Thank you for standing by, welcome to the H&M nine-month report conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today on Thursday, the 25th of September, 2014. I would now like to hand the conference over to your speaker today, Nils Vinge. Please go ahead, sir.
Thank you. Welcome everyone to this telephone conference on occasion of H&M's nine-month results 2014. Our CFO, Jyrki Tervonen, is with me, and we'll be happy to answer your questions after the presentation. You'll find the presentation slides to this telephone conference on hm.com. Please look at the slide, third quarter 2014. It was a very strong quarter, both in terms of sales and profits. We continued gaining market shares with very well-received collections, and we continued our global expansion with new stores as well as new large online markets. H&M Group sales increased 21% in SEK and 16% in local currencies. Sales were strong for all group brands H&M, COS, & Other Stories, Monki, Weekday, and Cheap Monday. We see this performance as a receipt that customers appreciate our collections.
Gross profit in the third quarter increased 20% to SEK 23 billion, corresponding to a gross margin of 58.3% compared to 58.8% a year ago. Looking at the market situation for some external factors such as raw material prices, cost inflation, supplier capacity, purchasing currencies, and transportation costs, combined market situation for these factors was slightly negative compared to the corresponding purchasing periods the year before, mainly as a result of increased cost inflation. Looking at the purchasing period for the fourth quarter, the combined market situation for the external factors is also expected to be slightly negative. The summer months in fashion retail are generally characterized by clearance sale to make room for incoming autumn collections. This year, markdowns in relation to sales were marginally higher than in Q3 2013. Cost control in the group remains very good.
Costs in comparable stores were higher in absolute terms than last year, as a share of sales, costs in comparable stores were lower. SG&A increased by 16% in local currencies, translating to SEK, the increase was 20% to SEK 15.7 billion. The increase is mainly related to our expansion, with costs for new stores and to our long-term investments. Please turn to the slide Long-term investments. We have continued our substantial long-term investments in IT and online, but also in the broadening of the product range and in our new brands. These are investments that we see as very important for H&M's future success. They cost a lot now but will be very important for H&M for many years to come. The long-term investments are aimed at further strengthening H&M's market position and securing future expansion. Online expansion has been rapid this year with four new markets.
France in March, followed by Italy and Spain in August, and China now in September, which was even a little earlier than planned. We are happy to see that customer reception has been very good in all these markets. Next year, we will launch H&M shop online in another 8 to 10 new markets. Long-term investments increased in the third quarter compared to the third quarter last year. In the third quarter of this year, the long-term investments had a greater impact on results than in Q2 this year. Compared to Q3 2013, the effect in Q3 this year was slightly more than 30 basis points higher on the gross margin as well as on SG&A. In total, a negative effect of approximately 65 basis points. To look at profitability in the quarter, please return to the slide Third Quarter 2014.
Operating profit increased by 20% to SEK 6.9 billion, and the operating margin was 17.7% compared to 18% in the third quarter last year. Profit after financial items also increased by 20% to SEK 7 billion in the quarter. After a tax rate of 24%, net profit increased to SEK 5.3 billion, equaling earnings per share of SEK 3.20, up from SEK 2.68. Now for some key figures. Please turn to the slide Key Data. Stock in trade as of the 31st of August amounted to SEK 17.9 billion, an increase of 17% in SEK and 15% in local currencies. The increase is mainly explained by the expansion in stores and online. The level and the composition of the stock and trade are considered good. Cash flow from current operations was SEK 18 billion. The investment in terms of CapEx totaled SEK 6.3 billion.
We invested mainly in new stores, but also in rebuilds and IT. The financial position of the group remains strong. Liquid funds amounted to SEK 13.5 billion, and return on equity was 46.1% rolling 12 months compared to 43.4% last year. Now some words on our store expansion. Please turn to the next slide. We continue our strong store expansion. In the third quarter, we opened 56 new stores net, and as of the 31st of August, we have 3,341 stores in 54 markets. China and the U.S. remain the largest expansion markets. In July, we opened a new flagship store on Fifth Avenue in New York, which you can see on the next slide. Customer reception has been very good. It is H&M's 13th store on Manhattan, and we have 334 stores in the U.S. today.
For the full year 2014, we maintain our plan to open around 375 new stores net within our expansion target of increasing the number of stores by 10%-15% per year. The Philippines will become a new market for H&M in October with a flagship store in the SM Megamall in Manila. We see greater anticipation ahead of the opening and plan to open more stores in Manila already this year. We're also looking forward to opening H&M in India. The opening in India, which was planned for late this year, has been moved to 2015. Next year, we will also open the first H&M stores in South Africa, Peru, Taiwan, and Macau. Expansion continues for the newer brands of the group as well, and we're also continuing to broaden our offering within H&M. One example is our new extended sports concept. Please turn to the slides, H&M Sport.
We are offering the new H&M Sport online at hm.com, as well as in stores in selected markets. H&M Sport has enjoyed a very good start. We are developing the collections, and we see that our customers appreciate it. We are ready for the next step to gradually expand the new H&M Sport to more stores and markets. Another example is our extended shoe range. Please turn to the slide H&M Shoes. This autumn, H&M is launching an extended shoe range for women, men, teenagers, and children. Like the sports concept, H&M's extended shoe collections are available online and in selected stores. The launch is still at an early stage, but customer reception so far has been very good. Now, before we move on to the Q&A session, some words on current trading.
In September, sales in local currencies have increased 7% from the 1st to the 23rd, compared with the same period last year. Looking at trading this time of the year, August, September, and October should be viewed together as the beginning of autumn can vary a lot between the years. This year, sales in the second half of August were helped by cooler weather, while sales in September so far have been affected by unusually warm weather in most of our markets. The weather effect in September is clearly reflected in the available external market data like, for example, from Germany. We have an exciting autumn ahead of us. Please turn to the next slide. Already next week, H&M is launching a collection that we are very proud of, H&M Conscious Denim.
It is a denim collection that is made of more sustainable materials, such as organic cotton, recycled cotton, and Tencel. Two of the pieces also include recycled fibers from clothes that we have collected under H&M's global garment collecting initiative. So far, customers have handed in more than 8,000 tons of used garments for reuse or recycling. Garment collection is part of our work to close the loop for materials. It is one of the many initiatives that we invest in for a more sustainable future. With that, we are now happy to take your questions, and please remember to only ask one question at a time. Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. The first question comes from the line of Eric Sheridan. Please ask your question.
Yes, hello. Thanks for taking my question. I was just wondering on the online, given that you said China was launched a little earlier than expected, what is the potential to accelerate the openings for the coming eight to 10 markets?
Don't get too carried away now. There's intense work going on for the preparations for the eight to 10 new markets. We will come back to you in due time when they will open. I want to remind you again, it's a lot of work, and we invest a lot in this, but of course, it's in our own interest.
Can I just follow up on that? Could you just tell us a little bit how the work on the standardized online platform is going?
It's going very well. As you can see, we have now launched four new markets within a very short time. Of course, that's boding well for the future.
Very good. Thank you very much.
Thank you very much. The next question comes from the line of Frédérique Le Rest. Please ask your question.
Yes. Good afternoon, Frédérique Le Rest from Morgan Stanley. I have a question on FX and the potential impact on sourcing costs. How are you dealing today with rapidly evolving FX and USD in particular? What kind of impact could you expect beyond next quarter? Do you think it could change, put a little more pressure on your gross margin? Thank you very much.
As we've said many times before, the gross margin is affected by maybe 25-30 different factors, where FX or currency is one of them. Of course, one of the most important relations is between the US dollar, since we source a lot in US dollar and the euro, because still majority of our sales is done in euro. In a very simple way, you could say that a strong dollar versus a weak euro is negative, all things equal. Things are not equal, so it's not that simple. At the moment, I would say, it's pretty flattish. It's no dramatic changes. Just to explain a bit further, as soon as we have placed an order, we hedge that. We lock in the markup, so to speak.
The effect on the currency is, so to speak, postponed until we sell the garment and you see it in our P&L.
Thank you.
Thank you very much. The next question comes from the line of Omar Saad. Please ask your question.
Thank you. Good morning. You had mentioned the spring-summer collections, clearly there have been a lot of strength in the numbers the last couple of quarters.
Yes.
Can you talk about what you think some of the key factors were in those collections that drove such strong sales and margins, then maybe talk about the strategies in the future to replicate that kind of success with future collections? Thank you.
Well, I think it's difficult to point out a specific product, a specific factor. I think it's the combination of many different factors. All in all, we believe that, we always work with continuous improvements, and we've done a lot of efforts. We always do a lot of efforts in order to improve the collections. Certainly, we are very happy, and the customers seem to be also very happy with the spring and summer collections, but it's very difficult to pinpoint any specific details or so.
Just to follow up, there hasn't been any change in the design process or the collection rollout process or anything like that?
No, not really. Apart from the fact that we continue to work with improvements, and there are always changes going on, but it's more evolution. There is no dramatic change that has been done, no.
Omar, just to add, it's the whole customer experience also in the stores, the total customer offering. We have been working a lot with the customer offering. One part is the sustainability work we do. It's a lot of different factors affecting the turnover, so we shouldn't forget the efforts we are doing in many areas like sustainability and the store experience.
Thank you.
Welcome.
Thank you very much. The next question comes from the line of Rebecca McClellan. Please ask your question.
Hi, good afternoon.
Good afternoon.
Is your guidance for the longer-term investment package 2014 still SEK 600 million to SEK 800 million? What would you guide for 2015, please?
When it comes to the guidance that we gave earlier, SEK 600 million to SEK 800 million for 2014, now it looks more SEK 800 million or slightly above for 2014. For next year, it is too early to give you an exact figure how it will look. We will have to come back to that in connection with the Q4 year-end report. What we can say is that the long-term investments will be still on a high level in 2015.
Lovely. Thank you. Could you just give us some idea on CapEx? I think it was north of SEK 9 billion for this year. Is that right?
As we said, we started the year to guide you in a range of SEK 9 billion-SEK 9.5 billion, and now it looks like it will be within that range, but maybe more towards SEK 9.5 billion. As we always say, it is still, even though we are in September, there are moving parts still. We are opening I think 180, 185 stores still in Q4. Of course, that could have some moving parts, but that is the guidance that may be towards SEK 9.5 billion.
Right. For next year, would that grow in line with? What sort of level of growth would you expect on that for next year?
That we have to come back to in connection with the year-end report to have a better guidance for 2015.
Okay. Thank you.
Hopefully there will be some new stores next year as well.
Yes. Appreciate.
Thank you. The next question comes from the line of Paul Steeg. Please ask your question.
Yes. Hello, gentlemen. Just interested in the markdowns, which you said in Q3 was slightly higher than this corresponding quarter last year. Can you give us a sense of the markdown or if you don't want to do that, just the incremental change, Q3 versus Q3 last year, please? Why that was?
Yeah. They are slightly higher, less than 20 basis points compared to Q3 last year. It's not always as simple that we have a stock problem or too high stock or certain products that is not selling with the planned speed. As we have said, we have been happy with the stock and trade level when we went into Q3. We are happy with the stock level and composition in the end of Q3 as well. It can also be a situation that we feel is quite common, especially these past years, that it's still a very high level of price activities on several markets. Of course, if we see that the competition is doing a lot of price activities, for instance, back to school activities, of course, we also have to react on that.
It's a lot of salesmanship also included in working with reduction. It doesn't always to be a stock problem.
Okay. Thank you. Just lastly, follow up on the same question, it isn't an additional one. Given September was a bit weaker than expected, I guess it's going to affect everybody because of the weather. Assuming October, November are a bit stronger, given your stock levels are a bit higher, you'd still be comfortable that there shouldn't be substantial potential markdown effects, if the remaining part of the quarter actually is back to your sort of growth expectations, you'd still be comfortable?
Yeah. As we said, we have a good level of stock and trade as per end August and also the composition. It's far too early to say anything about the reduction levels for Q4. We still have more than two months ahead of us. Especially if the market situation is that it's tough selling figures on the markets, it might be that promotion activities and price activities also will increase during the quarter. It's far too early to have any guidance when it's still left over two months in Q4. We have to come back to that in connection with the next quarterly report.
Understood. Thank you very much.
Thank you.
Thank you. The next question comes from the line of Caroline Gulliver. Please ask your question.
Hello, guys. I had a question about the long-term investments online. I just wondered if you could update us on what you were doing to improve your delivery offer and in particular moving towards click and collect, perhaps? Just looking for an update on some of your key markets.
Yes, of course we are, as you've heard, investing a lot in long-term investments and a lot of that is, of course, aimed for online. For us, top priority is expansion to roll out in new markets. Parallel to that, of course, we work with a number of things to improve the customer experience, including, and there are lots of factors like click and collect that we're looking at. Gradually we are improving the customer. It's not that it's bad today, but it can always be improved, and a lot of things are going on.
Okay.
Any follow-up to that or is that
Perhaps I can just try ask you just another side one.
Okay.
You said last time that you were already online in around 65%-70% of your markets. I'm guessing by sales. I'm guessing by the end of the year you'll probably be somewhere around 75%-85%. Could you, A, confirm that, and B, by the end of next year, once you've opened another eight to 10 countries, will you be nearer sort of 95%-100%? Will be approaching?
We are approaching 100, absolutely. It's easy. If you look at the quarter report and just take the countries where we have online-
They represent, as you say, more than 75% already. Of course, the eight to 10 new markets we plan to open next year will add that figure even more. Yes.
Thank you.
Thank you. The next question comes from the line of Simon Irwin. Please ask your question.
Good afternoon, gentlemen.
Good afternoon.
Can you just talk a little bit about the overall impact of the sports collection, the shoes, and all of these other product initiatives in terms of what that's doing to your average prices?
Average prices?
Yeah.
It doesn't have any material effect on the average prices in the group. What it does do, of course, is that it extends our offering and we attract even more customers, and the stores we open actually tend to be larger and larger. That I can say.
Right. Obviously a lot of these will be at higher prices generally than your kind of normal offer. Surely won't it be mixing your average pricing up?
I see what you mean, that's more up to you to speculating. It's not the reason that we want to drive the ASP.
It's also widespread in the price range. Of course there will, when we are increasing the assortment in shoes for instance, we will not only increase the higher price group, we will also have a good price, low price. I think that the mix, I don't think that will have a material effect on the average sales price if looking at the whole H&M assortment.
Okay. Could I just also ask about your attitude to other online distribution? Clearly, your primary focus is distributing H&M in particular through your own platforms.
Right.
Particularly with your smaller brands.
Yeah
What have you done so far in terms of using third-party distribution methods?
Well, first of all, if we take the brand Cheap Monday, that's sold through several different platforms or other companies, because it's a wholesale operation, and then also including ASOS. We have Monki is sold through ASOS as well. I think that's it at the moment.
Of course, we are looking, but first priority is, of course, to use our own platform. Of course, there are possibilities all around the globe, for instance, in China, Tmall, et cetera. We will prioritize our own channel.
Yeah. Do you think that would be appropriate for COS?
For COS, we're very pragmatic, so far we have COS in, I think, 18 or 17 markets online, and it's our own platform, and it's very successful.
Great. Okay. Thank you.
You're welcome.
Thank you. The next question comes from the line of Christodoulos Chaviaras. Please ask your question.
Hi there. I wanted to pick up from that latest point about Tmall. Wanted to ask about the online in China. You said that it has started very well. Are you planning to go on Tmall? If yes, how soon? Also in terms of the online impact
If you take the first question.
Sure.
As Jyrki just said, the preferred path is always to do it organically through our own platform. That's how we've started, and we're very happy so far, even though it's in a very early stage, I must say. However, we were very pragmatic, and of course, he mentioned Tmall as an option, who knows? That's something we will have to follow up.
Okay. I appreciate that China, that's very early. If I look at the non-store growth in countries that you have operated online, like the U.S., France, and Spain, or even Italy, they have shown some pretty significant accretion there. Do you confirm or do you also believe that online has been earnings accretive, or do you feel that it has the same profitability as in store?
Are you talking about margins or top line, or what are you talking about?
Top line and margin.
Well, we've said many times that for us, online is more or less on the same profitability level as stores. We also said that online is a very good complement to the offline, we talk about a seamless omnichannel shopping experience. That's clearly why we invest so much and roll it out so rapidly now, because we see it's a very interesting way going.
Okay. Last one from me. If we think very long-term, because now your growth market is to be China and the U.S., and I guess a lot more emerging markets than your core German and the Nordics countries. If we think that your expansion now is going to be more into the emerging markets, potentially, how should we think about the long-term gross margin? Should we think about a different mix or more or less the different geographies have very similar gross margins?
Of course, there are different gross margins in different markets. However, for us, it's always about the pricing strategy. We always start from the customer perspective, we actually have the same price strategy in all markets. Of course, gross margin can differ from market to market, depending on different cost levels, different import costs, VAT, et cetera. The spread between the countries, from a price perspective, is quite limited.
In the long term, it's dependent on what's happening on the market. If the market is trending towards lower gross margins or higher gross margins, of course, we are following the markets. As Nils said, we always start from the customer offering, that's the main focus in our business. As you said, long term, that's a word we like.
Can you say that the gross margin, as it stands today, is higher in the emerging markets versus the established markets, or not really?
First of all, we don't split up the world in emerging markets and non-emerging markets. We look at each market per se, and there are differences, I'd say, but no dramatic differences.
Okay. Cool. Okay. Thank you very much.
Thank you. The next question comes from the line of Charlie Muir-Sands. Please ask your question.
Yeah. Thank you very much. Good afternoon.
Good afternoon.
Had some follow-up questions on the operating cost. Firstly, further to Rebecca's question about the long-term investment. I think given what you indicated through the first three quarters, even if we're going to go slightly over SEK 800 million for the full year, that implies a substantial drop in that cost in the fourth quarter. I just want to confirm that I'm interpreting that correctly. I've got a follow-up question on store costs.
Yeah, we don't give any figures for the fourth quarter when it comes to this. Our guidance is that full year will be slightly above SEK 800 million. I think in average, I would say it's more or less on the same level as the three first quarters have been on average. I think it's no major changes. Maybe then slightly less than in Q3, no major differences in level.
Okay, great. You alluded that costs in existing stores rose but rose less than the sales in those existing stores.
Correct. Yeah.
If I just say simply like-for-like store costs rose slightly. That would be the first time that has happened in over a year. I'm just wondering, is this the annualization of specific cost savings initiatives? We should therefore think that like-for-like store costs might start to creep up again? How can we think about the dynamics there? Thanks.
No. I think the normal situation when we have a sales increase as high as we had in the third quarter, the normal situation is, of course, that we have to add a lot more hours in the stores, in the logistic organization, et cetera. I would say that that's the normal situation. We have been successful in several quarters to have a good balance in the comparable stores, and we still have a very good cost control. As you said, we are increasing the absolute figures, but still, as a share of sales, it's better than last year. For me, still a very good cost control.
Also there are differences in quarters, even though the sales development might be the same, like Q2 +20%, Q3 +21%, more or less the same levels, but there is a big difference how much volumes you handle during Q3 compared to Q2. A quarter where you have a big summer sale, of course, you handle much more volumes, both in the logistical chain and also in the stores. It's a little bit tougher to have a leverage during big reduction quarters. I'm convinced that we will also, in the future, have a very good cost control in our comparable stores.
Understood. One final brief question. I know you don't disclose like-for-like sales specifically anymore, but last quarter you confirmed that the contribution from new space was running broadly level. Is that still the case, or has new space and new online could have driven some of that strong growth particularly?
Could you rephrase the question, please?
Well, I'll put it simply. Were your like-for-like sales as strong in Q3 as Q2?
Yes.
Yes. Absolutely.
Yeah. Thank you.
Thank you. The next question comes from the line of Anne Critchlow. Please ask your question.
Thanks. Good afternoon. My question concerns the launch of the eight to 10 online markets in 2015. I'm wondering how much of the investment for that fell into 2014 or falls into 2014.
Was the question the long-term investments, how much of the part from 2015 will fall in 2014, or?
Yes, for the 8-10 online markets that will be launched in 2015. How much of that falls into 2014?
Exactly how much, of course we will start and already have been starting to make preparations with those 8-10 new online markets that we are going to open in 2015. Exactly how much that will land in this current year, it depends on how good we are in getting the process ahead. For sure, we have been working simultaneously with these 8-10 markets already now, and will continue now in the fourth quarter.
Okay. Thank you.
Welcome.
Thank you. The next question comes from the line of Adam Cochrane. Please ask your question.
Good afternoon, guys.
Hi.
I'm going to ask on the long-term investments, and there's two bits to it really. The first, when you're thinking about your conscious collection, your move towards more organic cotton, are these initiatives part of your long-term investment program as you classify it, or are they just completely separate?
They are not included in the long term that we're talking, SEK 600 million-SEK 800 million. They are not included in that figure.
Still they are very long term.
They are very long term, but not in that sense.
In terms of your price points on them, are they something that you just absorb the additional cost of any incremental bits that are more expensive, or do you pass it through to the consumer and the consumer accepts the higher charge?
We absorb it.
You absorb it?
We absorb it.
In the medium term, would you expect your proportion of sustainable cotton, organic cotton, et cetera, to increase overall?
Yeah. The goal is that by 2020, all cotton should be from more sustainable sources.
How much do you think that would cost you?
A lot. This is something we think is an investment, but for us, as Karl-Johan writes in the report, we invest in our common future.
I think that this is one part of having a good sales development in the future. I think more and more customers, they are really putting focus on how companies work with sustainability. I think it shouldn't be looked as a cost. I think it's an investment for the future. It's one of the most important investments in our custom offering. I think it's very basic for us that, of course, we should do this.
I think you're certainly ahead of the game. The fact that it's described as very long-term and a big investment, I just thought it might fall into the long-term investment.
No, it's not falling in those SEK 800+ million.
Okay, thanks. Secondly, in terms of those long-term investment costs that are going into online and IT, when you mentioned earlier about online sales being roughly the same profitability as in-store sales, is that after a sort of allocation of all of those long-term investment costs included within that number?
Yeah, these investments that we are activating in the balance sheet, of course, they will start to be depreciated. Of course, the cost will come into that online business as well. Now we activate in the balance sheet, now we already have been starting to make some depreciations from them.
I see what you mean. We don't break it down in more details because we also invest for, like I said, omnichannel, which is for both channels. We don't see it so clearly separate, but it's absolutely clear that it's not what you are asking for. Is it margin dilutive or not? No, it's not.
It's not margin dilutive including-
No
all of the allocated costs?
No.
No.
Okay. Thank you.
Thank you. The next question comes from the line of Jamie Merriman. Please ask your question.
Hi there. Good afternoon.
Good afternoon.
My question is about China. I know that you mentioned it as one of the key countries for future store openings. Having gone there this summer and talking to some real estate professionals, the sense that I took away was that there's too much retail space being opened and too many malls being opened. The first question is, are you seeing that? How do you take that into account when you think about your own store openings?
Well, this is, of course, a risk, and that's why it's important to have good teams in place. We have several expansion teams in place and monitor the expansion and stick to the right malls, because as you say, there's a lot of malls being constructed, and all of them will not succeed.
That's key to map the ones that we feel are the best ones. Of course, in that sense, it's very important and very good to have a strong brand, and H&M is one of the strongest brands in fashion apparel globally and in China.
You don't feel there's any need to slow openings to test, just wait and see which malls are going to be the right ones or anything like that?
Well, we always want to grow with quality, as we say. There is a lot of work going on and careful benchmarking between the different options. We feel very comfortable with the expansion pace we have at the moment.
Great. Thank you.
The next question comes from the line of Dana Telsey. Please ask your question.
Good afternoon, everyone. Can you talk a little bit about, as you think about the month of September and the different markets, Europe, U.S., Asia, are there markets that are specifically slower, as you had mentioned Germany? With the level of markdowns given the slower September, how are you gauging the level of markdowns? Lastly, on the compensation expense
Please, Dana, please one question at a time for all the listeners.
Okay. No problem.
Okay. The first question, if we see differences, yes, of course, we do. We feel that's one way of analyzing is whether it's a collection. There are, of course, differences depending on what country you have, and some countries where it's been very cold, of course, that's affecting sales more. I mean, some countries where it's been colder, we've seen very good sales development, of course.
Is the U.S. different than Europe? Is it different markets different?
If you're talking about the first two weeks in September, I think the weather in Europe has been much warmer historically than maybe the situation in North America.
Got it. In terms of compensation expense, how do you see that impact the change in compensation expense, that impact on operating expenses going forward?
Compensation, do you mean salary increase or?
Yes.
Yeah, I think.
That you had mentioned.
Our own?
In sourcing.
In sourcing or our own salary?
On the compensation expense, the change that was made, that was mentioned in the release, how does that impact the expense structure?
Are you talking about?
Incentive program?
Yes, exactly. Yes.
Okay.
Okay. It's clear. Good that you mentioned it. We call it HIP, H&M Incentive Program, which is for all staff, all, no matter what country you work in and no matter what salary you have. You have to work for five years at H&M to get included in the program. The rules say that if H&M's profit year-on-year increases by 10% of the net profit after tax, before HIP should be paid to HIP. Hopefully, if we continue like this, there will be a payout in Q4.
It will affect the Q4 result?
Yes.
Got it. Thank you.
Thank you. The next question comes from the line of Jessica Lowery. Please ask your question.
Yeah. Hi, team.
Hi.
Obviously, you don't do those like for like anymore, but when you look at your store performance, what's driving the growth in same stores? Are you managing to get more footfall in? Is it basket size? What's the dynamic behind the like-for-like expansion?
It is, as you know, one of the most competitive industries in the globe, perhaps. We don't want to reveal. Of course, we keep track of all these KPIs. I think the most important thing is what we mentioned before, even stronger collections and better customer experience in the stores.
Okay.
Online, of course. Yeah.
Cool. Just a totally unconnected follow-up. Did I hear you say you're going to open 180 stores in Q4? Is that.
Gross.
Is that gross or net?
Gross.
Gross.
Okay.
We will, gross.
Perfect. Thank you.
Thank you.
Thank you. The next question comes from the line of Rebecca McClellan. Please ask your question.
Yeah. Hi again. Is your promotional policy online consistent with your promotional strategy in the stores?
Of course, it has to be adjusted for the channel.
Right. It doesn't completely reflect what's going on in store then?
Well, yes and no. We call it one H&M, but then each channel has to be adjusted for. It could be that you sometimes have a markdown or activity online, and sometimes it's something that you would find in stores. They, of course, it's coordinated centrally.
Okay. My second question please is, how has your average transaction value online trended since you sort of opened up into new markets? Have you seen an increase in the average transaction value, or?
The average transaction value?
Average order value or average basket size online?
Of course, we monitor this very closely. Again, sorry, it's not something we want to go into details in.
Okay, thank you.
Thank you. The next question comes from the line of Paul Biggs. Please ask your question.
Yeah. Hi, guys. Just one follow-up from me. As you expand into new geographies, obviously Australia, next year South Africa, potentially more southern hemisphere, do you have to make material changes to your supply chain, supplier base, distribution logistics, or is that something that you are comfortable with? Can you just explain how you are looking at that expansion to the southern hemisphere, please? Thank you.
Absolutely. You're touching upon something that was a hinder for us before we launched H&M in the southern hemisphere. That, of course, the complexity with the reverse season, because now when we have autumn, they have spring, et cetera. We have developed a way of coming around that, and obviously our customers in the first two stores in the southern hemisphere are very happy. You've seen the figures in Chile and in Australia. Of course, now there is a very interesting potential for us to scale this up and open up a lot of stores in the southern hemisphere. Exactly how we have solved it's not something we want to go into details regarding. The most important thing is that the customers in the southern hemisphere, they can of course find the latest trends and seasonal products.
You're comfortable that you've got the supply chain right in terms of the different seasonality of the products? It sounds like you're having no problems there.
Absolutely.
Okay. Thank you.
Yeah. The next question comes from the line of Christodoulos Chaviaras. Please ask your question.
Sorry, guys. One follow-up from me as well. A technical one, probably. On the gross margin, you mentioned that 30 basis points is from the long-term investments negative, and another maybe 15 to 20 basis points is from the markdowns. That explains the whole gross margin difference, in which case, I wonder why do you say that the external factors are slightly negative? Am I missing something here?
No, you're not missing anything. Again, there may be 25 or 30 different factors, and so there are a lot of other things, and some of them might be positive and some of them might be negative, but we point out two of them.
Is FX positive or negative for the gross margin in the quarter?
Which one?
The FX.
FX is positive, yes.
Okay. I see. All right, cool. Thank you.
Thank you very much. There are currently no further questions. Please continue.
Okay. With that, 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.
Thank you very much. That does conclude the conference call for today. Thank you all for participating. You may now disconnect.