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. I must advise you the conference is being recorded today on Thursday, 28th January 20 16. And I would now like to hand the conference over to your speaker today, Mr.
Nils Vinkay, Head of Investor Relations. Please go ahead.
Thank you. Hello, everyone, and welcome to the Stockholm conference on the occasion of H&M's full year results 2015. Our CFO, Jurgen Karvelen, is with me today, and we'll be happy to answer your questions after the presentation. You'll find the presentation slides to this telephone conference on hm.com. Please look at 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 5 new markets. We continue 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 continue 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 and M, Kos and Other Stories, Monkey, Weekday and Cheap Monday. For the full year, sales including VAT totaled SEK 210,000,000,000, an increase of 19% in SEK and 11% in local currencies. Looking at the Q4, sales were good in September October, but in November, sales were negatively affected by unseasonally mild weather in many of our large European markets as well as in North America. Sales including VAT in the 4th quarter increased by 9% in local currencies and 14% in Swedish krona amounting to SEK 56,500,000,000 Looking at sales development in some of H and 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 4 50 stores and approximately 37,000,000,000 SEK in sales last year. H and M is still growing in Germany. The U. S.
Is H and M's 2nd largest market with 4 15 stores. Total sales for the year reached $25,100,000,000 an increase of 18% in local currency and 45% in SEK. Canada and Mexico also developed well. In the UK, which is the 3rd largest market of the group, sales were strong and in neighboring Ireland, very strong. China was H and 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 and M was also strong in the Southern and Eastern Europe. So with a good performance all in all last year, H and M continued to gain market share and strengthen its market position further. And now to look at results, please turn to the next slide. Gross profit in the 4th 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 external factors remained negative. This is mainly due to the strengthening of the U. S.
Dollar. For the full year, gross profit increased 16% to $103,000,000,000 corresponding to a gross margin of 57% compared to 58.8 percent in 2014. Please turn to the Slide SG and A. Cost control in the group remains good. In the 4th quarter, selling and administration costs increased by 16% in SEK to SEK 20,900,000,000.
In local currencies, the increase was 12%. The increase in SG and 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 and 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 4th quarter amounted to 7,100,000,000 dollars Developments in the 4th quarter were mainly due to the effects of the strong U.
S. Dollar on purchasing costs and to the unseasonably mild weather in November, which dampened sales and resulted in increased margins. Costs for long term investments increased by approximately $150,000,000 in the 4th quarter compared to Q4 2014. For the full year 2015, the increase was 600,000,000 Profit after financial items increased by 5% in the full year to EUR 27,200,000,000 compared to SEK 25,900,000,000 in 2014. The increase in profit for the full year 20 15 means that the H and M incentive program, which is for all employees, will receive another SEK 75,000,000.
This allocation to HIP was expensed in the Q4 2015. To look at net profit, please refer to the slides sales and profits. Net profit was SEK 5,500,000,000 in the 4th quarter compared to SEK 6,200,000,000 and equaling earnings per share of SEK 3.34 compared to SEK 3.76 billion. For the full year, after tax rate of 23.3 percent, net profit increased to SEK 20,900,000,000 from SEK 20,000,000,000 and earnings per share increased to SEK 12.63 from SEK 12 0.07. And now for some other key figures, please turn to the Slide key data.
Stock in trade on the 30th November amounted to $24,800,000,000 an increase of 28% in SEK. The increases in the stock and trade is mainly due to the strengthening of the U. S. Dollar and to our expansion, but also to the negative effects of the warm autumn on sales of winter garments. Thus, the stocking trade as per the 30th November contains a larger volume of winter garments than planned.
This is expected to result in costs for markdowns increasing by 1 to 2 percentage points in relation to sales in the Q1 of 2016. Other than these factors, the level and the composition of the stockings trade are considered satisfactory. Cash flow from current operations was SEK 24,100,000,000, more or less unchanged from last year. Investments in terms of CapEx totaled SEK 12,100,000,000 for 20.15, an increase from SEK 9 point $4,000,000,000 in 2014. Investments covered mainly new stores, refurbs, online and logistics.
For 2016, CapEx is expected to be at €13,500,000,000 to €14,500,000,000 The financial position of the H&M Group remains strong. Liquid funds were $13,000,000,000 compared to $16,700,000,000 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 percent. Our expansion continues to create new jobs. In 2015, the HCM Group created 16,000 new jobs.
And today, we are more than 148,000 employees worldwide. That equals an average number of full time employees of 104,634. And now for some comments on expansion. Please look at the slide Store Expansion 2015. H and M's strong expansion continues.
We opened 4.30 new stores net in 2015, 249 of them were opened in the 4th quarter. Largest expansion took place in existing markets with China and the U. S. Being the largest expansion market again last year. We added 5 new markets: Taiwan, Peru, Macau, India and South Africa.
And customer reception has been very positive in all markets. Please turn to the next slide.
At the
end of the year, the H and 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% to 15% per year with continued high profitability. For 2016, we plan to open 425 new stores now. Most of the expansion will take place in existing markets. We also plan to add 3 new H and 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 developed well. In 2016, the expansion will continue for Kos and Other Stories, Monkey, Weekday and ChipMante. Main expansion focus will be on Kos, which will add further 5 markets again in 20 16, costs 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 and M's online store, hn.com, opened in 10 new markets in 2015. Customer reception has been great in all of these markets. H and M is available online in 23 markets. We are very pleased with the development of online sales so far, and we continue investing in order to increase availability and service for our customers.
In 2016, the plan is to offer e commerce in a further 9 existing H and M markets. These markets are Ireland, Japan, Greece, Croatia, Slovenia, Estonia, Latvia, Lithuania and Luxembourg. We also continue to broaden H and M product range. Examples of ongoing long term investments include H and M Sport as well as H and M's extended shoe range and in 2015, the new beauty concept H and M Beauty. Please turn to the next slide.
H and M Beauty has got off to a very good start since its launch began in July 2015. H and 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 and M stores. And looking ahead, we're also developing other new brands, which we'll be able to communicate more on a later date.
And now before we move on to the Q and A session, just some words on current developments. In December, which is the 1st month of our Q1, sales were up 10% in local currencies. And sales in January are expected to increase by 7%, including a negative calendar impact effect of 2 percentage points due to 1 more Sunday compared to January 2015. We follow market developments closely. For 2016, we see many opportunities, but we're also well aware of the challenges facing.
We firmly believe that our customer offering and our investments will need to increase market share and strengthen H and M's position further. In 2016, our long term investments will increase by around SEK 600,000,000, which is about the same as the increase was in 2015. Meanwhile, if we look at market conditions regarding sourcing, the U. S. Dollar has continued to impact purchasing costs.
For the Q1 2016, the strong dollar will have the same significant negative impact on purchasing costs as for the Q4 in 2015. But thereafter, the negative impact is expected to gradually diminish with effect from the Q2 2016. Even though the strong dollar will result in higher purchasing costs, H and M will make sure it has the best customer offering in each individual market. And now we're happy to take your questions. And as usual, please remember to only ask one question at a time.
Thank Your first question comes from the line of Paul Sigurds. Please go ahead.
Yes. Good afternoon, everyone. My question is on the gross margin. Without obviously giving targets, you've given some helpful insight into the movement. And I'm just trying to get a sense for your Q1, given the impact from the stronger dollar, but 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 than the guidance. But if we're looking at the purchasing costs, they are maybe slightly even higher for Q1 than it was in Q4. So that's some kind of a guidance. But they were more or less at the same level.
More and then you have
the extra markdowns as well versus the Q1 of last year, right? So that's an incremental revenue. Yes.
That's very give a guidance between 102 100 basis points, still more or less 5 weeks of the quarter left. So we will see where it depends. But of course, we see that it's still many markets which are very driven by reduced garments.
Right. And 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 we sort of threw the worst of it? Would that be sort of only from Q4 in the current financial year?
Yes. Theoretically, the U. S. Dollar, we don't know where the U. S.
Dollar will end up during the year. But 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.
Good afternoon.
My question is just about the CapEx, both the guidance and also what you reported this year. I mean, at least in Swedish kroner, it seems to be growing much faster than sales growth and space growth. So 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 going faster?
Yes. CapEx in Swedish krona, it seems like the increase is around 28%, but in local currency, it's 16%. And looking just if you go to the cash flow statement, that's a certain time of 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. So 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 Jurg Nowicki.
My first question would be, last year, you announced a new concept for this year. Can you give me any details on that?
New concept for this year, you mean that we are working on new brands and new ideas? Yes, it's
going to be a new brand.
We are working with that, but unfortunately, we don't have anything else to add right now. But we will come back to that as soon as we have more to tell you.
But this will happen like this will see its first openings this year?
No, no, no, no. We said we will come back with more information. We haven't said anything about when will we launch it.
Well, because Mr. Johansen said in 2016, like before 2017, that's going to happen. So you're not sure yet now?
No, that might be a misunderstanding. I think he said that we will come back with more information later, maybe 20 16. That's what I think he said.
So it's still a maybe?
Well, we're working on it. But I hear that he has said 2017, we it's likely to happen.
Okay. Okay. 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 had new stores. We still see potential to grow. But of course, we have a large much larger market share in Germany compared to many other markets. And I think Germany has been a pretty tough market in general.
So that's what I can say. Okay. Potentially, we're very happy with the German performance.
Okay. The other concept like Cheap Monday didn't open single store, weekday even closed stores, but still you do see potential for growth there?
Absolutely, yes. We see potential for all our brands.
But how come they're not growing?
Well, we are I mean, we continue to look after the profitability and some and I mean, they are pretty early still in their development stage. And we've highlighted costs and other stories, of course, but we're also happy with other brands. But there are still things that we need to improve before we really accelerate them. Okay.
And then the Cheap Monday, for instance, it's more as a wholesale. I think we have like, is it 4 or 5 stores? Like showroom stores there, brand building showroom stores. So it's more of a wholesale company.
Okay, okay.
All right.
In the last report, Mr. Johansen said that online business is starting to pay off. In this report, there's nothing like that is mentioned. Can you give us any idea about how profitable the online business itself is?
We are very happy with our online development. But we don't I'm sure you know we don't comment per market or per concept or per channel. But we are happy with the profitability. And but we think it's more interesting to talk about the total operations than multi brand, so to speak.
And we
definitely see it as 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. And as I said, we rolled out 10 new markets last year, planned to add another 9 at least this year. And we continuously make a lot of improvements on the online customer offering in terms of availability, shipping, etcetera, etcetera.
Last time, you said you were thinking about launching Click and Collect. Is that going to happen in these stores?
I said we are looking into it, but we have not taken any decision to launch it yet. But that's one of many features we'll have guessed.
Okay. 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 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? Or does there come a point where perhaps online becomes more important to the growth channel and space is less important?
How are you thinking about that?
We still see great potential for physical stores, and we believe we can grow with this range for many years still. We have a very interesting pipeline. So now I think we can that's why we've kept the growth target of 10% to 15% stores per annum for now. And we see the combination of physical stores and online. And who knows about the very long future, but in the near term future, we definitely see potential to grow the physical stores for many years.
Okay. And then as a follow-up, are you concentrating on any particular type of store format for the H and 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. So the store size has slightly has increased slightly over the years and will become slightly larger even in 2016 compared to 2016.
And can you tell us in square meters how big perhaps Target store might be or a typical store?
It's about 1500 square meters now.
Okay. Thank you very much. Thank you. Your next question comes from the line of Cedric Lucas. Please go ahead.
Yes, good afternoon. Cedric Lucas from Raymond James. I have a follow-up question on your online evolution. What prevented you from scratch to develop immediately 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 some other interesting things as well, as I've been saying.
And for us, of course, number 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 the customer offering and broadening the assortment and as I said, delivery times, etcetera. But you can collect this definitely there. And as everything, there are pros and cons, but I don't want to go into details exactly. No more questions?
Thank you. Your next question comes from the line of Richard Jaffe. Please go ahead.
Thanks very much. And 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 described as average unit costs start to decline?
Well, if you do the pure mathematics and apply the strengthening of the U. S. Dollar, our gross margin would take in a much bigger hit than it had. So of course, there are things that offset the U. S.
Dollar pressure, but far from offsetting it totally, as you can see. So there are things that go in that way, just like you said, caught on and there are some other things as well that has helped us slightly.
Thank you. The beauty business, looking forward, how big do you see that as a percent 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 have launched it in more than 900 stores across 41 markets, and we will continue to roll out another 300 stores this year. We are quite happy very happy, I would say, with the launch. And of course, it has interesting sales density, etcetera. And it's been very well received by the customer most of all.
So I think we have something that we can improve further. But it's 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 Tucci. Please go ahead.
Good morning, everyone. 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? And 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 like, right? I mean, like costs and stores, is that what you Exactly. Yes. We are very pleased with the development of our new brands.
First of all, costs, which really has had a very strong another very strong year. And we have now costs in more than 30 markets and to continue with another 5 new markets this year coming up. Yes, we're very pleased with the development. It's actually already the 2nd largest fashion brand in Sweden and has a very strong momentum. And when it comes to other stories, we are also very pleased, has also started very, very well.
It's not profitable yet, and that wasn't the plan because it costs a lot. It takes time to invest to get a new brand to develop a new brand, but we see very, very interesting potential for other stores as well. And for the other brands, they're also doing well, even though, as we said before, they're not expanding as fast. But we believe that there is potential for each of them, and we're working on each of them. And on top of that, as we discussed, we're working with some other new ideas, which we hope to come back with more information later.
Then when it comes to concepts within H and M, we've launched, as I said, H and M Beauty very successfully and hope that will come even stronger going forward. And we talk about beauty, we will launch a conscious or sustainable collection this year, which is very, 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 and of course see a great potential going forward. And of course, we have other things that we haven't disposed yet.
Thank you.
You're welcome.
Thank you. Your next question comes from the line of Chris Chabria. Please go ahead.
Hi, guys.
First question on the gross margin, I'm afraid again. So the magnitude of the markdown that you're guiding to for the Q1 is actually a little larger than any other retailer so far, both in Europe, the UK or in the U. S. Has announced, although the reasons have been well documented indeed, but what is the reason behind that? Were you planning for a stronger growth and hence the weather created a bigger problem?
And more interestingly, longer term, would you does this change at all your thinking of how production and sourcing is happening?
Well, I don't know exactly how our competitors and what they have announced when it comes to markdowns in for the coming quarter. But for us, as we state in the report, due to unseasonal 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. And 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.
So 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, etcetera. But 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 getting in garments every day, and we can adopt the situation. But of course, we are planning for a normal weather and when there are major deviations from normal weather, so of course, then 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 who have kept their prices flat, and we've seen competitors reducing prices.
Okay. Yes, we are doing price analysis regularly, and we see on the several markets very, very good competitors are some of them are probably decreasing prices as well. So it's a mixture depending on the market.
I see. So I guess also your strategy will be a mixture as well?
Yes. 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. And for instance, when the Russian ruble was differentiated very much, a lot of competitors increased their prices, and so did we, but less than the competitors. So we strengthened our price position and our custom offering in that case.
Okay. That is clear. Last one, the long the new long term investments that you're doing, can you give us a bit more color where they are allocated to? I mean, not in terms of gross margin as you know, in terms of is that more marketing? Is that more IT?
The story for us, what is that? And also, because I've seen the capitalized expenditures have increased by around SEK 1,000,000,000 Is this related to these long term investments? And over what period of time do you depreciate that?
Right. If you start with the IT, as you said, that we take on the balance sheet is EUR 1,100,000,000 this year. It was €868,000,000 last year. The depreciation time is 10 years for this. We have depreciated €77,000,000,000 this year.
But on top of that, we also take a lot of costs directly on the P and L. Those are the long term investments we refer to that the incremental investments that were $600,000,000 in 'fifteen and planned to be around $600,000,000 again, another increase in 'sixteen. It's mainly running online, IT, new brands, new concepts, just like before, new initiatives, yes. And we've spread more or less fifty-fifty on cogs and SG and A.
Okay, clear. Thank you very much for that.
Welcome.
Thank you. Your next question comes from the line of Geoff Lowry. Please go ahead.
Hi, team. Hi, Geoff. Hello. A high level question, please. Obviously, you've never run the business with an operating margin target, but 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. And of course, it's a balance of everything. And again, that's why I always stress that the growth target is still 10% to 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 dividend. But we haven't there is no specific margin target.
That's true. But of course, it's always a balance of long term, mid term and short term.
And one have to remember that we are facing a situation where we have a tough pressure from the U. S. Dollar, and we don't know where the U. S. Dollar will be within 1 or 2 years.
Today, it's against us and our thinking when we are a long term thinking company. And also, we are in a hurry for many years now, and it will continue still the high investment levels that we have in the online business, IT and also we have launched costs, other stories and etcetera. So 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 costs and other stories. So I think, yes, for this time of this era, we are in a situation where we are having pressure from the U. S.
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. Two questions for 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? And the difference between the EUR 102 100,000,000 markdown effect is really just what is the sort of usual course of business for trading in February is my first question. So just to confirm that you've cleared through all of that stock.
And related to that, given that you are clearing stock, assuming some discount there, the sales growth in February looks sorry, in January, you haven't seen it very yet. In January, it 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. And then the second question is really just a really a clarification. When you talked about EUR 600,000,000 incremental investment, you just sort of, I think, indicated that some of it was capitalized and some of it is going through OpEx.
Is that correct, that it's that EUR 600,000,000 is split between those two buckets?
The last one, it's going through the income statement. That's not capitalized. It will hit the P and L, the SEK 600,000,000.
Okay, perfect.
Thank you. Yes. And coming back to stock in trade and if we have cleared out everything now in January, no, we haven't. And we as I said earlier, we see still quite heavy discounts on several markets, a lot of reductions. So we still have 5 weeks to go.
So we don't know exactly where we will end when it comes to reductions. And as it's stated as will will give different answers when it comes how many basis points compared to last year. Then January sales, we have to remember that we are meeting a strong January from last year. I think we did plus 14 percent last January.
There's a calendar impact. So the underlying run rate is around 9% and it was 10% in December. So it's not it's lower, but not that much lower.
It's lower. So I think that's the main reason, and it's a tough competition when it comes to reduced levels. And I think the 7%, if we take back the calendar effect of 2%, then it's 9%, then 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, but considering the circumstances, we are 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 morning, Richard.
Good afternoon. Just got a question on 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're 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'm 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, but I don't want to go into detail. But of course, we try as best as we can. But again, remember, we are long term and we have long relationships with our suppliers, and we try to work together.
Okay. So would you say I mean, I guess, a follow-up, Nils, is would you say you're being sort
of less aggressive
in terms of renegotiating than some other companies? Or is it that H and M is very efficient to start with?
I think it's more of that. I mean, as you say that you can improve your negotiations, you implied that you didn't negotiate well last year. Right. So in terms yes, you're right.
Yes. Okay. And 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. Jocchi, maybe you can comment on that.
Yes, of course. It's simply that we have paid slightly more preliminary taxes. So we will get it back hopefully soon. So we have paid more prevalent factors.
Okay. So it's a one off probably
for this year.
Yes, one off.
Okay. Okay. Thanks.
Your next question comes from the line of Pradeep Grati. Please go ahead.
Hi. It's Simon Irwin at Credit Suisse instead. 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 preopening costs, etcetera. I know the way that you run your accounts that you do kind of year end balancing and provisions and things like that within 4Q. So 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 it's many reasons. Again, number 1, that my colleagues are very cost conscious in the organization. But second, I think it's important to also state that HIP allocation was more last year.
So there is a positive year on year, which affects 1%, so to speak.
Yes. But even outside of that, it still looked like a relatively low number. And 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 €3,200,000,000 versus €2,200,000,000 dollars Can we expect that to start being expensed rather more significantly in the year ahead? And is that going to influence the depreciation and amortization charge?
You're absolutely right. As we start to roll out these new systems, we start to depreciate. And of course, that will increase depreciation going forward. And as I said before, the depreciation time is 10 years. And this year, we depreciated $77,000,000 only.
And that will, of course, increase going forward.
Okay. So depreciation as a percentage of sales is likely to go up noticeably in the year ahead?
Yes. As a result of this, absolutely.
Okay. And just finally, in terms of this the excess inventory that you 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 kind of 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. And of course, we do that. But as you said, it's also a costly way to do it. So it's a mix of those that we try move, but also clear in each market. But I mean, we don't see this as very dramatic as Jyrki said.
This is a one off for as a result of the extraordinary mine, especially in November. And then we will clear it out and move forward.
Okay. And just finally on the development costs. I mean, without asking you for kind of hard guidance, is that something we should expect to continue to be within the P and 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 they are each of them are very, very interesting with very interesting business cases. But of course, all of them hopefully will they are starting to pay off. And we already we see the secondary derivative is negative, so to speak, right, because we actually had €880,000,000 incremental cost 2 years ago, and now we had $600,000,000 and now $600,000,000 again. So in a way, you can say that it's a slowdown.
Certainly good. All right. Thank you very much, Niels.
Thank you. And your next question comes from the line of Rebecca Walidini. 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. I stated in my presentation, we are quite pleased with our development in the UK and very pleased with Ireland. And of course, we see still great potential for us to grow. And I think the UK will actually be among our top expansion markets in 2016.
Okay.
And we also I'd also like to mention that we remain the first transition in the U. K, an online transition from the old platform to the new platform. This has
been very, very successful and
has also improved the availability and the service for our customers in the U. K. It's 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 and clacked.
Absolutely. But this transition is a huge challenge. And so 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, etcetera.
Okay. All right. Why did you pick the UK market to be the first?
Oh, I can't go into details, but you have to share somewhat, right?
Yes. But there are several reasons. It's about available stock, the DC locations, etcetera. So it's a combination of different underlying things that made it suitable to start with UK.
Yes. 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.
Previously being shipped 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. I think we started actually end of the autumn, November or December.
Okay. And where is that distribution center located?
My knowledge of the distribution center. Yes.
Thank you. Your next question comes from the line of Erik Karlsson. Please go ahead.
Thanks for taking my question. You have had very good cost control on SG and 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% to 2%, Do you think you can continue to keep SG and 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 the underlying inflation, etcetera. So from certain in certain periods, maybe we will succeed. But in the long term, of course, we need to, of course, find a more efficient way for working that we are looking into and, of course, a like for like development.
Thank you. Your next question comes from the line of Charlie Muir Sands. 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
like IT.
Okay. Fine. It seems quite long. Secondly, I mean, 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 12,000,000,1200 square meters, and the new ones are above 1500.
Great. Thanks.
And then
Average. And there's a huge spread from a couple of 100 square meters to 6,000, I think, is large.
Yes. And on the last couple of conference calls, you'd 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% to 15% per annum net growth in store numbers. Does that mean you could have did a bit of soul searching and found you'd still get the return on capitals and the opportunities to continue to expand at that pace? Or this is just the best way to guide in the absence of disclosing online and like for like?
Again, I'd like to remind, we said it every time that there is this has nothing to do with plans to reduce our ambitions when it comes to growth. We believe we can grow with this space for many years going forward. So we decided to keep this target for now. And but still we still believe that it's becoming less and less relevant because the growth is now taking online with other brands, etcetera. So that's the reason.
But it has nothing to do with our growth ambition.
Understood. And just combining all of the factors, the larger average store size, the 11% net store number ambition for the year ahead, the fact that lower 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?
I mean the store number you have, we don't give you the store contribution. No, we don't for competitive reasons.
Okay. But I mean But
let me put it this way. We are very happy with the expansion in the new stores, and they are not diluting profitability. If anything, they are helping.
Okay. So the margin pressure you've seen, is that is very much driven by pressures in the pre existing estate relative to the dilutive effect of expansion?
The margin pressure is most of all the U. S. Dollar.
On the existing stores?
Well, yes, it's for the whole group, also new stores because the products are the same.
Yes. Yes. Understood. Great. Thank you very much.
Welcome.
Your next question comes from the line of Alex Turner.
Our questions have already been answered.
Thank you. We'll move on to the next question. It's from the line of Luke Todd. Please go ahead.
Hi, guys. Thanks for taking my questions. I just wanted to try and get a bit more information on your specific plans for the UK. I know you've touched on it a couple of times. But sort of the store plans 2016, how much of that is going to be in the UK?
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 in the beginning of the year, and we're still negotiating with landlords.
Okeydokey. And in terms of this new fascia that you're going to be launching, do you see that coming to the UK sort of from the get go? Or do you have a launch country in mind that you're opening into new markets?
I think we're too early stage by now to speak about specific launch in that market.
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.
Yes, hi, good afternoon. I've got 3 small questions, please. Firstly, of the 425 new net new stores in 2016, how many are expected to be the H and M face share? And secondly sorry? Most of them.
I mean, last year, I think it was about SEK 350,000,000 out of SEK 400,000,000. So you're expecting it to be of a similar sort of ratio?
More or less. As Nils said, there's still a lot of contracts not negotiated, etcetera. So we can't give you any more detail. This is pretty exact, but still, it's a moving target.
I understand. And my second question is you mentioned that And Other Stories is yet to sort of reach profitability. With costs, it's in 153 stores in 30 markets. Does that provide a sufficient critical mass in order to generate sort of a group average margin? Or does it still need sort of further critical mass to sort of see profitability ramping?
We actually admitted a years ago that we were quite happy with the profitability and with costs, and it hasn't worsened since.
Okay. And my final question, please. Can you I'm sorry because I
got a couple from the call, so you
might have talked about it already. But can you just sort of develop a little bit the situation in China at the moment? I think this morning you mentioned that the sort of year 2 performance was slowing and the environment you've seen slowed down in the environment.
Yes. We I mean, first of all, we are very happy with the Chinese our business in China. And for the year, we actually increased by 16%, and we added 83% increase the stores necessary. But we saw a slowdown in the during the autumn, absolutely. And I mean the whole industry in China has been a bit tougher.
But we are very long term, and we see no reason to slow down our expansion. We see great potential going forward. And as I said, the plans for next year are to add a similar number of stores as in 2015. Okay. Would you like to add something, Jason?
No. Maybe when it comes to costs, the critical mass, of course, we have the critical mass within cost with 153 stores. And we are very happy with the performance, both top line and bottom line, and the development is very strong. And as Neil said, other stories, we are not there yet exactly when we are. We have a plan for it, but we are not there yet.
But we are really, really confident that another store has a huge potential.
And Rebecca, regarding cost, sorry if I was unclear, and we are very happy with cost also regarding as regards to profitability, sorry.
Yes. No, I understood that. So Jenski, sorry, just in terms of the critical mass center, it's not a country critical mass requirement. It's a platform critical mass requirement that's important.
Yes. It's the number of stores just to have the critical mass when it comes to sourcing, etcetera. But 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. So that's also one important thing that's going deeper in uncertain markets or should we go more spread out.
So but as I said, another story is we see really good development. And when we compare it with costs in the same stage, it's at least as good as cost was.
All right. Thank you very much.
You're welcome.
Thank you. Your next question comes from the line of Stephen Wilmot. 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 2% during the year. And I think very few other retailers grow at a pace, especially large retailers. And of course, market statistics is very difficult to get exact numbers because it depends on what you include in the market, the numbers, is it department stores, is it sales stores, etcetera. But according to what we can see, we grow, take market share in most markets.
And how far can that trend run? Are you at maturity in Germany, for example?
In Germany, we can I mean, we only have we have below 10% of the market? Of course, we can there's still more than 90% to grow, right?
But it will it be in the new facias in Germany because the H and M facia is mature, would you say?
We don't see we don't look at it as being mature. We still see potential. We can grow. We can improve. Of course, we also have a potential with the new brand, absolutely.
And we can also grow with existing stores because we have a good portfolio with stores. But of course, when we are broadening our concept, maybe stores which were opened 10 years ago, 16 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. So 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. But that is still we see potential to grow in Norway.
Thank you. Your next question comes from the line of Michelle Wilson. Please go ahead.
Hi, good afternoon.
Good afternoon,
Brian. Just a quick one for me. I think you touched on it a bit earlier, but I know you've previously talked about replatforming some of the international websites. How far along are you in that process? And what kind of triggers the decision to replatform 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. So of course, it's always costly, not efficient to run on parallel platforms. So we want to do it as quickly as possible. But of course, it's also risk and costly. So we have to find a balanced way.
And we started with U. K, as I mentioned, and it's been very successful. But I can't give you any more details and so.
Are you
able to say how many of these sites were still on the old platforms?
Yes. All the ones prior to Italy, I think. So the U. S. Was the last one on the old platform.
Okay. And is the new platform changed distribution capability? Or is it just the functionality of the websites?
No, no. It's a I mean, it's a completely new platform, which allows us to be much more scalable, efficient. It's modern and the other one was built on our old mail order system, which was designed in the 80s 90s, so to speak.
Okay. That's very helpful.
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 node system, as I said before.
Yes, the
back end system as well. Absolutely.
Right. Okay. And then just to follow-up on the point with regards to the capitalized development costs and their depreciation. What exactly are those costs that justify 10 year depreciation? Because obviously IT development seems to be moving very quickly, kind of 3, 5 year period might be seen as more normal.
So just wondering what was within them to justify that 10 year period?
Because it mostly relates to platform related and platforms we have platforms, so we have much more than 10 years. So this is, of course, according to the accounting
Yes, to the IFRS rules, etcetera.
Okay. Certainly. And then 2 other quick ones. First, one, just wanted to get a little bit more color in terms of what's in these long term investments. So just as a bit of an example, would say any cost involved in your switch to renewable energy or the more expensive, I presume, sustainable costs?
And would those go in 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. And then finally, just looking at the cash position where your cash balances continues to decrease. And I see you reiterated the dividend policy of
paying 50% profit after tax
and any surplus liquidity. Can you share your thoughts around what is meant by surplus liquidity? And 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 growth to reduce the cash balance further?
When it comes to dividend, it's a question for the Board of Directors. And we have given them the management's view of our investment levels. We have a strong financial position still. So 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. And in terms of your view of what is a kind of solid lease adjusted basis? What are the considerations you use when deciding what will be considered solid and
when that starts to change?
Yes, it's different angles. We're looking at our working capital needs, our cash flow, our investment levels, etcetera. So it's a lot of different KPIs and the measures that we are looking. And I think, as I said, we still have a financially strong position within the company. And 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 Chris Chagria. Please go ahead.
Sorry, guys. One follow-up only. Just because you mentioned that the that another storage is still automating, Would you disclose what this loss is?
No. It's part of the long term investments that we do, and we're very happy that we do these investments. I mean, as I said, it seems very promising. We have cut off to a very, very strong start. And cost that comes further is, as I said, a really success.
Okay. No problem. I thought it was helpful. Thank you very much.
Thank you. There are no further questions in the queue. Please continue.
Okay. Thank you all for very much for participating in this conference call. And please remember that the next telephone conference will be in conjunction with the half year results on the 22 June. Goodbye.
Thank you. That does conclude the conference for today. Thank you all for participating. You may now disconnect.