild weather in many of our large European markets as well as in North America. Sales including VAT in the fourth quarter increased by 9% in local currencies and 14% in Swedish krona, amounting to SEK 56.5 billion. Looking at sales development in some of H&M's largest markets during 2015, please turn to the slide, sales per market. Germany is still the Group's largest market by far.
With almost 450 stores and approximately SEK 37 billion in sales last year, H&M is still growing in Germany. The U.S. is H&M's second largest market with 415 stores. Total sales for the year reached SEK 25.1 billion, an increase of 18% in local currency and 45% in SEK. Canada and Mexico also developed well. In the U.K., which is the third largest market of the Group, sales were strong, and in neighboring Ireland, very strong. China was H&M's largest expansion market again last year with a net addition of 83 new stores. Sales grew 16% in local currency and 41% in SEK. Elsewhere, development for H&M was also strong in Southern and Eastern Europe. With a good performance all in all last year, H&M continued to gain market share and strengthen its market position further. Now to look at results, please turn to the next slide.
Gross profit in the fourth quarter increased by 9%, corresponding to a gross margin of 57.5% compared to 60.4% a year earlier. Markdowns in relation to sales were higher than in Q4 2014, mostly due to increased price activities in November. The negative effect year-on-year was approximately 50 basis points. The combined effect on the purchasing costs from the external factors remained negative. This is mainly due to the strengthening of the US dollar. For the full year, gross profit increased 16% to SEK 103 billion, corresponding to a gross margin of 57% compared to 58.8% in 2014. Please turn to the slide, SG&A. Cost control in the group remains good. In the fourth quarter, selling and administration costs increased by 16% in SEK to SEK 20.9 billion. In local currencies, the increase was 12%.
The increase in SG&A is mainly related to the expansion and the long-term investments within IT and online and to the broadening of the product range. SG&A for the full year 2015 increased by 20% in SEK and 12% in local currencies. To look at profits, please turn to the next slide. Profit after financial items in the fourth quarter amounted to SEK 7.1 billion. Developments in the fourth quarter were mainly due to the effect of the strong US dollar on purchasing costs and to the unseasonably mild weather in November, which dampened sales and resulted in increased markdowns. Costs for long-term investments increased by approximately SEK 150 million in the fourth quarter compared to Q4 2014. For the full year 2015, the increase was SEK 600 million. Profit after financial items increased by 5% in the full year to SEK 27.2 billion, compared to SEK 25.9 billion in 2014.
The increase in profit for the full year 2015 means that the H&M incentive program, which is for all employees, will receive another SEK 75 million. This allocation to HIP was expensed in the fourth quarter 2015. To look at net profit, please turn to the slides, sales and profits. Net profit was SEK 5.5 billion in the fourth quarter, compared to SEK 6.2 billion and equaling earnings per share of SEK 3.34 compared to SEK 3.76. For the full year, after a tax rate of 23.3%, net profit increased to SEK 20.9 billion from SEK 20 billion. Earnings per share increased to SEK 12.63 from SEK 12.07. Now for some other key figures, please turn to the slide, key data. Stock in trade on the 30th of November amounted to SEK 24.8 billion, an increase of 28% in SEK.
The increases in the stock in trade is mainly due to the strengthening of the US dollar and to our expansion, but also to the negative effects of the warm autumn on sales of winter garments. Thus, the stock in trade as per the 30th of November, contains a larger volume of winter garments than planned. This is expected to result in costs for markdowns increasing by one to two percentage points in relation to sales in the first quarter of 2016. Other than these factors, the level and the composition of the stock in trade are considered satisfactory. Cash flow from current operations was SEK 24.1 billion, more or less unchanged from last year. Investments in terms of CapEx totaled SEK 12.1 billion for 2015, an increase from SEK 9.4 billion in 2014. Investments covered mainly new stores, refurbs, online, and logistics.
For 2016, CapEx is expected to be at SEK 13.5 billion-SEK 14.5 billion. The financial position of the H&M group remains strong. Liquid funds were SEK 13 billion compared to SEK 16.7 billion. The board of directors will propose to the annual general meeting a dividend of SEK 9.75 per share. Return on equity was 38.1%. Our expansion continues to create new jobs. In 2015, the H&M group created 16,000 new jobs. Today we are more than 148,000 employees worldwide. That equals an average number of full-time employees of 104,634. Now for some comments on expansion. Please look at the slide, store expansion 2015. H&M's strong expansion continues. We opened 413 new stores net in 2015. 249 of them were opened in the fourth quarter. Largest expansion took place in existing markets, with China and the U.S. being the largest expansion markets again last year.
We added five new markets, Taiwan, Peru, Macau, India, and South Africa. Customer reception has been very positive in all markets. Please turn to the next slide. At the end of the year, the H&M group had 3,924 stores across 61 markets and all brands included. Our growth target remains intact to increase the number of stores by 10%-15% per year with continued high profitability. For 2016, we plan to open 425 new stores net. Most of the expansion will take place in existing markets. We also plan to add three new H&M markets this year, New Zealand, Cyprus, and Puerto Rico. To look at the other brands of the group, please turn to the next slide. All our brands develop well. In 2016, expansion will continue for COS, & Other Stories, Monki, Weekday, and Cheap Monday.
Main expansion focus will be on COS, which will add further five markets again in 2016. COS had 153 stores in 30 markets by year-end. In parallel with the group's strong store expansion, e-commerce is being added in more and more markets globally. Please turn to the next slide. H&M's online store, hm.com, opened in 10 new markets in 2015. Customer reception has been great in all of these markets. H&M is available online in 23 markets. We are very pleased with the development of online sales so far. We continue investing in order to increase availability and service to our customers. In 2016, the plan is to offer e-commerce in a further nine existing H&M markets. These markets are Ireland, Japan, Greece, Croatia, Slovenia, Estonia, Latvia, Lithuania, and Luxembourg. We also continue to broaden H&M product range.
Examples of ongoing long-term investments include H&M Sport, as well as H&M's extended shoe range, and in 2015, the new beauty concept, H&M Beauty. Please turn to the next slide. H&M Beauty has got off to a very good start since its launch began in July 2015. H&M Beauty is already available in around 900 stores across 41 markets, as well as online. The rollout will continue this year. For 2016, the plan is to add H&M Beauty in a further 300 H&M stores. Looking ahead, we're also developing other new brands, which we will be able to communicate more on a later date. Now, before we move on to the Q&A session, just some words on current developments. In December, which is the first month of our first quarter, sales were up 10% in local currencies.
Sales in January are expected to increase by 7%, including a negative calendar impact effect of two percentage points due to one more Sunday compared to January 2015. We follow market developments closely. For 2016, we see many opportunities, we're also well aware of the challenges that exist. We firmly believe that our customer offering and our investments will lead to increased market share and strengthen H&M's position further. In 2016, our long-term investments will increase by around SEK 600 million, which is about the same as the increase was in 2015. Meanwhile, if we look at market conditions regarding sourcing, the US dollar has continued to impact purchasing costs. For the first quarter 2016, the strong dollar will have the same significant negative impact on purchasing costs as for the fourth quarter in 2015.
Thereafter, the negative impact is expected to gradually diminish with effect from the second quarter 2016. Even though the strong dollar will result in higher purchasing costs, H&M will make sure it has the best customer offering in each individual market. Now we're happy to take your questions, as usual, please remember to only ask one question at a time.
Thank you. As a reminder, if you would like to ask a question today, it's star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. To ask your question today, it's star and one on your telephone, be reminded that it's one question at a time. Your first question comes from the line of Paul Segers. Please go ahead.
Yeah. Good afternoon, everyone. My question is on the gross margin. Without obviously giving targets, you've given some helpful insight into the movement. I'm just trying to get a sense for your first quarter, given the impact from the stronger dollar, also the increased markdowns. Would it be fair to assume that the movement in your gross margin in Q1 in total could be worse than what you saw in Q4?
As you said, we don't comment on the gross margin, any guidance. If we're looking at the purchasing costs, they are maybe slightly even higher for Q1 than it was in Q4. That's some kind of a guidance. They were more or less at the same level.
You have the extra markdowns as well versus the first quarter of last year, right? That's an incremental-
Yeah, exactly.
Yeah.
Give a guidance between 100 and 200 basis points. Still more or less five weeks of the quarter left, we will see where it ends up. Of course, we see that it's still many markets which are very driven by reduced garments.
Right. Then, I guess, as you say, incrementally it becomes less of a drag through from Q2 onwards. When does it fully annualize? When would you say, all else being equal, the gross margin, I guess it depends on price investments as well, I guess, but when are we through the worst of it? Would that be only from Q4 in the current financial year?
Yeah. Theoretically, the US dollar, we don't know where the US dollar will end up during the year, with these levels, it should probably be around Q4, maybe somewhere there.
Okay. Thank you. Very helpful.
Thank you. Your next question comes from the line of Jamie Merriman. Please go ahead.
Good afternoon. Thanks very much.
Afternoon.
My question's just about the CapEx, both the guidance and also what you reported this year. At least in SEK, it seems to be growing much faster than sales growth and space growth. I was just wondering if you could give us some idea of what that looks like in constant currency terms, or if there's any reason why it's growing faster.
Yeah. CapEx in SEK, it seems like the increase is around 28%, but in local currency, it's 16%. Looking just, if you go to the cash flow statement, that's a certain time of a snapshot. You can't directly compare the increase in CapEx with the increase of sales because this year the opening schedule was quite different from the last year. We opened up 249 net stores in Q4, and in November, I think we opened up almost 125 stores. Of course, that will give an, compared to last year, a top-line effect as well if we are late in the quarter with the openings.
Okay. That's helpful. Thank you.
Thank you. Your next question comes from the line of Jörg Nawrocki. Please go ahead.
Good afternoon. My first question would be, last year you announced a new concept for this year. Can you give me, us, any details on that?
New concept for this year. You mean that we are working on new brands and new ideas?
Yes. On a new brand. It's going to be a new brand like Yeah.
Unfortunately, we don't have anything else to add right now. We will come back to that as soon as we have more to tell you.
This will see its first opening this year?
No. We said we will come back with more information. We haven't said anything about when we will launch it.
Well, because Mr. Johansson said in 2016, like before 2017, that's going to happen. You're not sure yet now?
That might be a misunderstanding.
Okay.
I think he said that we will come back with more information later, maybe 2016. That's what I think he said.
It's still a maybe?
Well, we're working on it, but I hear that he has said, 2017, it's likely to happen.
Okay. All right. Germany, plus 2%, that's very low compared to previous years. Does that mean that growth in Germany is somehow coming to an end?
No, I don't think so. We still add new stores. We still see potential to grow, of course, we have a much larger market share in Germany compared to many other markets, I think Germany has been a pretty tough market in general. That's what I could say.
Okay.
We still see potential. We're very happy with the German performance.
Okay. The other concept, like Cheap Monday, didn't open a single store. Weekday even closed stores. Still, you do see potential for growth there?
Absolutely, yes. We see potential for all our brands.
How come they're not growing?
Well, we continuously look after the profitability and they are pretty early still in their development stage. We've highlighted COS and & Other Stories, of course, but we're also happy with the other brands. There are still things that we need to improve before we really accelerate them.
Okay.
Cheap Monday, for instance, it's more as a wholesale. I think we have, like, is it four or five stores?
Yeah.
They're more like showroom stores there.
Brand buildings.
Yeah, brand buildings. Showroom stores. It's more of a wholesale company.
Okay. All right. In the last report, Mr. Persson said that online business is starting to pay off. In this report, there's nothing like that is mentioned. Can you give me, us, any idea about how profitable the online business itself is?
We are very happy with our online development. We don't, I'm sure you know, we don't comment per market or per concept or per channel. We are happy with the profitability. We think it's more interesting to talk about the total operations, the multi-brand, so to speak. We definitely see that when we have online and bricks-and-mortar physical stores together, it's really interesting. That's, of course, the reason why we have accelerated the rollout of our online store. As I said, we rolled out 10 new markets last year. We plan to add another nine at least this year.
We continuously make a lot of improvements on the online customer offering in terms of availability, shipping, et cetera.
Last time you said you were thinking about launching click and collect. Is that going to happen in the stores?
I said we are looking into it, but we have not taken any decision to launch it yet. That's one of many features we look at. Yes.
Okay. All right. Thank you.
Thank you.
Thank you. Your next question comes from the line of Anne Critchlow. Please go ahead.
Hello, my question is about space expansion, because the 425 stores, I think is the most you've ever done in a year. I'm just wondering how you're thinking about that for the medium term. Is it the maximum you could ever do? Do you think you'd extend it? Does there come a point where perhaps online becomes more important as a growth channel and space is less important? How are you thinking about that?
We still see great potential for physical stores, we believe we can grow with this range for many years still. We have a very interesting pipeline. No, I think that's why we've kept the growth target of 10%-15% stores per annum for now. We see the combination of physical stores and online. Who knows about the very long future, but in the midterm future, we definitely see potential to grow the physical stores for many years.
Okay, thanks. As a follow-up, are you concentrating on any particular type of store format for the H&M concept in terms of store size? Are there any developments there you'd like to talk about?
Yes. Last couple of years, the store sizes have actually increased, mainly as a result of the fact that we've added new concepts, as you know. The store size has increased slightly over the years and will become slightly larger even in 2016 compared to 2015.
Can you tell us in sq m how big perhaps a target store might be or a typical store?
It's above 1,500 square meters now.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Cédric Le Cals. Go ahead.
Yes, good afternoon. Cédric Le Cals from Morgan Stanley. I have a follow-up question on your online evolution. What prevented you from scratch to develop immediately a click-and-collect concept for your online operations? What would be the catalyst for going to click-and-collect? You said you were considering it. What are the pros and cons for you of this system? Thank you.
Well, it's interesting. Especially from the U.K. market, we had a lot of questions about click and collect, and I think definitely it's something worth looking into. However, there are so many other interesting things as well, as I've been saying. For us, of course, the first priority is to expand the online and have it in all our markets, and that's the top priority, and we are busy with that. At the same time, there are lots of other things we can do as regards to customer offering and broadening the assortment and, as I said, delivery times, et cetera. Click and collect is definitely there, and as with everything, there are pros and cons. I don't want to go into details exactly.
Thank you.
More questions?
Thank you. Your next question comes from the line of Richard Jaffe. Please go ahead.
Thanks very much. Looking at the gross margin erosion, we're seeing or hearing of average unit cost declines, both cotton and labor pressures have softened cotton down about 20%. I'm wondering if you guys have seen any offset to the gross margin pressure you've described as average unit costs start to decline.
Well, if you do the pure mathematics and apply the strengthening of the US dollar, our gross margin would have taken a much bigger hit than it had. Of course, there are things that offset the US dollar pressure. Far from offsetting it totally, as you can see. There are things that go in the other way, just like you said, cotton, and there are some other things as well that have helped us slightly.
Thank you. The beauty business, looking forward, how big do you see that as a % of the total business? Or how strong a presence do you anticipate it will have in an average store?
It's difficult to say, but it's been a very broad launch. We've launched it in more than 900 stores across 41 markets, and we will continue to roll out another 300 stores this year. We are very happy, I would say, with the launch. Of course, it has interesting sales density, et cetera, and it's been very well received by the customer, most of all. I think we have something that we can improve further. I don't want to speculate in how much bigger share of sales or anything, but it's a very important complement.
I understand. Thank you.
Thank you. Your next question comes from the line of Dana Telsey. Please go ahead.
Good morning, everyone.
Good morning.
Good morning. Can you talk a little bit more about the new concepts and what you're seeing, where you expect the growth to come from, and how they're changing? Lastly, you've added some new categories, whether it's beauty, whether it's sport. Are we going to see the continued expansion in more stores, and are there more new categories to come? Thank you.
Okay. The first question, I think, was about brands, right? Something like COS and stories. Is that what you-- Yeah.
Exactly.
Yeah. We are very pleased with the development of our new brands. First of all, COS, which really has had another very strong year. We have now COS in more than 30 markets and continue with another 5 new markets this year coming up. Yes, we're very pleased with the development. It's actually already the second-largest fashion brand in Sweden and has a very strong momentum. When it comes to & Other Stories, we are also very pleased. Has also started very well. It's not profitable yet, and that wasn't the plan because it costs a lot, it takes time to invest to develop a new brand. We see very interesting potential for & Other Stories as well. For the other brands, they're also doing well, even though, as we said before, they're not expanding as fast.
We believe that there is potential for each of them, and we're working on each of them. On top of that, as we discussed, we are working with some other new ideas, which we hope to come back with more information later. When it comes to concepts within H&M, we've launched, as I said, H&M Beauty very successfully, and hope that will become even stronger going forward. Talking about beauty, we will launch a conscious or sustainable collection this year, which is very interesting. When it comes to shoes, also doing well. We have today around 120 stores in 26 markets and online. Sports, also doing well. We have sports in 2,600 stores. Of course, see a great potential going forward. Of course, we have other things that we haven't disclosed yet.
Thank you.
You're welcome.
Thank you. Your next question comes from the line of Chris Chaviaras. Please go ahead.
Oh, hi guys.
Hi.
The magnitude of the markdown that you are guiding to for the first quarter is actually a little larger than any other retailer so far, both in Europe, the U.K., or in the U.S. has announced. The reasons have been well documented indeed. What is the reason behind that? Were you planning for stronger growth and hence the weather created a bigger problem? More interestingly, longer term, does this change at all your thinking of how production and sourcing is happening?
I don't know exactly how our competitors and what they have announced when it comes to markdowns for the coming quarter. For us, as we state in the report, due to unseasonable mild or warm weather in the autumn, which also continued in December in many big markets, we ended up with too many winter garments in our stock. Now we have reduced them, and it might be that we are a little bit more weather-dependent when it comes to garments compared to some of the competitors. That could be the reason if you know that other retailers are reducing less. It might be that we are having a little bit more when it comes to warm outdoor, heavy knitted, et cetera. The guidance is as stated, 100 to 200 basis points for increased reductions in Q1.
Any steps maybe to make the production more flexible or quicker, or you treat that as a one-off at the end of the day?
I think we have a very flexible sourcing model, and we're getting in garments every day, and we can adapt the situation. Of course, we are planning for normal weather. When there are major deviations from normal weather, of course then, a fashion retailer might end up in a situation where you have certain parts of the collection where you had slightly too high stock.
Okay. Thanks for that. Second question on pricing. Have you seen at all any change in the industry thinking about pricing? Have you seen any of your competitors raising prices, or have you heard of any inclination to increase prices?
Yes, we have seen competitors increase prices, we've seen competitors have kept their prices flat, and we've seen competitors reducing prices.
Okay.
Yeah, we are doing price analysis regularly, and we see on several markets, very good competitors, some of them are probably decreasing prices as well. It's a mixture depending on the market.
I see. I guess also your strategy will be a mixture as well.
Of course, as we said, we will follow what's happening on the different sales markets, and we always start from our customer offering to ensure that we have the best customer offering. For instance, when the Russian ruble was depreciated very much, a lot of competitors increased their prices, and so did we, but less than the competitors. We strengthened our price position and our customer offering in that case.
Okay.
Yeah.
That is clear. Last one. The new long-term investments that you're doing, can you give us a bit more color where they are allocated to? Not in terms of gross margin, as you know, in terms of, is that more marketing? Is that more IT? The store refurb, what is that? Also, because I've seen the capitalized expenditures have increased by around SEK 1 billion.
Right.
Is this related to these long-term investments? Over what period of time do you depreciate that?
Right. To start with the IT, as you said, that we take on the balance sheet is SEK 1.1 billion this year. It was SEK 868 million last year. The depreciation time is 10 years for this. We have depreciated SEK 77 million this year. On top of that, we also take a lot of cost directly on the P&L. Those are the long-term investments we refer to, that the incremental investments that were SEK 600 million in 2015 and plan to be around SEK 600 million again, another increase, 2016. It's mainly running online, IT, new brands, new concepts, just like before, and new initiatives. Yeah.
Okay.
We spread more or less 50/50 on COGS and SG&A.
Okay. Clear. Thank you very much for that.
You're welcome.
Thank you. Your next question comes from the line of Geoff Lowery. Please go ahead.
Hi, team.
Hi, Lowery.
Hello. A high-level question, please.
Sure.
Obviously, you've never run the business with an operating margin target. Equally, your margin has compressed a lot. Is there any sort of level at which you'd seek to defend profitability more than you've done, in the sense that in the end, on these kind of trajectories, it could challenge your ability to sustain the dividend and/or the kind of CapEx levels that you are finding ways to invest? Just interested in how you think about that relationship.
Right. You're absolutely right that, of course, it's a balance of everything. Again, that's why I always stress that the growth target is still 10%-15% new number of stores per annum with continued high profitability, because, at the end of the day, we need to be profitable to be able to invest and continue to invest, and to be sustainable, and to continue to pay dividends. There is no specific margin target. That's true. Of course, it's always a balance of long-term, mid-term, and short-term.
One has to remember that we are facing a situation where we have a tough pressure from the US dollar, and we don't know where the US dollar will be within one or two years. Today, it's against us and our thinking when we are a long-term thinking company. Also, we are in a period for many years now, and it will continue still the high investment levels that we have in the online business, IT. Also, we have launched COS & Other Stories and et cetera. I think, with this long-term view, if we didn't have that, if we were trying to maximize each quarter or each year, then probably we wouldn't have COS and & Other Stories. I think, for this time of this era, we are in a situation where we are having pressure from the US dollar and also high investment levels.
Thank you very much.
Thank you. Your next question comes from the line of Adam Cochrane. Please go ahead.
Good afternoon, guys.
Good afternoon.
Two questions from me. In terms of, firstly, the stock in trade that you said comprised more winter garments than you'd like in Q1, has that all been cleared through as at the end of January? The difference between the 100 and 200 markdown effect is really just what is the usual course of business for trading in February, is my first question. Just to confirm that you've cleared through all of that stock. Related to that, given that you are clearing stock, assuming some discount there, the sales growth in February, sorry, in January, haven't seen February yet. In January, looks to be quite low given the fact that you were clearing the stock. I suspected that that would lead to a higher sales growth. The second question is really just a clarification.
When you talked about SEK 600 million incremental investment, you just, I think, indicated that some of it was capitalized and some of it is going through OpEx. Is that correct, that SEK 600 million is split between those two buckets? Thanks.
With the last one, it's going through the income statement. That's not capitalized. It will hit the P&L, the SEK 600 million.
Okay, perfect. Thank you.
Yeah. Coming back to stock in trade if we have cleared out everything now in January, no, we haven't. As I said earlier, we see still quite heavy discounts on several markets, a lot of reductions. We still have five weeks to go. We don't know exactly where we will end when it comes to reductions. As it's stated as a share of sales, of course, the top line as well will give different answers when it comes how many basis points, compared to last year. January sales, we have to remember that we are meeting a strong January from last year. I think we did the +14% last January.
There is a calendar impact, the underlying run rate is around 9%, it was 10% in December. It's lower, but not that much lower.
It's lower. I think that's the main reason, it's a tough competition when it comes to reduced levels. I think, the 7%, if we take back the calendar effect of two, it's nine, it's pretty okay when we are meeting a 14% increase. Of course, we are not happy. We have planned for more. We have planned for more, considering the circumstances, even though a little bit, we are satisfied.
Okay, thanks.
Thank you very much. Your next question comes from the line of Richard Chamberlain. Please go ahead.
Thanks. Afternoon, everyone.
Good afternoon.
Afternoon. Just got a question back on the comment where you say the negative impact on purchasing costs should gradually diminish with effect from the second quarter. Just wondered how you are finding the capacity situation for sourcing in Asia. Is that going to help you offset more of the dollar sourcing pressure gradually? I guess I am just trying to get a sense of how much the gross margin is naturally going to improve because of dollar-euro stabilization, or how much you can renegotiate with suppliers. Thanks.
Well, as I said before, of course, there are things that offset the dollar pressure. I don't want to go into detail. Of course, we try as best as we can. Again, remember, we are long-term, and we have long relationships with our suppliers, and we try to work together.
Okay. Would you say, I guess follow up, Nils, would you say you are being less aggressive in terms of
renegotiating than some other companies, or is it that H&M is very efficient to start with?
I think it's more that. To say that you can improve your negotiations, you imply that you didn't negotiate well last year.
Right.
Yeah, you're right.
Yeah. Okay. Just a quick other one on the balance sheet. I see there's a tax receivable line this year, and I just wondered what that relates to. Jyrki, maybe you can comment on that.
Yeah, of course. It's simply that we have paid slightly more preliminary taxes, so we will get it back, hopefully soon. We have paid more preliminary taxes.
Okay. It's a one-off-
Yeah, one-off
probably for this year. Okay.
Yeah.
Okay. Thanks.
Thank you. Your next question comes from the line of Fraser Ramzan. Please go ahead.
Hi, it's Simon Irwin at Credit Suisse and Ned.
Hi, Simon. How are you?
Could I just ask about OpEx, particularly through 4Q, which looks surprisingly low, considering how many stores you opened right at the back end of the year, and given obviously pre-opening costs, et cetera. I know the way that you run your accounts, that you do year-end balancing and provisions and things like that within 4Q. Are there some kind of lumpy elements, or is that the kind of genuine run rate?
I think you're right. It is surprisingly low, but I think there's many reasons. Number one, that my colleagues are very cost-conscious in the organization. Second, I think it's important to also state that HIP allocation was more last year. There is a positive year-on-year, which affects 1 percentage point, so to speak.
Yeah. Even outside of that, it still looked like a relatively-
Absolutely
low number.
You're right.
The other question is just on looking at the balance sheet over the last couple of years. The amount of capitalized development expenditure has gone up quite sharply at SEK 3.2 billion versus SEK 2.2 billion. Can we expect that to start being expensed rather more significantly in the year ahead, and is that going to influence the depreciation amortization charge?
You're absolutely right. As we start to roll out these new systems, we start to depreciate. Of course, that will increase depreciations going forward. As I said before, the depreciation time is 10 years, and this year we depreciated SEK 77 million only, and that will, of course, increase going forward.
Okay. Depreciation as a percentage of sales is likely to go up noticeably in the year ahead.
Yes. As a result of this, absolutely.
Okay. Just finally, in terms of the excess inventory that you've kind of had at the end of the period, is it all in the markets where you can sell it through? Or is it kind of stuck in various markets, and is it efficient for you to move that inventory around the business to clear it out?
As a global retailer, of course, one of the advantages is that we can shift garments or products to different markets. Of course, we do that. As you said, it's also costly way to do it. It's a mix of those that we try to move, but also clear in each market. We don't see this as very dramatic, as Jyrki said. This is a one-off as a result of the extraordinary demand, especially in November. Then we will clear it out and move forward.
Okay. Just finally on the development costs. Without asking you for hard guidance, is that something we should expect to continue to be within the P&L for several more years to come, or can you see a kind of finite element to these programs which will naturally roll off at some stage?
To be honest, I don't know, but I hope we will continue to see them because each of them are very interesting, with very interesting business cases. Of course, all of them, hopefully, they are starting to pay off, and we already see the second derivative is negative, so to speak, right? Because we actually had SEK 880 million in incremental cost two years ago, and now we had SEK 600 million, and now SEK 600 million again. In a way, you can say that it's a slowdown.
Sounds good. All right. Thank you very much, Nils.
Thank you. Your next question comes from the line of Rebecca McClellan. Please go ahead.
Hi, everyone.
Hi.
Hi. I just wanted to ask how you saw the U.K. market, I guess, in 2016, and what you saw as the main challenges and opportunities there.
Right. As I stated in my presentation, we are quite pleased with our development in the U.K. and very pleased with Ireland.
Okay.
Of course, we see still a great potential for us to grow, and I think the U.K. will actually be among our top expansion markets in 2016.
Okay.
I also like to mention that we made the first transition in the U.K., the online transition from the old platform to the new platform, and it has been very successful, and it also improve the availability and the service for our customers in the U.K. It has been very, very well received.
Okay. Do you have any similar plans with other online developments? I know you spoke a little bit about Click & Collect.
Absolutely. This transition is a huge challenge. We're very happy that we were so successful in the U.K. Of course, we have other transitions in front of us with our old online markets like Germany and Nordics, et cetera.
Okay. All right. Why did you pick the U.K. market to be the first?
Oh, I can't go into details, but you have to choose someone.
Sure. Yeah, there are several reasons. It's about available stock, the DC locations, et cetera. It's a combination of different underlying things that made it suitable to start with U.K.
Yeah, that's one thing I forgot to mention. We actually, as Jyrki said, we have opened a completely new distribution center for online in the U.K.
Okay. Okay.
Previously, we shipped it from Sweden. That's why the lead times were quite long for the U.K. customers. Now it's a lot better.
Okay. When did that happen?
During the autumn.
Okay.
I think we started actually end of the autumn, November or December or somewhere.
Okay. Where's that distribution center located?
My knowledge on the U.K.-
Let me check with Jyrki. Yeah.
I'm sure you can find it. Try Google.
Okay. I shall do. No worries. Thank you so much.
Thank you. Your next question comes from the line of Erik Olsson. Please go ahead.
Thanks for taking my question. You have had very good cost control on SG&A on a like-for-like basis through a period of weaker demand here. If we assume low like-for-like growth going forward, but still positive, let's say 1%-2%, do you think you can continue to keep SG&A growth on a like-for-like level below or at that level?
In the long term, of course, it's hard to keep the like-for-like cost development in comparable stores with underlying inflation, et cetera. In certain periods, maybe we will succeed, but in the long term, of course, we need to find more efficient ways of working that we are looking into, and of course, a like-for-like development. Safe development.
All right. Thank you.
Thank you. Your next question comes from the line of Chiara Battistini. Please go ahead.
Thanks very much. I've just got a couple of follow-up questions, really. Firstly, just want to clarify, are you saying that all depreciation is over 10 years or that you're including IT, which seems.
IT
Okay. Fine. Seems quite long. Secondly, it's very good of you to give us the average new store size. Can you give us any context here? What is the average existing store size in your estate?
We've stated in the past that it's been between 1,200 and 1,500 sq m, and the new ones are above 1,500.
Great. Thanks.
Average. There's a huge spread from a couple of hundred sq m to 6,000, I think is the largest.
Yeah. On the last couple of conference calls, you sort of raised the prospect of perhaps reconsidering the way you were guiding on expansion. Nevertheless, today, you've clearly put in the statement you're very happy to reiterate your 10%-15% per annum net growth-
Right
in store numbers. Does that mean you kind of did a bit of soul searching and found you'd still get the return on CapEx and the opportunities to continue to expand at that pace? Or that this is just the best way to guide in the absence of disclosing online and like-for-like?
I'd like to remind, we said it every time, that this has nothing to do with plans to reduce our ambitions when it comes to growth. We believe we can grow with this pace for many years going forward. We decided to keep this target for now. We still believe that it's becoming less and less relevant because the growth is now taking place online with other brands, et cetera. That's the reason, but it has nothing to do with our growth ambition.
Understood. Sort of combining all of the factors, the larger average store size, the sort of 11% net store number ambition for the year ahead, the fact that new stores appear to be at lower sales densities. Should we be thinking about a new space contribution that's still double digit in the current financial year?
On the store number you have, we don't give you the store contribution. No, we don't, for competitive reasons.
Okay.
Let me put it this way, we are very happy with the expansion of the new stores, and they are not diluting profitability. If anything, they are helping.
Okay. The margin pressure you've seen, is very much driven by pressures in the preexisting estate rather than the dilutive effect of expansion?
The margin pressure is most of all the U.S. dollar.
On the existing stores?
Well, yeah. It's for the whole group, also the new stores, because the products are the same.
Yeah. Understood. Great. Thank you very much.
Welcome.
Thank you. Your next question comes from the line of Alec Turner. Please go ahead.
Well, thanks so much, Nils. Our questions have already been answered.
Super.
Thank you. We'll move on to the next question. It's from the line of Luke Ladden. Please go ahead.
Hi, guys. Thanks very much.
Hi.
I just wanted to try and get a bit more information on your specific plans for the U.K. I know you've touched on it a couple of times, but of the store plans for 2016, how much of that is going to be in the U.K.?
As I said, it's going to be a lot of stores, but we don't want to give any specific numbers because there's still a lot of uncertainty at the beginning of the year, and we're still negotiating with landlords.
In terms of this new fascia that you're going to be launching, do you see that coming to the U.K. from the get-go, or do you have a launch country in mind, then you'll open it into new markets?
I think we're in too early a stage by now to speak about specific launch markets.
Okay, perfect. Is there any specific U.K. plans that you can share?
Maybe next quarter.
Okay, perfect. Thanks.
Thank you. Bye.
Thank you. Your next question comes from the line of Rebecca McClellan. Please go ahead.
Yeah. Hi, good afternoon. I've got three small questions, please. Firstly, of the 425 net new stores in 2016, how many are expected to be the H&M fascia? secondly
Most of them.
Sorry?
Most of them.
Most of them. Last year, I think it was about 350 out of 400. You're expecting it to be of a similar sort of ratio?
More or less.
More or less. As Nils said, there is still a lot of contracts not negotiated, et cetera, we can't give you any more detail. This is pretty exact, but still, it's a moving target.
I understand. My second question is, you mentioned that & Other Stories is yet to reach profitability. With COS, it's in 153 stores in 30 markets. Does that provide a sufficient critical mass in order to generate a group average margin, or does it still need further critical mass to see profitability ramping?
We actually admitted a couple of years ago that we were quite happy with the profitability and with costs, that it hasn't worsened since.
Okay. All right. My final question, please. I'm sorry because I got cut off from the call, you might have talked about it already, can you just develop a little bit the situation in China at the moment? I think this morning you mentioned that the year two performance was slowing, the environment, you're seeing a slowdown in the environment.
Yeah. First of all, we are very happy with our business in China. For the year, we actually increased by 16%, and we added 83% increase to stores net. Sorry. We saw a slowdown during the autumn, absolutely. The whole industry in China has been a bit tougher. We are very long-term, and we see no reason to slow down our expansion. We see great potential going forward. As I said, the plans for next year are to add a similar number of stores as in 2016. Okay. Would you like to add anything?
Okay.
No. Maybe when it comes to costs and the critical mass, of course, we have the critical mass within cost with 153 stores. We are very happy with the performance, both top line and bottom line, and the development is very strong. As Nils said, & Other Stories, we are not there yet. Exactly when we are, we have a plan for it, but we are not there yet. We are really, really confident that & Other Stories has a huge potential.
Rebecca, regarding costs, sorry if I was unclear. We are very happy with costs also as regards profitability. Sorry.
Yes. No, I understood that. Jyrki, sorry. Just in terms of the critical mass, it's not a country critical mass requirement, it's a platform critical mass requirement that's important.
Yes.
Okay.
It's the number of stores just to have the critical mass when it comes to sourcing, et cetera. Of course, it's also a mixture how we will expand. Of course, it's probably a little bit more expensive to spread around in many, many countries. That's also one important thing, that going deeper in uncertain markets, or should we go more spread out? As I said, & Other Stories, we see really good development, and when we compare it with COS in the same stage, it's at least as good as the COS was.
Yep.
All right. Thank you very much.
You're welcome.
Thank you. Your next question comes from the line of Steven Vilmot. Please go ahead.
Hello there. Thanks for taking my question. I just wanted you to elaborate on the comment you made earlier about how you were taking market share. Can you explain or quantify that in any way?
Yes. As you've seen by our numbers, we have increased sales in local currency by 10% during the year. I think very few other retailers grow at such a pace, especially large retailers. Of course, market statistics, it's very difficult to get exact numbers, because it depends on what you include in the market numbers. Is it department stores? Is it specialty stores, et cetera? But according to what we can see, we take market share in most markets.
How far can that trend run? Are you at maturity in Germany, for example?
In Germany, we have below 10% of the market, of course, there's still more than 90% to grow, right?
Will it be in the new fascias in Germany because the H&M fascia is mature, would you say?
We don't look at it as being mature. We still see potential. We can grow, we can improve. Of course, we also have the potential with the new brands, absolutely.
We can also grow with existing stores because we have a good portfolio with stores. Of course, when we are broadening our concept, maybe stores which were opened 10 years ago, 15 years ago, the location is perfect, but maybe we need some more space so we can grow with existing stores as well. It's not only opening a new store, it's how we work with our portfolio, looking into old stores. There is still a lot of potential in that sense as well.
Which of your markets would you say you're most saturated in or you're most developed in? Is it Germany?
No. I think if you look at where we have the largest sales per capita, it's actually Norway. Still, we see potential to grow in Norway.
Okay. Thank you very much.
Welcome.
Thank you. Your next question comes from the line of Michelle Wilson. Please go ahead.
Hi, good afternoon.
Afternoon.
Just a quick one for me. I think you touched on it a bit earlier, I know you've previously talked about re-platforming some of the international websites.
Yes.
How far along are you with that process, what kind of triggers the decision to re-platform on the sites?
We've invested a lot of resources into the new platform, which has allowed us to expand much faster into new markets. Of course, it's always costly, not efficient to run on parallel platforms. We want to do it as quickly as possible. Of course, it's also risky and costly. We have to find a balanced way, we started with U.K., as I mentioned, it's been very successful. I can't give you any more details than so.
Are you able to say how many of the sites are still on the old platform?
Yes, all the ones prior to Italy, I think. The U.S. was the last one on the old platform.
Okay. Does the new platform change distribution capability, or is it just the functionality of the websites?
Oh, no. It's a completely new platform, which allows us to be much more scalable, efficient. It's modern. The other one was built on our old mail order system, which was designed in the '80s and '90s, so to speak.
Okay. That's very helpful. Thank you.
Thank you. Your next question comes from the line of Simon Bowler. Please go ahead.
Hi, good afternoon. Just a few quick follow-up ones, if that's okay. With regard to the new website platform, is there anything different about the underlying systems or the flow of stock with regards to that, or is it mostly a front-end platform that's different?
It's a complete new system, as I said before.
Yeah, the back-end system as well.
Absolutely.
Right. Okay. Just to follow up on the point with regards to capitalized development costs and their depreciation, what exactly are those costs that justify a 10-year depreciation period? Because obviously, IT development seems to be moving very quickly. A kind of 3- to 5-year period might be seen as more normal. Just wondering what was within them to justify that 10-year period.
It mostly relates to platform-related, and we have platforms where we have much more than 10 years. This is, of course, according to the accountants-
Yeah, to the IFRS rules, et cetera.
Okay. Certainly. Two other quick ones. First one, just wanted to get a little bit more color in terms of what's in these long-term investments. Just as a bit of an example, would, say, any costs involved in your switch to renewable energy or the more expensive, I presume, sustainable cotton, would those go within your long-term investments? They're separate?
No, they are not included in the long-term investments.
They're part of the continuous investments we do in our offering.
Okay, great. Good stuff. Finally, just looking at the cash position where your cash balances continue to decrease, I see you reiterated the dividend policy of paying 50% profit after tax at any surplus liquidity. Can you share your thoughts around what is meant by surplus liquidity? Is the right way to think about this that we shouldn't expect any dividend growth until the current level of dividend is cash covered, or could we see the dividend grow to reduce the cash balance further?
When it comes to dividend, it's a question for the board of directors. We have given them the management view of our investment levels. We have a strong financial position still. I don't want to comment. We think, the management, that the proposal from the board of directors is very well-balanced, considering the investment levels and our financial position.
Okay. In terms of your view of what is a kind of solid financial position, how do you look at that? Do you look on a lease-adjusted basis? What are the considerations you use when deciding what would be considered solid and when that starts to change?
Different angles. We are looking at our working capital needs, our cash flow, our investment levels, et cetera. It's a lot of different KPIs and measures that we are looking. I think, as I said, we still have a financially strong position within the company. When it comes to dividends, I think it's a balanced proposal.
Okay, great. Thank you.
Thank you. Your next question comes from the line of Chiara Laudanna. Please go ahead.
Sorry, guys. One follow-up only. Because you mentioned that & Other Stories is still loss-making, would you disclose what this loss is?
No, it's part of the long-term investments that we do. We're very happy that we do these investments. As I said, it seems very promising. It's got off to a very strong start, and COS, when it comes further, is, as I said, a real success.
Okay, no problem. Thank you very much.
Thank you. There are no further questions in the queue. Please continue.
Okay. Thank you all very much for participating in this conference call. Please remember that the next telephone conference will be in conjunction with the half-year results on the 22nd of June. Goodbye.
Thank you. That does conclude the conference call today. Thank you all for participating. You may now disconnect.