Thank you for standing by and welcome to the First Quarterly 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, Tuesday, March 24, 2015. And I'd now like to hand the conference over to your speaker today, Mr.
Nils Vineet. Please go ahead.
Thank you. Welcome to this telephone conference on occasion of H and M's Q1 results 2015. Our CFO, Jurgen Tervanen is with me today and will be happy to answer your questions after the presentation. You'll find the presentation slides to this teleconferenceonhm.com. Please look at the slide Q1 2015.
We've had a very good start of 2015 with a strong Q1, both in terms of sales and results. Collections from all group brands have been well received. With an attractive customer offering and global expansion with stores and online, we have increased our market share and strengthened H and M's position further. Please turn to the slide sales. Market conditions for fashion retail in the Q1 remained characterized by a challenging macroeconomic situation in many places.
In this environment, H and M continued to perform well. Sales including VAT increased by 15% in local currency and 25% in SEK amounting to SEK 46,800,000,000. Looking at the development in some of H and M's largest markets, please turn to the slide sales per market. In Germany, which is the group's single largest market, H and M sales developed well despite weak market statistics. Sales were up 5% in euro and 12% in SEK.
In H and M's 2nd largest market, the U. S, sales were very strong. In local currencies, the increase was 28% and 57% in SEK. The U. K.
Kept developing well. Sales increased by 17% in sterling and 34% in SEK. In China, H and M's rapid growth continues. Sales grew by 28% in local currencies and sales grew by 28% in local currencies and
54% in SEK.
China is now
the 5th largest market of the H and M Group. So overall, a very good sales performance. And now to look at results. Please turn to the next slide. Gross profit in the Q1 increased by 26%, corresponding to a gross margin of 55.2% compared to 54.9 percent a year earlier.
Markdowns in relation to sales decreased by 30 basis points compared to the Q1 last year. And looking at some external factors such as raw material prices, cost inflation, supplier capacity, purchasing currencies and transportation costs. Combined, the market situation for these factors was slightly negative compared to the corresponding purchasing period the year before, mainly as a result of the increased cost inflation. Please turn to the slide SG and A. Cost control in the group remained good.
In the Q1, SG and A increased by 23% in SEK and 14% in local currencies. The increase is mainly related to the expansion and to the continued long term investments in IT and online and the broadening of the product range. To look at profits, please turn to the next slide. Profit after financial items increased by 35% to more than SEK 4,700,000,000. The increase is mainly due to strong sales and good cost control, but also to positive currency translation effects.
Profit after financial items has been negatively affected by the costs for our long term investments in, for example, IT and online. These costs were higher in the Q1 of 2015 compared with the corresponding quarter last year. Please turn to the next slide. After tax rate of 23.5 percent, net profit increased to SEK 3,600,000,000. Earnings per share increased by 36 percent to SEK 8.18 from SEK 1.60.
And now for some more key figures, please turn to the slide key data. Stock in trade as of the 28th February amounted to EUR 20,300,000,000 an increase of 28% in SEK and 23% in local currencies. The increase is mainly due to the store and online expansion and also to the strengthening of the U. S. Dollar, which has affected purchasing costs and as a consequence the value of the stock in trade.
As a share of sales, stock in trade was 12.7% compared to 12% the previous year. The competition and the level of stock in trade are considered good. Cash flow from current operations was DKK 4,900,000,000 up from DKK 2,700,000,000. The main explanation for the increase is the strong result. Investments in terms of CapEx totaled SEK 2,200,000,000, an increase from €1,600,000,000 The increase is mainly a reflection of the strong expansion in stores and online.
For 2015, CapEx is expected to reach approximately SEK 11,000,000,000 to SEK 11,500,000,000. The financial position of the H and M Group remains strong and liquid funds increased to SEK 20,000,000,000 from SEK 18,200,000,000. Return on equity was 40.1%. And now some words on expansion. Please turn to the Slide 4, expansion 2015.
H and M has a strong global presence with 3,551 stores in 57 markets, 6 fashion brands and sales online. In the Q1, we opened 40 new stores net. One of them was the 1st H and M stores in Taiwan, which opened in Taipei in mid February. The store has been very well received. And later this year, the first H and M stores in Macau will open.
And Peru, South Africa and India are also planned new markets for H and M in 2015. In total, we will open approximately 400 new stores net in 2015, within our target to grow the number of stores by 10% to 15% per year. The largest expansion will take place in existing markets led again by China and the U. S. One example of an exciting upcoming offering is the planned new H and M flagship store on Herald Square in New York.
It will be one of the largest stores in H and M Group. Please turn to the next slide. Expansion also continues for the newer brands of the group, including Kos and Other Stories, Monkey, Weekday and Cheap Monday. Main focus will be on Kos and Another Stories. Both brands will open more new stores in 2015 than in 2014.
Kos will add at least 3 new markets this year: Bahrain, which opened in via franchise in February and Luxembourg and Czech Republic, which will open in the autumn. With many exciting store openings to look forward to, we are also reaching a growing number of customers via shopping online. Please turn to the next slide. H and M's online store, hm.com will be launched in 9 new markets in 20 15. 8 of them will be opened already this spring.
It will be Portugal, Poland, the Czech Republic, Romania, Slovakia, Hungary, Bulgaria and Belgium. In the autumn, we will also open the H and M online store in Switzerland. Please turn to the next slide. As part of our long term initiatives, we also continue broadening the H and M product range. H and M Sport and H and M's extended true range are examples of how we have developed our customer offering in stores and online.
Both H and M Sport and extended true range have been well received and will be rolled out to more stores. Another example is H and M Home. This year, approximately 100 new H and M home departments are open and around 10 new markets in the yard. 2015, we're also launching yet another new concept, H and M Beauty. H and M Beauty will be a new broad concept for makeup, body care and hair care with high quality value for money products in a specially produced design.
H and M Beauty would initially be launched in around 900 H and M stores in approximately 40 markets and online in autumn 2015. It will be presented in an inspiring shopping environment, which will further strengthen our customer offering. And now before we move on to the Q and A session, just some words on current developments. Sales in the period of the 1st to 21st March increased by 9% in local currencies compared to the same period last year. Looking at the external factors affecting our sourcing costs going forward, the strengthening of the U.
S. Dollar is the most notable factor. The market situation as regards to external factors for the purchasing period for the Q2 2015 is negative because of the substantial strengthening of the U. S. Dollar against most currencies, including the euro since autumn 2014.
This will be even more negative for the purchasing periods for Q3 and Q4. Although the strong U. S. Dollar will result in gradually increased purchasing costs when sourcing for the coming quarters of 2015, We will still make sure to have the best customer offering in each H and M market according to our business concept, fashion and quality at the best price in a sustainable way. And with that, we are now happy to take your questions.
Please remember to only ask one question at a time. Thank you.
Thank Your first question comes from the line of Paul Stegas. Please go ahead.
Yeah. Hello, everyone. Just a quick question on the incremental investment costs that you highlighted in Q1. Could you give us a sense of how material they were and the phasing across the rest of the year on those incremental costs please? Thank you.
Yes. In Q1, the incremental cost is SEK 100,000,000 in Q1. And we still think that for the full year, it will be somewhere between SEK 400,000,000 to SEK 600,000,000.
Okay. Thank you.
Thank you. Your next question comes from the line of Richard Chamberlain. Please go ahead.
Yes. Thanks very much. Hi, guys. Hi. So just a couple of things, please.
Just on the sales in March so far, I just wondered if there are any special factors affecting the performance. Obviously, it's a short period after a strong 3 months. But were there any special factors such as calendar effects or timing of promotional activity? Thanks.
No, not really. But as always, every spring, we say the same message that you should see the sales for March, April and May together due to the differences in when the timing of spring and Easter, etcetera. So you shouldn't draw too much conclusions from the 3 weeks sales period.
Right. Okay. Thanks, Niels. And just one more, please. On the balance sheet, I just wondered why intangible fixed assets went up so much in the Q1.
Was there a reason for that?
Yes. There are of course reasons. And the main reason is that we are expanding, but there is also quite a substantial currency effect in the tangible fixed assets. And we are, of course, opening a lot of stores in U. S.
And China. So if the balance sheet is having, let's say, somewhere between 10% 11% just currency effects, so some lines in the balance sheet, for instance, tangible fixed assets, they have much higher currency effects. I think it's close to 20%. So that's the reason when looking at the balance sheet that the increase of almost 30%.
Right. Okay. Thanks very much.
Your next question comes from the line of Simon Irwin. Please go ahead.
Good afternoon, gentlemen.
Good afternoon.
Can I just ask about the product initiatives and what that's doing to overall pricing? I suppose the kind of simplest way maybe of phrasing is of the like for like that was delivered in the quarter and obviously we need to estimate that. Was most of that driven by ASP or by volume?
It's of course a mix, but mostly volume driven essentially.
Right. But there was a noticeable ASP impact within that as well was there?
No. We don't comment on the ASP development, which could vary over time. But it's mostly due to different mix effects. But again, it's mostly volume.
Okay. And just going back to your answer about the incremental costs in the quarter and across the full year. Last year, I think you said that they were roughly evenly split between OpEx and gross margin. Is that the case this year? Or is it more OpEx oriented?
It will be more or less 50% split on the cost of goods sold and the rest in within the SG and A. So half half
more or less. Okay. So there will
have been an impact in the 1Q gross margin? We had to guess 10 basis points or something like that?
Yeah. Something like that.
Okay. Thank you.
Thank you. Your next question comes from the line of Rebecca McFadden. Please go ahead.
Yes. Hi. Good afternoon.
Good afternoon.
Good afternoon. A couple of questions, please. In view of the pressure on sourcing costs because of the U. S. Dollar, is there any sort of move towards perhaps adjusting prices over the medium term in order to try and compensate for the cost pressure?
Well, when looking at the gross margin and how that will develop in the coming quarters. Of course, these higher sourcing costs will give an effect on our purchasing prices. But we don't want to exactly go in how we will deal with a stronger U. S. Dollar.
What we can say is, as Niels already said, that we will stick to our business idea to guarantee that we have the best customer offering on each market. But at the same time, of course, during a period like this, we are following the competitors very close and looking what's happening on different markets. And of course, we will act on that as well. And that can differ from market to market what we will do.
I see. And are you seeing any evidence of sort of slight ASP inflation across the competition at present? Or do you think it's too early for that?
Well, as Jyrki said, this is something we do continuously. And yes, I mean, if you take some markets like Russia, for example, obviously, the ruble has weakened quite dramatically. We've seen price increases, and we have some peers that have announced that they would make yet more price increases. But again, we follow very closely. And there is always a lag from the time of order until the effects will be seen in the stores.
And we see that Q2, especially Q3, Q4, you will see more out in the market probably.
Okay. Thank you.
Thank you. Your next question comes from the line of Fraser Ramsden. Please go ahead.
Thanks very much. Good afternoon. Just coming back to your earlier comment. I think you said, I may have
missed it, that there was about
a 20% impact on fixed assets from currency. Was that right?
Quite huge currency effects when translating different currencies to Swedish krona.
Right. And so should we think that in view of where you source from that the impact on inventory was of a similar magnitude in the period end?
Well, of course, that will sometimes affect, but we are buying inventories in different currencies. And so of course, there might be some pressure in the inventory as well. But I think that's the thing we are able to handle in a good way.
Okay. And sorry just one final one. I think you said that external factors were negative in the quarter, but obviously markdown benefited your gross margin by about 30 basis points. So I'm wondering what the positive factor was other than markdown within the gross margin this quarter?
Right. I mean, again, there are maybe 25, 30 different factors affecting the gross margin and some are positive and some are negative. And we've highlighted some of the largest ones. But all in all, I mean the rest is more or less flattish, I would say, if you but we have I mean the markdowns, as you said, was around 30 basis points year on year. And then you have the long term investments which was negative 10 bps or something and the rest is a combination of the other factors.
Okay. But external factors were negative. So we should assume your commercial policies were the thing that delivered the positive balance here?
Again, there are so many other factors. And depending on I mean, what we try to comment is the market conditions. Then we might succeed better than the market in negotiating or whatever.
Yes.
That doesn't necessarily mean that the gross margin will be exactly as the external factors.
Understood. Thank you very much.
Thank you. Your next question comes from the line of Charlie Mervisjem. Please go ahead.
Good afternoon. I had a question about the operating costs. So they grew 14% on a constant currency basis. And I appreciate there's about DKK100 1,000,000 in there for year over year increase in long term costs.
No, actually 50, half and half in the
SG and A.
Yes. Sorry, any 50, yes, obviously in the OpEx line. It doesn't really suggest a lot of OpEx leverage. Could you talk about costs in comparable stores, which you've done in the past versus the incremental cost of growth?
Yes. We still have a good cost control. But in comparable stores, it's more or less in Q1 flat just slightly higher than last year. And but as a share of sales, it's a lower share of sales in Q1. But of course, as we said many times that we have an underlying inflation when it comes to salaries, etcetera.
So the normal is that there is an underlying increase in the cost for comparable stores as well. Now we have been successful some quarters to come in even below in money. But I would say that the normal situation is that we have to work hard as we do with the efficiency and hopefully also have a positive like for like.
And on the CapEx side of things, you've just reiterated your CapEx guidance for the year. And I appreciate it is a range. But given the movement of the depreciation of the krona is there upside risk to that CapEx guidance in English?
Yes. When we guide the SEK 11,000,000,000 to SEK 11,500,000,000 that's with the currencies prevailing at the year end. So of course, when we are translating the CapEx from different countries to Swedish krones, it will increase. But we stick to the guidance with the prevailing currency rate that was in connection with the year end. And then the guidance is €11,000,000,000 to €11,500,000,000 But as we said, it's a moving target.
It can be revised decisions. Some parts will come up new opportunities etcetera. So but that's the best guidance we have for today.
Thank you very
much. Chris Tavarez, your line is open.
Hi. Sorry about that. Good afternoon, guys. One question in terms of the FX impact on the gross margin in the Q1, would you be able to quantify that or tell us whether that was positive or negative? [SPEAKER KARL HENRIK
SUNDSTROM:] We said that the external factors aggregated are slightly negative, but just the FX is more or less neutral.
Sorry, I didn't catch that. So just FX was
More or less neutral.
More or less neutral. Okay. Okay. Then another one very quick. In terms of if we see the entire March, and I know that's a really detailed one, but March has one less weakened this year, if I'm not wrong versus the previous year.
Don't you think that this will have a calendar impact? Because I heard you saying that you want to see on a 3 quarter on a 3 month basis sales, but you haven't mentioned any calendar impact and you haven't quantified it, which you usually do. So I wonder whether you do think that there is a calendar impact for March.
Yes. For the full March, as you say, there is a negative calendar effect estimated to 2% to 3 percent. So it's a negative calendar effect.
I see. But there isn't one from the first until 21st, right?
No. Then there is no calendar effect. There is 3 Saturdays and 3 comparable days for each weekday. So there is no calendar effect in that figure.
Okay. Thank you very much.
Welcome.
Thank you. Your next question comes from the line of Nicholas Farr. Please go ahead.
Thank you, operator. We can hear you very poorly by the way. Gentlemen, I'd like to ask you a question on the online rollout. Obviously, we noticed quite substantial increases in local currency sales in markets like the U. S.
But also in Italy and a few other prominent markets where you just recently rolled out new channel sales. Could you educate us a bit on the impact on those markets from new channel sales please?
Yes. We are very happy again with the online development, but also with the store development. So it's a combination of both online and offline.
Yes. And also I understand you've been rolling out various software systems and changed the made a few changes to the product offering versus customers, enabling in some markets a more seamless customer experience with returns possible in physical stores etcetera. How has that rolled out? And is there any early indications of the impact on bottom line please?
Again, this is the reason why we invest so much in online and IT. It's not just expansion of the online store to more markets. It's also as we elaborated many times now, the improvement of the existing store to take it to even further levels, so to speak, in terms of greater offering, wider offering, better navigation and seamless features, as we discussed before. So developing very well, but we take it step by step and very promising.
And the final question if I may. Can I just say, I guess, there are 3 main sort of possibilities to counteract the increasing sourcing costs ahead, changes in price points, changes in mix and categories and buying cheaper goods? Do you think is there anything of this that you've been discussing in particular? And or are there any other options available for you at your discretion please?
As we discussed before, there are a number of things we work on. Of course, we work very hard. But we don't compromise with quality, of course. But having said that, it's, of course, very difficult to offset the magnitude of the sharp U. S.
Dollar increase.
And finally, in terms of price position in the market, you said you're monitoring closely your competitors. Are you referring to your absolute position or your relative position in the market please?
It's both of course. And this is done on a continuous basis not just right now when the dollar is changing rapidly.
Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Samantha Conti. Please go ahead.
Hi. Good afternoon. I just wanted to Nils to elaborate. On this looking at the 3 months together, the March, April, May numbers, you said it's a recurring thing every year. Is it because of the change of season or because the weather is so dodgy worldwide?
What's the reason And
also And also the timing of the different Easter and holidays makes a big huge impact on the monthly sales numbers. Just look at our historical monthly sales numbers, you will see very volatile numbers.
Okay. And that's every year? That's recurring every year?
Yes.
Okay. Thank you.
Welcome.
Thank you. Your next question comes from the line of Richard Jaff. Please go ahead.
Thank you very much. And just a question on what's happening in Asia and Europe and the apparent margin erosion there. If you could address what that might be based in the specific causes for the operating margin erosion? Thank you.
You're referring to the segment report. Again, this is as a result of our transport pricing policy and timing. So you can't get any conclusions on that on a quarterly basis. I'm sorry.
Thank you.
Thank you. Your next question comes from the line of Simon Bauer. Please go ahead.
Hi, gents. Apologies in advance because I
think I might have just missed
a comment earlier. Just wanted to clarify. Did you or alternatively could you if not quantify the impact on your inventory balance from the U. S. Dollar appreciation which
implied earlier was a significant reason for the increase that we've seen there?
Of course, there is a significant dollar impact, but we choose not to quantify it. No.
Okay. Not to worry. Thanks anyway.
Thank you. Your next question comes from the line of Andrew Hughes. Please go ahead.
Hi. Good afternoon, gentlemen.
Good afternoon. Good afternoon.
Just a question going back to the big move in FX. So we've seen sort of 20% or so move in the dollar versus the euro. How does that compare with the situation a few years ago when the cotton price had trebled? Is it the same sort of magnitude in terms of what it does to your effect of your bought in prices?
It's difficult to say because of course there are similarities, but there are also big differences. And I think the company is different and the world looks different.
Yes. So your response and say external factors may be different. But in terms of the quantum, is it possible to sort of compare the 2 together?
Not really I think. Okay. I think where you're heading. But I think it's important to look at history and learn from that. But then again, there are always some other tweaks and again, different environment today than it was 4 or 5 years ago.
Yes. I mean by different environment, do you mean that obviously we're in the middle of a financial crisis at that point and we're not now? Or is there anything else that's changed?
A lot of them. Most things have changed, I would say. We have a different exposure to different markets. We're larger, etcetera. But what I could say is the same is, of course, our long term commitment and always to have the best offering in each market.
Do you think with the change in your geographical exposure, your markets are more competitive now than they were 4 or 5 years ago?
In a way you could say by definition that competition is always getting worse because everyone tries to improve things. But at the same time in some markets, there might be softer competition because a lot of competitors have left the market etcetera. But of course, for us, it's always about improving things and strengthening our offering and being long term. Okay.
Great. Thank you.
Thank you. There are no further questions currently coming through from the phone lines. We do have another question from the line of Rebecca McClellan. Please go ahead.
Hi. I've just got one follow-up question please on the sourcing model. I know that you've got significant volumes out and sourced out to the Far East. If the dollar sort of stays where it is over the medium term, is there any sort of prospect of you bringing some of your sourcing back closer to home back into the European basin or anything?
I mean, there's always a lot of development going on in sourcing, meaning also shifting from different markets. But again, with the volumes we have, you can't just jump back and forth. But this is something we continue to look at. And we since we grow so much, we also continuously have to add new markets and new suppliers. So that's why we're looking at sourcing in Africa, for example, and in Burma, etcetera.
But of course, we still source almost 20% of the volumes in Europe, which of course is very interesting for proximity and speed.
And are you seeing any sort of pressure on European sourcing costs or average unit costs because of perhaps a geographical shift away from the dollar denominated sourcing?
Sorry, say again. New question please.
Is there any sort of shift away is there any pressure on European based average unit costs because other competitors might be shifting away from Asia for example?
Yes. It might be if a lot of players are moving sourcing to Europe of course then it's of course maybe causing capacity limitations, etcetera, which could affect the prices. We haven't seen that at the moment. But of course, it might be in the future the situation if more and more sourcing are moved to Europe.
Okay. Thank you.
Thank you. Your next question comes from the line of Paul Rosington. Please go ahead.
Good afternoon, everyone.
Good afternoon.
Could you just remind us of the actual mechanism by which you hedge out your U. S. Dollar exposure on sourcing?
Right. It's very simple and we do it continuously meaning that each order or every day when we place new orders, we hedge the exposures until we pay the suppliers, you could say, in a simple way. Meaning that the as I said before, the lag between time of when you place the order until you see the effect coming through in the figures in the P and L, etcetera, is roughly 2 quarters. This is done continuously no matter if the dollar is weak or strong.
Brilliant. Thanks very much. That was it. Sorry, I think I've got one last question. You've opened fewer stores in Q1 this year versus Q1 last year.
Was that by design or just more question of availability of new space?
It's more a timing issue. But again, our target for the year of approximately 400 new stores remain.
Understood. Thank you.
You're welcome.
Thank you. Your next question comes from the line of Paul Stegas. Please go ahead.
Yeah. Hi, again. Just a follow-up. Given the interest rates in Sweden, our negative territory, Central Bank, I mean, does that make you think any differently about your balance sheet and cash balances going forward? I'm aware obviously you have cash across your different geographies.
But generally anything we should be thinking about in terms of the cash on the balance sheet and the payout ratios or dividend? Or I think will it probably remain as it was before?
Yes. When it comes to the cash situation and the interest rates, we often have got the question, do you have too much money laying in the bank accounts? Of course, it's a relevant question. But we are happy with our cash position and the balance we have at the current time. So what's happening in the future that we will see.
But for now, we think we are in a good balance.
Okay. And maybe just one follow-up question on sourcing. Is there any discussions around Chinese suppliers that you could potentially buy in euros going forward as we've seen in a few other sort of industries? Or is this generally always been U. S.
Dollar price sourcing and that's the way it will stay?
Well, of course, we're always open to new ideas and this is something that we've been looking at. But no, I mean, I think the U. S. Dollar is the predominant source in currency in Asia.
Okay. Thank you.
Welcome.
Thank you. Your last question comes from the line of Nicholas Pham. Please go ahead.
Thank you. Now we've gone a quarter into the year 2015, I was just wondering, would you actually care to give us a little bit more detailed breakdown of the investment related extra costs that you actually expect for the full year on a quarterly basis?
You mean these incremental long term investments?
Yes, please.
I think the message is the same. For the year, we approximately guide for SEK 400,000,000 to SEK 600,000,000, but they could be spread unevenly between the quarters. So sorry, we can't give you any more flavor.
Okay. And then just a nitty gritty question. You state the number of stores in China at 278 at the end of your fiscal Q1. And according to the most recent set of results for Q4, you had 291 stores in China. So that implies actually 13 stores 13 fewer stores, which is not in tandem with the report and the tables on page 12 today.
I was just wondering if I'm missing something here.
Yes, you are because we've broken out Hong Kong.
Okay. Thank you very much.
Thank you. There are no further questions coming through. Please continue.
Thank you all very much for participating in this conference call and welcome back for the Q2 results on the 25th June. Goodbye.
Thank you. That does conclude the conference for today. Thank you for participating. You may all disconnect.