And gentlemen, thanks for standing by and welcome to the 9 Months Report 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 this conference is being recorded today on Thursday, 24th September 2015. I would now like to hand over to your speaker for today, Mr.
Nielsen. Please go ahead, sir.
Welcome to this telephone conference on the occasion of H and M's 9 month results 2015. With me is our CFO, Jyrki Tarvonen, 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. Continued to perform well in the first 9 months of 2015, both in terms of sales and profits. Our collections were well received for all group brands.
Continued our successful expansion with stores and online, and we kept taking market share. As our offering is reaching more and more customers every day, we're also developing and improving our ranges in order to make our offering even better. This summer, for example, we launched our new concept H and M Beauty, and it has got off to a very good start. We've also continued investing long term in areas such as IT and online to further strengthen the H and M Group and secure future expansion. Please turn to the Slide sales.
In the 1st 9 months of the year, sales including VAT reached SEK 153,000,000, an increase of 12% in local currencies and 21% in SEK, which is a good proof that our collections are well appreciated worldwide. In the 3rd quarter, sales increased by 11% in local currencies. Translated into SDK, sales including VAT amounted to DKK 53,400,000,000, an increase of 18% compared to last year. Sales were strong in June July, but in August sales were negatively affected by the unseasonably warm weather in many of our large European markets. We also met a strong comparable with growth of 19% in August 2014.
Looking at the month of September, the weather has become more normal and in the period of the 1st to 22nd September, sales increased by 12% in local currencies compared to the same period last year. And now to look at results, please turn to the next slide. Gross profit in the 3rd quarter was CHF 25,700,000,000 That corresponds to a gross margin of 55.9 percent compared to 58.3% last year. The combined effect on the purchasing costs from external factors remained negative. This is mainly due to the strengthening of the U.
S. Dollar. Markdowns in relation to sales increased by 30 basis points compared to the Q3 last year, mostly due to the increased price activities in August. For the 9 month period, gross profit amounted to SEK 75,200,000,000 with a gross margin of 56.9 percent. Please turn to the slide SG and A.
Cost control in the group remains good. In the Q3, selling and administration costs increased by 20% in SEK to $18,800,000,000 In local currencies, the increase was 12%. The increase in SG and A is mainly related to the expansion and the long term investments. To look at profits, please turn to the next slide. Profits developed well in the 1st 9 months of the year, although in the Q3, profits were negatively affected by the transaction effects from the strong U.
S. Dollar on purchasing costs. Higher costs for our long term investments also impacted profits negatively, as did the weak August sales and the subsequent rise in markdowns due to the unseasonably warm weather. In the Q3, profit after financial items was at the same level as last year at $6,900,000,000 And in the 9 month period, profit after financial items increased by 11% to SEK 20,000,000,000. Please turn to the payables sales and profit.
With an estimated tax rate of 23.5%, Tax amounted to SEK 1,600,000,000 in the 3rd quarter. Net profit was SEK 5,300,000,000 equaling earnings per share of DKK 3.21, largely unchanged from the Q3 last year. In the 9 month period, net profit increased by 12% to DKK 15,400,000,000 This equals an EPS of SEK 9.29, up from SEK 8.31 last year. And now for some other key data. Please turn to the next slide.
Stock in trade on the 30 1st August amounted to $25,200,000,000 an increase of 40% in SEK. In local currencies, the increase was 38%. While the reported increase in the stock in trade is high, both the composition and the level of the stock in trade are considered good, with higher proportion of new garments compared to the same time last year. The increase in stock in trade is explained mainly by the value increase caused by the strengthening of the U. S.
Dollar and also by the store and online expansion. Also, a large part of the increase in stock in trade, more precisely DKK 1,200,000,000 is due to a bookkeeping effect arising from our previously communicated change in the process around invoice management for sourcing. Cash flows from current operations was SEK 17,800,000,000 compared to SEK 18,000,000,000. And investments in terms of CapEx totaled $7,900,000,000 for the 1st 9 months of the year compared with $6,400,000,000 in the same period last year. Investments covered mainly new stores, but also IT and logistics.
For 2015 as a whole, CapEx is still expected to reach approximately to SEK 11,500,000,000 based on exchange rates from the 30 November 2014. The financial position of the H and M Group remains strong. Liquid funds were $11,000,000,000 compared to $13,500,000,000 Return on equity was 44.7% compared to 46.1 percent. And now for some comments on expansion. Please look at the slide store expansion.
H and M's strong expansion continues. The plan for 2015 remains intact, meaning approximately 400 new stores net. The largest expansion is taking place in existing markets with China and the U. S. Being the largest expansion markets.
We added 164 new stores net in 1st 9 months of the year, bringing the total numbers of stores to 3,675 stores at the end of the 3rd quarter. This means that we will open around 240 new stores net in the 4th quarter alone. We're adding 5 new H and M markets this year. Taiwan, Peru and Macau have already opened and all have had a very good start. In October, we will open the 1st H&M stores in India and South Africa.
The 1st store in India will open in the select City Walk Mall in New Delhi. And in South Africa, the first store will open in Cape Town in the V and A Waterfront. Today, we also announced 3 new H and M markets for next year: New Zealand, Cyprus and Puerto Rico. Announcement words on our other group brands. Please turn to the next slide.
Expansion continues for Kos and Other Stories, Monkey, Weekday and Cheap Monday. In 2015, expansion focuses mostly on another stories and
Kos.
Kos will add 4 new markets this year. Bahrain opened their franchise in February, Luxembourg, Hungary and Canada are planned to open this autumn. Krause will open in the Czech Republic in 2016. Please turn to the next slide. In parallel to our rapid store expansion, we're also adding e commerce in a growing number of markets.
H and M's online store, hm.com, is opening in 10 new markets in 2015. 8 of them have opened already. It's Portugal, Poland, the Czech Republic, Romania, Slovakia, Hungary, Bulgaria and Belgium. And customer reception has been great in all of these markets. With the addition of Switzerland and Russia this autumn, H and M will be available online in 23 markets by the end of this financial year.
In 2016, the plan is to offer e commerce in the 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 the H and M product range. Please turn to the slide, H and M Beauty. In July, we began the launch of our new concept H and M Beauty, which is now available in 700 stores across 28 markets and online.
Following a very good start, we will continue to roll out H and M Beauty to more stores. Already by the end of November, H and M Beauty will be available in a total of approximately 900 stores in 42 markets and online. We're also developing other new concepts and brands, which we will communicate more on at a later date. And now before we move on to the Q and A session, just some words on current development. We have an exciting fashion season ahead of us.
And like we said initially, sales in the 1st 3 weeks of September were up 12%. Meanwhile, if we look at market conditions regarding sourcing, as the U. S. Dollar strengthened further during the sourcing period to the Q4, purchasing costs for the Q4 had been even more negatively affected than the purchasing costs for the Q3. As always, we are continuously reviewing our customer offering in each market and we are monitoring the market closely to ensure that we offer the best combination of fashion, quality, price and sustainability.
And now we're happy to take your questions. And as usual, please remember to only ask one question at a time. Thank you.
Thank you very much. Your first question comes from the line of Anne Critchlow from SG London. Please go ahead.
Hello, thank you. I've got two questions. The first one is about current trading. Are there any calendar effects in the final week of September that we need to take account of, please?
No, there is no major calendar impact in September.
Okay. Thanks very much. Sorry, in fact, that's it
for me. Thank you.
Okay.
Thank you. And your next question comes from Rebecca McClellan from Santander. Please go ahead.
Yes. Hi, good afternoon. Good afternoon. And a couple of questions. Firstly, what was your average selling price at the beginning of September 2015 versus the beginning of September 2014, please?
And my second question is, given sort of the slight weakness in the renminbi and a bit of time on your side, have you managed to mitigate some of these further pressures in the Q4 sort of COGS outlook?
Again, Rebecca, I'd like to remind you, please one question at a time. It's easier for everyone. But I do remember your first question was regarding ASP. And unfortunately, we do not for competitive reasons, we do not comment the ASP, sorry. And what's next for the second question?
And just with a bit of time on your side, have you managed to mitigate any of these U. S. Dollar related pressures in the COGS as we go into the Q4 and into
previously for the purchases we have done for Q4, as Neil previously said, it's even a more negative effect for those purchases. And we are always looking to different ways of mitigating negative effects. But exactly how we are working with our pricing, etcetera, that we will always keep to ourselves for competitive reasons. But always, as we have said, we are always looking into finding efficiencies and changing sourcing market, etcetera.
All right. Thank you very much.
Your next question comes from the line of Chris Chabris from Barclays. Please go ahead.
Hi, guys. I do have 3 questions, but they are very short, one at a time. So the first one, the first one on Russia. You and I have seen some significant growth there. I wonder what is the composition between price and volume?
Have you raised prices in Russia?
Russia, we are very happy Russia. And as you say, we do very well and we continue to expand. We're also very happy to launch e commerce all over this autumn. And regarding pricing, etcetera, we are we don't want to give too much details. But what happened last year, especially, was that the ruble depreciated quite substantially towards most other currencies.
And I would say every retailer had to compensate and increase prices. And we have also adjusted, but I would say less probably than the rest of the market and thus increased our competitive advantage even further.
Okay, very helpful. Then on China, on a more negative note there, if we try to decompose some sort of like for like, these have been negative, but understandably you do grow stores quite rapidly there. Given that you do operate online, does it come maybe to a surprise the existing store base is not as productive maybe or this is in line with your budget in the past about China?
We continue to expand very rapidly in China. We're very happy with the development and also the profitability. And we launched e commerce as late as last year, last autumn. And then, of course, from quarter to quarter, there will always be volatility. So no concern really for the numbers in China.
I would say the contrary, we look there is a huge potential. We'll continue to expand very rapidly this quarter. So we really are optimistic for the future going on in China. But of
course, in Q3, if you compare it to Q2, yes, the local growth is less than in Q2 for sure. But we are still on a good level when it comes to the turnover and the profitability. So we are, as Niel said, continuing our rapid expansion in the Chinese market.
Okay. And last one on the 4Q store openings. So in 4Q you're going to open close a store number in order to hit your 400, which is close to the number that you opened the entire 2011. Yes. So it is the highest in the quarter historically and by quite some amount.
Are there any
concerns that you have that should we be thinking that maybe the locations have been compromised or it just happens to be timing issue from Q3 to Q4 and it's business as usual. What I'm trying to get you to sorry, that is a longer than I thought question. But what I'm trying to get is to realize how your planning went on because it is an extraordinary amount of new stores that you're opening. And I wonder whether there are any profit implications even in the near term.
When it comes to if we are compromising when it comes to store locational terms, we never compromise on those. We always stick to have a high quality, the best allocation and good terms, flexible terms. Some years, it happens. We usually are very heavy the second half year and Q4 as well. And so they are, as you said, business as usual.
Yes, it's a huge amount of stores that we are going to open, but we have fantastic teams in
the countries, and
we are quite confident that we will stores contributing to our portfolio.
Okay. Thank you very much.
You're welcome.
Thank you. The next question comes from the line of Fraser Ramsden, Nomura. Please go ahead.
Thanks very much. Good afternoon. I have a question about the comment in the release this morning that you're looking into launching other new concepts and brands and that you will come back to us at a later date on this. From that, should we think that your long term investments that are now getting very, very long term are going to continue into next year and perhaps at an even higher level than the current year. I still thought I'm asking is when my shareholders expect your EBIT margin to stop falling, which is just a continuum at the moment?
Yes. At this moment, of course, the main impact on the EBIT margin is the strengthening of the U. S. Dollar and the hitting the gross margin. In gross margin.
But when it comes to the long term investments, yes, we are looking into some very interesting new ideas, and we are comfortable that they will make us much stronger in the future. But of course, it will mean that long term investments will most probably continue next year. They will. But exactly, if they are increasing or staying on the same level, that we have to come back to in connection with the year end reporting. But for sure, there are new ideas coming up.
Okay. And could I just ask half an extra question? Your comments around Chris' question on the level of openings in the Q4, would you have already taken quite a lot of preopening costs in the P and L in the 9 month period? I suppose the slight concern is with so many openings, is this going to hit your SG and A on a like for like basis in a big way in Q4? Yes, of course.
It's not exactly that all the costs will be in Q4. A lot of cost is already in within the 9 months. They're, of course, coming up cost, but it's more or less in the same pace that we have the EBITDA. So there shouldn't be such a dramatic changes. Thanks.
That's very helpful. Thank you. Welcome. Thank you
very much. And your next question comes from the line of Charlie Muir Sands from Deutsche Bank. Please go ahead.
Good afternoon. Good afternoon.
I had
a question about the currency. Clearly, you've indicated that the pressure is greater in the Q4. If current exchange rates are maintained, when is the worst quarter for you? Is it Q4 or is Q1 even tougher?
Well, still we have a lot of purchases to be done for Q1. So we don't know where the U. S. Dollar will be ahead of us. But I would say that if the currency rates are more or less on this level, I would guess that the impact on purchases prices in Q1 is more or less the same as in Q4.
Okay. And then the second question is that your CapEx guidance is given on a legacy exchange rate. Clearly, your openings are not necessarily weighted to your existing revenue or OpEx exposure. Could you help us by trying to translate that guidance into SEK at current exchange rates?
Yes. We have to come back to that. But you are correct. When we guide for SEK 11,000,000 to SEK 11 point 5,000,000,000, it's the year end closing date rates that we are referring. So of course, it can be more when we are translated to average rate as we are doing in the P and L.
So for sure, that's an effect. But let's come back to that effect because we have 240 net stores to open. It's quite a huge amount to still open. So, will be a much clearer picture when we have opened all those stores.
And then my final question is trying to disaggregate your revenue growth by country or region and adjusting for space. It appears that your Southern European business has been performing a lot better than Germany and some of the other Northern European markets. Do you think that, that is a consumer phenomenon or particularly around the weather in Q3?
I think it's a combination. And as we've been stating now for more than a year, we've seen positive signs in the macro in those markets, and we've seen very strong development, and it continues. But also, I think that, I mean, the offerings we've had have been very well received, and we
have very strong teams in place. Yes. I would say looking just purely on the Q3 figures, it's a mix. It's a mix. As we state, in August, we were hit much more in the northern parts of Europe.
We performed well in the southern parts. And as Sunil said, the macro in many countries in South Europe, macros where the unemployment rate is going down quite quickly. So there are good macros also in South Europe.
Thank you very much.
And your next question comes from the line of Simon Owen from Credit Suisse. Please go ahead.
Good afternoon, gentlemen. Given renewed bouts of volatility with emerging market currencies, are there any markets where you have a material number of rentals that are not in local currency?
No, not No, no. Most of the rents are in local currencies.
So particularly in Russia, I suppose, is the obvious one to think about. You don't have any dollar or euro rents there?
No, the vast majority is purely in rubles and also good terms with turnover rents, etcetera.
Right. And just following on from that, given the kind of weakness in terms of currencies and demand, does this change your view about the pace of acceleration in some of these markets that actually now might be quite a good time in some of these markets where you're not you don't have a very substantial commitment to some emerging markets?
Yes and no. I mean, we always have a long term view. And as you say, in difficult macro situation, with our long term view and strong financials, there might be opportunities for us to expand even further, yes.
Great. Thank you very much.
Your next question comes from the line of Nicholas Pham from SEB. Please go ahead.
Good afternoon. Good afternoon. Can I just ask you, you talked in last quarter of discussing internally at least to change the longer term target or guidance that you give every year to open 10% to 15% new stores? Could you elaborate on how those discussions are going and the reasoning behind the alternatives and what they are, please?
Yes. It's nothing new. We have been discussing the relevance of the existing target of 10% to 15% stores because today with online and there's and the different formats we have and franchises that's right, it doesn't become so relevant anymore. But the most important thing is that we are not planning to slow down. The ambition to grow remains.
But we haven't decided yet how to what target to use, so to speak.
Yes. It could be that we are continuing with the 10% to 15%. But as Nils said, with online, different concepts, etcetera, it's getting more irrelevant as a figure to talk about stores. And then, of course, there are different options if we are sticking to increase in sales per year or maybe not to have any fixed financial KPI, but still communicating in a way that the market understands that we are continuing with our high expansion rate and with continued high profitability and good financial position. So we are looking into 2 different solutions and suggestions and also looking into what other peers, competitors, how they are communicating.
And so but we haven't decided yet what the outcome will be. So but still, internally, we will regardless what the end result will be, so regardless of that, we will internally, of course, work as we have done with really, very clear goals when it comes to store openings, expansion, profitability, etcetera.
Thanks. Could I also ask you, I think you've indicated that your net dollar flow is at the range of €35,000,000,000 to €40,000,000,000 every year. And that's just according to our estimates that theoretically or mathematically in a static assumption, the gross margin should have been down by SEK 4,000,000,000 in Q3 or 400 basis points at least. Now obviously adjusting for the markdown effect, there's only within quotes about a 200 basis points fall. Could you let us in on what were the main drivers that had an impact on sort of the actual outcome versus the static and mathematical effect, please?
Yes. Okay. The static or mathematical or theoretical effect is, of course, one thing. But the reality, how we are buying, it's not exactly as we have been talking several times that we try to give you a guidance in what direction the purchase prices are going by saying, okay, look at approx 2 quarters back for those garments that we are selling in Q3, etcetera. But in reality, we are not always buying in that pattern.
We buy sometimes even earlier some basic garments or we have lead times within 3, 4 weeks. So it's a mixture. So the reality is that the mathematical result will give as you calculated, was it like SEK 4,000,000,000 on a base of SEK 40,000,000,000 to SEK 50 1,000,000,000, I hope you meant. So that's one way of looking to it. And of course, the mathematical results will be as you have calculated, but the reality when we are buying exactly to which currencies and the selling patterns ahead.
So it will be a different result than the mathematical or theoretical. But there are, of course, always things that we try to mitigate, but we will always stick to our business concept and thinking long term and start from the customer offering. So
in short, what you're telling us is that the main reason for that the static model doesn't work in this case is that there's too many differences in lead times in sourcing. It's not pricing or cost of goods, but it's lead times. Is that
affecting our gross margins. As we have been talking, it's like 20, 25 different factors affecting the gross margin. And we don't want to elaborate and go into each of these. We give you some major factors behind it, those 4, 5 macro factors that we have been talking about. But otherwise, we don't want to elaborate what the gross margin is built up.
And we understand that you are keen to know it, but with respect, we don't want to give it away to our competitors. We don't have any patent. So we really want to stick that and have that information for us, only for us, sorry.
Okay. Thank you.
Thank you very much. And your next
Nice simple one from me. In terms of your new store formats that you're introducing, both the existing ones where you're rolling them out and the new ones that you're developing, Can you remind us of the rationale as to why you felt it was necessary to move beyond the core H and M brand, please?
It's very simple. I mean, there are so much and many opportunities. It's a way to reach a broader customer base, of course. And also, we can capitalize on existing backbone, infrastructure, logistics, sourcing, etcetera. And I think the success so far of, for example, cost and storage are very good proofs of that the model the rationale works.
So as this proportion expands over time, your business model is becoming increasingly complex. Do you think there's more that you could do to help our understanding of how the company looks, how it's developing, what the different drivers for these different concepts are? Because there's a slight danger from the outside that it's becoming we're simplistically looking at a very increasingly complex business.
True. But for us, luckily, as I said, there are so many opportunities. And we our ambition will be very long term, and we want to develop the company further. And luckily, we our target is not to sell fares, as you know.
And when it comes to the complexity of the business, of course, it's getting more complicated with different brands, different channels, etcetera. But if we stick to what Nils said that we see a lot of opportunities, we have the H and M brand, We have the cost. We have Stories. We have Mokie and Weekday, etcetera. So clearly, we can see that we are finding a potential in the market for those.
We see new customers or even same customers, but asking for a different kind of fashion. So I think we are just finding the opportunities and investing and taking care of those opportunities that we identify on the market that we are doing something better than the existing markets for those brands. So that's the whole idea. And of course, we have said that we are investing a lot in building up the new formats, but I think we see that cost is performing very well, also Stories. But for Stories, it's still in the beginning and we have still a lot of work to do.
So it's more to do with not that a lack of opportunities for the core H and M brand in your existing markets, but you can see additional opportunities for these other brands?
Exactly. Yes, I think they are complementing each other very well. Okay. Thank you.
Thank you. And your next question comes from Jamie Merriman from Bernstein. Please go ahead.
Thank you. Good afternoon.
Good afternoon.
My question is about the U. S. In the release in previous releases, you've noted that the U. S. Is one of your largest opportunities for store growth from here.
And just thinking about you have over 380 stores in the U. S. Today. What do you think the right number of H and M stores is in that market? Obviously, you've seen some U.
S. Retailers start to reduce store numbers. So I'm just wondering where do you think the cap is?
We refrain from giving such a number as we stick to the fact that there is still a lot of potential for us and we're very happy with the development momentum we have in the U. S, both for our stores and also online.
Okay. Thanks. Welcome.
Thank you. And your next question comes from Andrew Porges from HSBC. Please go ahead.
Hi, good afternoon, gentlemen. Could you just come back to more short term trading?
Could you just comment whether there's been any sort
of spillover from weather impacts in August into September or whether there are any specific drags on short term trading that you're seeing?
It's always very difficult to tell. And as always, we say that you shouldn't focus too much on a monthly number. You should look at it over a season. And again, September, we're quite pleased, 12% is okay. It's about the rate we've had for the year in local currencies.
Your next question comes from the line of Audrey Borris from Morgan Stanley.
It's actually Jeff Ruddle at Morgan Stanley. Just a quick question. Obviously, August was very difficult because of the weather. And you therefore exited the quarter with, I imagine, a lot more stock you intended. I think stock was up about 40% year on year.
My question is, when does the when will you be taking the markdown for that? Because presumably, a lot of that markdown hasn't actually occurred during this quarter.
Well, when looking at the stock, we consider both the level and the composition of the stock to be on a good level. The increase that you mentioned, 40% in Swedish krona and 30 8% in local currencies. It's mainly explained by the strong dollar that made our purchasing cost much higher. And as we book the stock in trade at cost, it will affect the stock. And there, of course, our normal expansion in the increase and then the change in the handling of our supply and invoices.
But when we are looking at the stock level and the composition, we consider it as a good. But just purely looking at that, we are not so afraid of the markdowns, but it's far too early say about the markdowns in Q4 because we still have over 2 months to go.
So you don't have any significant excess of summer stock left over?
No. As we indicated, we have more cash garments in the stock than we had compared to the same term last year. Okay, great. Thank you very much.
Thank you. And your next question comes from the line of Tushar Jain from Bank of America. Please go ahead.
Yes, hi. Good afternoon. Two simple questions from my side. Just on the first one, can you tell us what will be the full year currency benefit on the revenues at the current FX rate? You're currently running at 10% for the 1st 9 months.
Just wondering if I can give us any view on that one?
You mean the translation effect?
Translation effect, yes.
I'm sorry, Igor, we don't have any such guidance. It's no, we don't, sorry.
Okay, great. And the second question, just want to understand on Sweden, you closed five stores in the Q3. It's just the timing issue as you're relocating the stores or the number has permanently come down from 177 to 172?
Yes. I mean, we always when we look at the stores, we relocate and sometimes we close down when we come to the end of the contract, but that's quite normal. And as an investor, you shouldn't be worried because we normally typically don't close down profitable and successful stores. Yes,
exactly. Thank you. Okay.
Thank you. We have a follow-up question from the line of Chris Travers from Barclays.
Yes. Sorry, one very quick one. The can you give us the amount of stores that you had on the 22nd September?
No, we don't have that number in front of us, but we will give you the number by the end of September, and we give you the full month's sales numbers on the 15th October, right?
Okay. That's all right. Thank you.
And your next question comes from Asad Malik from Citi. Please go ahead.
Good morning, guys. Sorry, my question has just been asked by Chris, which you're not
answering. Thank you.
And there appears to be no further questions coming through.
Okay. Thank you all very much for participating in this conference call, and welcome back for the full year results on the 28th January next year. Bye.
Thank you very much. That does conclude the conference for today. Thank you all for participating and you're now free to disconnect.