Ladies and gentlemen, thanks for standing by. Welcome to the nine-month report call. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you can press star one on your telephone. I must advise this conference is being recorded today on Thursday, the 24th of September 2015. I would now like to hand over to our speaker for today, Mr. Mårtensson. Please go ahead, sir.
Welcome to this telephone conference on the occasion of H&M's nine-month results 2015. With me is our CFO, Jyrki Tervonen, 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. H&M continued to perform well in the first nine 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&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&M Group and secure future expansion. Please turn to the slide, Sales. In the first nine months of the year, sales including VAT reached SEK 153 billion, 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 third quarter, sales increased by 11% in local currencies. Translated into SEK, sales including VAT amounted to SEK 53.4 billion, an increase of 18% compared to last year. Sales were strong in June and July. 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. In the period of the 1st to the 22nd September, sales increased by 12% in local currencies compared to the same period last year. Now to look at results, please turn to the next slide. Gross profit in the third quarter was SEK 25.7 billion. That corresponds to a gross margin of 55.9% compared to 58.3% last year. The combined effect on the purchasing costs from the external factors remained negative. This is mainly due to the strengthening of the US dollar. Markdowns in relation to sales increased by 30 basis points compared to the third quarter last year, mostly due to the increased price activities in August. For the nine-month period, gross profits amounted to SEK 75.2 billion with a gross margin of 56.9%. Please turn to the slide, SG&A.
Cost control in the group remains good. In the third quarter, selling and administration costs increased by 20% in SEK to SEK 18.8 billion. In local currencies, the increase was 12%. The increase in SG&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 first nine months of the year, although in the third quarter, profits were negatively affected by the transaction effects from the strong US 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 third quarter, profit after financial items was at the same level as last year at SEK 6.9 billion. In the nine-month period, profit after financial items increased by 11% to SEK 20 billion.
Please turn to the tables, Sales and Profits. With an estimated tax rate of 23.5%, tax amounted to SEK 1.6 billion in the third quarter. Net profit thus was SEK 5.3 billion, equaling earnings per share of SEK 3.21, largely unchanged from the third quarter last year. In the nine-month period, net profit increased by 12% to SEK 15.4 billion. This equals an EPS of SEK 9.29, up from SEK 8.31 last year. Now for some other key data, please turn to the next slide. Stock in trade on the 31st August amounted to SEK 25.2 billion, 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 a 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 US dollar and also by the store and online expansion. Also, a large part of the increase in stock in trade, more precisely SEK 1.2 billion, 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 17.8 billion compared to SEK 18 billion. Investments in terms of CapEx total SEK 7.9 billion for the first nine months of the year compared with SEK 6.4 billion 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 SEK 11 to 11.5 billion based on exchange rates from the 30th of November 2014.
The financial position of the H&M Group remains strong. Liquid funds were SEK 11 billion compared to SEK 13.5 billion. Return on equity was 44.7% compared to 46.1%. Now for some comments on expansion. Please look at the slide store expansion. H&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 the first nine months of the year, bringing the total numbers of stores to 3,675 stores at the end of the third quarter. This means that we will open around 240 new stores net in the fourth quarter alone. We're adding five new H&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 first H&M stores in India and South Africa. The first store in India will open in the Select Citywalk mall in New Delhi, and in South Africa, the first store will open in Cape Town in the V&A Waterfront. Today, we also announced three new H&M markets for next year: New Zealand, Cyprus and Puerto Rico. Now some words on our other group brands. Please turn to the next slide. Expansion continues for COS and & Other Stories, Monki, Weekday and Cheap Monday. In 2015, expansion focuses mostly on & Other Stories and COS. COS will add four new markets this year. Bahrain opened via franchise in February. Luxembourg, Hungary and Canada are planned to open this autumn. COS 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&M's online store, hm.com, is opening in 10 new markets in 2015. Eight of them have opened already. It's Portugal, Poland, the Czech Republic, Romania, Slovakia, Hungary, Bulgaria and Belgium. Customer reception has been great in all of these markets. With the addition of Switzerland and Russia this autumn, H&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 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 the H&M product range. Please turn to the slide H&M Beauty. In July, we began the launch of our new concept, H&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&M Beauty to more stores. Already by the end of November, H&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. Now before we move on to the Q&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 first two 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 fourth quarter, purchasing costs for the fourth quarter have been even more negatively affected than the purchasing costs for the third quarter.
As always, we're 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. Now we're happy to take your questions. As usual, please remember to only ask one question at a time. Thank you.
Thank you very much. As a reminder, if you wish to ask a question, please press star one and wait for your name to be announced. You can cancel this request by pressing the hash key. Once again, star one to ask a question over the phone lines. Your first question comes from the line, Anne Critchlow from Societe Generale. 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. Your next question comes from Rebecca MacKinnon from Santander. Please go ahead.
Yes. Hi, good afternoon.
Good afternoon.
A couple of questions. Firstly, what was your average selling price at the beginning of September 2015 versus the beginning of September 2014, please? My second question is, given sort of a 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 fourth quarter sort of COGS outlook?
Again, Rebecca, I'd like to remind you, please one question at a time. It's easier for everyone. I do remember your first question was regarding ASP, and, unfortunately, for competitive reasons, we do not comment the ASP. Sorry.
What was the second question?
Just with a bit of time on your side, have you managed to mitigate any of these US dollar-related pressures in the COGS as we go into the fourth quarter and into the first half of 2016?
Of course, when we're looking at the US dollar effect for the purchases we have done for Q4, as Nils previously said, it's even a more negative effect for those purchases. We are always looking to different ways of mitigating negative effects. Exactly how we are working with our pricing, et cetera, that we will always keep to ourselves for competitive reasons.
Okay.
Always, as we have said, we are always looking into finding efficiencies and changing sourcing markets, et cetera.
All right. Thank you very much.
Your next question comes from the line of Christodoulos Chaviaras from Barclays. Please go ahead.
Hi, guys. I do have three questions, but they are very short. One at a time. The first one on Russia. Given I've 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 with Russia, as you say, we do very well, and we continue to expand. We're also very happy to launch e-commerce already this autumn. Regarding pricing, et cetera, 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. I would say every retailer had to compensate and increase prices. 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. 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 that 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. Of course, from quarter to quarter, there will always be volatility. No concern really for the numbers in China. I would say the contrary. There is a huge potential. We'll continue to expand very rapidly this autumn, this quarter. We really are optimistic for the future going on in China.
Of course, in Q3, if you compare 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. We are, as Nils said, continuing our rapid expansion in the Chinese markets.
Okay. Thank you for that. Last one, on the 4Q store openings. In 4Q, you're going to open a store number in order to hit your 400, which is close to the number that you opened the entire 2011.
That's correct, yes.
It is the highest in a quarter historically.
Yes
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? Sorry, that is a longer than I thought question, 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. I wonder whether there are any profit implications, even in the near term.
If we are compromising when it comes to store location or terms, we never compromise on those. We will always seek to have a high quality, the best A location, and good terms, flexible terms. Some years it happens. We usually are very heavy the second half year and Q4 as well. So they are, as you said, business as usual. 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 open the stores in due time, and that will be very good stores contributing to our portfolio.
Okay. Thank you very much.
You're welcome.
Thank you. Once again, it's star one if you wish to ask a question and you can cancel this request by pressing the hash key. The next question comes from the line of Fraser Ramzan, 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 long-term are going to continue into next year and perhaps at an even higher level than the current year? I suppose what I'm asking is when my shareholders expect your EBIT margin to stop falling, which is just a continuum at the moment.
Yeah. At this moment, of course, the main impact on the EBIT margin is the strengthening of the US dollar and the hit across.
Yeah.
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. Of course, it will mean that long-term investments will most probably continue next year. They will. 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. For sure, there are new ideas coming up.
Okay. Could I just ask half an extra question?
Yep.
Your comments around Chris's question on the level of openings in the fourth quarter, would you have already taken quite a lot of pre-opening costs in the P&L in the nine-month period? I suppose the slight concern is with so many openings, is this going to hit your SG&A on a like for like basis in a big way in Q4?
Yes, of course. It's not exactly that all the cost will be in Q4. A lot of cost is already in within the nine months. There are, of course, coming up costs, it's more or less in the same pace that we have every year.
I see.
There shouldn't be such dramatic changes.
Thanks. That's very helpful. Thank you.
Welcome.
Thank you very much. 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 fourth quarter. If current exchange rates are maintained, when is the worst quarter for you? Is it Q4 or is Q1 even tougher?
Still we have a lot of purchases to be done for Q1. We don't know where the US 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.
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?
We have to come back to that. You are correct. When we guide for SEK 11 billion-11.5 billion, it's the year-end closing date rates that we are referring to. Of course, it can be more when we are translating it to average rate as we are doing in the P&L. For sure, that's an effect. Let's come back to that effect because we have 240 net stores to open. It's quite a huge amount to still open. It will be a much clearer picture when we have opened all those stores.
my final question is trying to disaggregate your revenue growth by country or region, 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 is a consumer phenomenon or particularly around the weather in Q3?
Yeah, 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. Also, I think that the offerings we've had have been very well-received, and we have very strong teams in place.
Yeah, I would say it's looking just purely on the Q3 figures. 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 Nils said, the macro in many countries in Southern Europe, especially when looking at the Spanish macros, where the unemployment rate is going down quite quickly. There are good macros also in Southern Europe.
Thank you very much.
Your next question comes from the line of Simon Irwin 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. Most of the rents are in their local currencies.
Particularly in Russia, I suppose is the obvious one to think about, that you don't have any dollar or euro rents there.
No, the vast majority is strictly in rubles and also good terms with turnover rents, et cetera.
Right. 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 don't have a very substantial commitment to some emerging markets?
Yes and no. We always have a long-term view, and as you say, in a difficult macro situation with our longer-term view and strong financials, there might be opportunities for us to expand even further, yes.
Great. Thank you very much.
Thank you. Here's another reminder of star one if you wish to ask a question, and the hash key to cancel it. Your next question comes from the line of Nikolas Ekman from SEB. Please go ahead.
Good afternoon.
Good afternoon.
Can I just ask 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%-15% new stores. Could you elaborate on how those discussions are going and the reasoning behind the alternatives and what they are, please?
It's nothing new. We have been discussing the relevance of the existing target of 10%-15% stores because today with online and the different formats we have and franchises, et cetera, it doesn't become so relevant anymore. The most important thing is that we are not planning to slow down. The ambition to grow remains. We haven't decided yet what target to use, so to speak.
It could be that we are continuing with the 10%-15%, but as Nils said, with online, different concepts, et cetera, it's getting more irrelevant as a figure to talk about stores. Of course, there are different options, if we are sticking to increase in sales per year or maybe not to have any strict 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. We are looking into different solutions and suggestions and also looking into what the other peers, competitors, how they are communicating. We haven't decided yet what the outcome will be.
Still, internally, we will, regardless what the end result will be, regardless that, we will internally, of course, work as we have done with really clear goals when it comes to store openings, expansion, profitability, et cetera.
Thanks. Could I also ask you, I think you've indicated that your net dollar flow is at the range of $35 billion-$40 billion 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 billion in Q3 or 400 basis points at least. Adjusting for the markdown effect, there's "only" about a 200 basis points fall. Could you let us in on what were the main drivers that had an impact on the actual outcome versus the static and mathematical effect, please?
Yeah. 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 approx. two quarters back for those garments that we are selling in Q3," et cetera. In reality, we are not always buying in that pattern. We buy sometimes even earlier, some basic garments, or we have lead times within three, four weeks. It's a mixture. The reality isn't that the mathematical result will give, as you calculated, was it like SEK 4 billion on a base of SEK 40 billion-SEK 50 billion, I hope you meant.
Yes.
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.
There are, of course, always things that we try to mitigate. We will always stick to our business concept and thinking long term and start from the customer offering.
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 a fair summary?
There are so many different factors affecting our gross margins. As we have been talking, it's like 20, 25 different factors affecting the gross margin, we don't want to elaborate and go into each of these. We give you some major factors behind it, those four or five macro factors that we have been talking about. Otherwise, we don't want to elaborate what the gross margin is built up. 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 patents, we really want to stick to that and have that information for us, only for us. Sorry.
Okay, thank you.
Thank you very much. Your next question comes from the line of Adam Cochrane from UBS. Please go ahead.
Good afternoon, guys.
Hi.
A 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&M brand, please?
Oh, it's very simple. There are so 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, et cetera. I think the success so far of, for example, COS and Stories are very good proofs of that the rationale works.
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 we're simplistically looking at a very increasingly complex business.
True, for us, luckily, as I said, there are so many opportunities, and our ambition, we are very long term, and we want to develop the company further. Luckily, our target is not to sell shares, as you know.
When it comes to the complexity of the business, of course, it's getting more complicated with different brands, different channels, et cetera. If we stick to what Nils said, that we see a lot of opportunities. We have the H&M brand, we have the COS, we have Stories, we have Monki and Weekday, et cetera. 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. 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.
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 COS is performing very well, also Stories. For Stories, it's still in the beginning, and we have still a lot of work to do.
It's more to do with not that a lack of opportunities for the core H&M brand in your existing markets, but you can see additional opportunities for these other brands.
Exactly. Yeah, I think they are complementing each other very well.
Okay. Thank you.
Thank you. 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 previous releases, you've noted that the U.S. is one of your largest opportunities for store growth from here. Just thinking about, you have over 380 stores in the U.S. today. What do you think the right number of H&M stores is in that market? Obviously, we've seen some U.S. retailers start to reduce store numbers. I'm just wondering, where do you think the cap is?
We refrain from giving such numbers. 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. Your next question comes from Andrew Hughes from HSBC. Please go ahead.
Hi, good afternoon, gentlemen. Coming 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, as always, we say that you shouldn't focus too much on a monthly number. You should look at it over a season. Again, September, we're quite pleased. 12% is okay. It's about the rate we've had for the year in local currencies.
Okay, thank you.
Thank you. Once again, star one to ask a question over the phones and hash key to cancel. Your next question comes from the line of Audrey Birenbaum from Morgan Stanley. Please go ahead.
Hi, it's actually Geoff Ruddell at Morgan Stanley.
Hi there.
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 than you intended. I think stock was up about 40% year-on-year. My question is, when will you be taking the markdown for that? 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 SEK and 38% in local currencies, it's mainly explained by the strong USD that has made our purchasing cost much higher. As we book the stock in trade at cost, it will affect the stock. There, of course, our normal expansion in the increase and then the change in the handling of our supplier invoices. When we are looking at the stock level and the composition, we consider it as good. Just purely looking at that, we are not so afraid of the markdowns. It's far too early to say about the markdowns in Q4 because we still have over two months to go.
You don't have any significant excess of summer stock left over?
No. Actually, as we indicate, we have more fresh garments in the stock than we had compared to the same time last year.
Okay, great. Thank you very much.
Thank you. Your next question comes from the line of Tushar Jain from Bank of America. Please go ahead.
Yeah, hi, good afternoon. Two simple questions on 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 first nine months. Just wondering if you can give us any view on that one.
You mean the translation effect?
Translation effect, yeah. That's good.
I'm sorry, we don't have any such guidance. No, we don't. Sorry.
Okay, great. The second question, just want to understand, on Sweden, you closed five stores in the third quarter. It's just a timing issue as you're relocating the stores, or the number has permanently come down from 177 to 172?
Yes. When we look at the stores, we relocate, and sometimes we close down when we come to the end of the contract. That's quite normal, and as an investor, you shouldn't be worried because we typically don't close down profitable and successful stores.
Okay, thank you.
Welcome.
Thank you. Once again, star one if you wish to ask a question over the phones. We have a follow-up question from the line of Chris Chaviaras from Barclays.
Yeah, sorry, one very quick one. Can you give us the amount of stores that you had on the 22nd of September?
No, we don't have that number in front of us, but we will give you the number by the end of September when we give you the full month sales numbers on the 15th of October, right?
Okay, that's all right. Thank you.
Okay, your next question comes from Asad Malik from Citi. Please go ahead.
Morning, guys. Afternoon, guys. Sorry, my question's just been asked by Chris, which you're not answering.
Okay.
Thank you.
Thank you.
Once again, star one to ask a question over the phones. 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 20th of January next year. Bye.
Thank you very much. That just concludes the conference for today. Thank you all for participating, and you're now free to disconnect.