Thank you for standing by and welcome to the H&M 9 Months 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. I must advise you that this conference is being recorded today on Thursday, September 23, 2014. And I would now like to hand the conference over to your speaker today, Neil Swinje.
Please go ahead, sir.
Thank you. Welcome everyone to this telephone conference on the occasion of H and M's 9 month results 2015. Our CFO, Jyrki Tervanen is with me and we'll be happy to answer your questions after the presentation. You'll find the presentation slides to this teleconference on hm.com. Please look at the slide Q3 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 and M Group sales increased 21% in SEK and 16% in local currencies. Sales were strong for all group brands, H and M, Kos and Other Stories, Monkey, Weekday and Cheap Monday. We see this performance as a receipt that customers appreciate our collections.
Gross profit in the 3rd quarter increased 20 percent to €23,000,000,000 corresponding to a gross margin of 58 point 3% compared to 58.8 percent 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 4th 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, but as a share of sales, costs in comparable stores were lower. SG and A increased by 16% in local currencies. And translation to SEK, the increase was 20% to €15,700,000,000 dollars The increase is mainly related to our expansion with costs for new stores and to our long term investments. Please turn to the slide 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 and M's future success. They cost a lot now, but will be very important for H and M for many years to come. The long term investments are aimed at further strengthening H and M's market position and securing future expansion. Online expansion has been rapid this year with 4 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 and M Shop Online in another 8 to 10 new months. Long term investments increased in the 3rd quarter compared to the Q3 last year. In the Q3 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 and A. So in total, a negative effect of approximately 65 basis points.
To look at profitability in the quarter, please return to the slide 3rd quarter 2014. Operating profit increased by 20 percent to $6,900,000,000 and the operating margin was 17.7% compared to 18% in the Q3 last year. Profit after financial items also increased by 20% to $7,000,000,000 in the quarter. And after a tax rate of 24%, net profit increased to 5,300,000,000 equaling earnings per share of DKK 3.20 up from DKK 2.68. And now for some key figures.
Please turn to the slide key data. Stocking trade as of the 31st August amounted to €17,900,000,000 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 18,000,000,000.
Investments in terms of CapEx totaled SEK 6,300,000,000 dollars We invested mainly in new stores, but also in new rooms and IT. The financial position of the group remains strong. Liquid funds amounted to €13,500,000,000 and return on equity was 46.1% rolling 12 months compared to $43,400,000,000 last year. And now some words on our store expansion. Please turn to the next slide.
We continue our strong store expansion. In the Q3, we opened 56 new stores net. And as of the 31st August, we had 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 and 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% to 15% per year. The Philippines will become a new market for H and M in October, with a flagship store in the SL Mega Mall in Manila. We see this 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 and 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 and 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 offerings within H and M. One example is our new extended sports concept.
Please turn to the slides H and M Sport. We're offering the new H and M Sport online at hm.com as well as in store on stores in selected markets. H and M Sport has enjoyed a very good start. We are developing the collections and we see that our customers appreciate it. So we are ready for the next step to gradually expand the new H and M Sports to more stores and markets.
Another example is our extended shoe range. Please turn to the slide H and M Shoes. This autumn, H and M is launching an extended shoe range for women, men, teenagers and children. Like the sports concept, H and 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.
And now before we move on to the Q and A session, some words on current trading. In September, sales in local currencies have increased 7% from the 1st to 23rd compared with the same period last year. Looking at trading this time of the year, August, September 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 effects in September is clearly reflected in available external market data like for example from Germany.
Thus, we have an exciting autumn ahead of us. Please turn to the next slide. Already next week, H and M is launching a collection that we are very proud of, H and M Conscious Denim. It is a denim collection that is made of more sustainable materials such as organic cotton, recycled cotton and tencel. 2 of the pieces also include recycled fibers from clothes that we have collected under H and M's global garment collecting initiative.
So far, customers have handed in more than £8,000 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. And with that, we are now happy to take your questions. And please remember to only ask one question at a time.
Thank you. And the first question comes from the line of Erik Karlsson. 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. We there is intense work going on for the preparations for the 8 to 10 new markets. And we will come back to you in due time when they will open. But it's 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 4 new markets within a very short time. So of course, that's going well for the future.
Very good. Thank you very much.
Thank you very much. And the next question comes from the line of Frederic Blucasse. Please ask your question.
Yes. Good afternoon. Frederic Locasto from Raymond James. I have a question on FX and the impact the potential impact on sourcing cost. How are you dealing today with rapidly evolving FX and USD in particular?
And what kind of impact could you expect beyond next quarter? Do you think it could change puts a little more pressure on your gross margin? Thank you very much.
Again, as we've said many, many times before, the gross margin is affected by between 25 to 30 different factors where FX or currency is one of them. And of course, one of the most important relations is between the U. S. Dollars since we source a lot of U. S.
Dollar and the euro because the majority of our sales is in euro. So in a very simple way, you could say that a strong dollar versus a weak euro is negative, all things equal. But 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.
And then just to explain a bit further, there is as soon as we have placed an order, we hedge that. So we lock in the markup, so to speak. So the effect on the currencies, so to speak, postponed until we sell the garment and you see in our P and L.
Thank you.
Thank you very much. And the next question comes from the line of Omar Saad. Please ask your question.
Thank you. I wanted to
ask you good morning. You had mentioned the springsummer collections and clearly there have been a lot of strengths in the numbers the last couple of quarters. Can you talk about what you think some of the key factors were in those collections that drove such strong sales and margins? And 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 the specific product, the specific factor. I think it's the combination of many, many different factors. But all in all, we believe that we always work with continuous improvement and we've done a lot of efforts and we always do a lot of efforts in order to improve the collections. And 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.
And just a follow-up.
So there hasn't been any change in the design process or the collection rollout process or anything like that?
No, not really. I mean, apart from the fact that we continuously work with improvements and there are always changes going on, but there's it's more evolution. There is no dramatic change that has been done, no.
And 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. So it's a lot of different factors affecting the turnover. So we shouldn't forget the efforts we are doing in many, many areas like sustainability and the store experience.
Thank you.
Welcome.
Thank you very much. And the next question comes from the line of Rebecca McClellan. Please ask your question.
Yes. Hi. Good afternoon.
Dewey. Do you if your guidance for
the longer term investment package, 2014 is still EUR 6,000,000 to EUR 800,000,000 SEK. And what would you say what would you guide for 2015, please?
Yes. When it comes to the guidance that we gave, we have SEK 600,000,000 to SEK 800,000,000 for 20.40. Now it looks more €800,000,000 or slightly above for 20 14. And for next year, it's 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.
But what we can say is that the long term investments will be beyond still on a high level in 2015.
Lovely. Thank you. And could you just give us some idea on CapEx? I think it was north of €9,000,000,000 for this year. Is that right?
Yes. As we said, we started the year to guide you in a range of SEK 9,500,000,000. And now it looks like it will be within that range, but maybe more towards SEK 9,500,000,000. Percent. But as we always say, it's still even though we are in September, there are moving parts still.
We are opening, I think, 180, 185 stores still in Q4. And of course, that could have some moving parts. But that's the best guidance that maybe towards 9.5.
Right. And 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.
But hopefully there will be some new stores next year as well.
Yes. Appreciate it.
Thank you. And the next question comes from the line of Paul Siegel. Please ask your question.
Yes. Hello, gentlemen. I'm just interested in the high 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 incremental change Q3 versus Q3 last year please and why that was?
Yes. They are slightly higher less than 20 basis points than compared to Q3 last year. And 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 in trade level when we went into Q3, and we are happy with the stock level and composition in the end of Q3 as well. But 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.
And then, of course, if we see that the competition is doing a lot of price activities, for instance, back to school activities, then of course, we also have to react on that. So it's a lot of salesmanship also included in working with the reduction. So it hasn't always to be a stock problem.
Okay. Thank you. Just lastly follow-up on the same question, so it isn't an additional one. Given September was a bit weaker than expected, I guess it's going to everybody because of the weather. But 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?
Yes. As we said, we have a good level of stock in trade as per end August and also the composition. Reduction levels for Q4. We still have more than 2 months ahead of us. And especially if the market situation is that it's tough selling figures on the markets, it might be that promotion activities and then price activities also will increase during the quarter.
So but it's far too early to have any guidance when it's still left over 2 months in Q4. So we have to come back to that in connection with the next quarterly report.
Understood. Thank you very
much. Thank you.
Thank you. And our 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 moving towards click and collect perhaps? Just looking for an update in 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. So for us, top priority is expansion to roll it out in the markets. But 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. But and 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. And the follow-up to that or is that
Perhaps I can just try actually just another slight one. You said last time that you were already online in around 65% to 70% of your markets. I'm guessing by the end of by sales, I'm guessing by the end of the year you'll probably be somewhere around 75% to 85%. Could you A confirm that? And B by the end of next year once you open another eight to 10 countries, will you be nearer sort of 95%, 100% approaching?
We are approaching 100, absolutely. But I mean, 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. And of course the 8 to 10 new markets we plan to open next year will add that figure even more so yes.
Thank you. Thank you. And the next question comes from the line of Simon Irvin. Please ask your question.
Good afternoon, gentlemen. 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 roof. But 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. But obviously a lot of these will be at higher prices generally than your kind of normal offer. So surely won't it be mixing your average pricing up?
I see what you mean, but that's more up to you to speculate in. But it's not the reason that we want to drive the ASP.
Okay. It's also widespread in the price range. So of course, there will when we are increasing the assortment issues for instance, we will not only increase the higher price group, we will also have a good price, low price. So I think that's the mix. So I don't think that will have a material effect on the average sales price if looking at the whole assortment.
Okay. Could I just also ask about your attitude to other online distribution? I mean clearly your primary focus is distributing H and M in particular through the through your own platforms. But particularly with your smaller brands, what have you done so far in terms of using 3rd party distribution methods?
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 also including ASOS. And we have a monkey installed through ASOS as well. And I think that's it at the moment.
But of course, we are looking first priority is, of course, to use our own platform. But of course, there are possibilities all around the globe, for instance, in China, tea mall etcetera. So but we will prioritize our own channel. Yes.
And do you think that would be appropriate for
costs? For costs, I mean, we're very pragmatic. But so far, we have costs 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. And the next question comes from the line of Chris Chaviaras. Please ask your question.
Hi, there. I wanted to pick up from the latest point about Timo. I wanted to ask about the online in China. You said that it has gone on it has started very well. Are you planning to go on Tmall?
And if yes, how soon? And also in terms of the online impact?
If you take the first question. Sure. As Jyrki just said, I mean, the preferred path is always to do Dog Energy to our own platform. And that's how we've started and we're very happy so far even though it's in very early stage, I must say. But however, we were very pragmatic.
And of course, he mentioned Tmall as an option, but who knows? I mean, that's something we will have to follow-up.
Okay. In terms of the impact of that online has to your sales and profits, and I appreciate that China, that's very early. But 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 think that it's the same 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, many times that for us online is more or less on the same profitability level as stores. And we also said that online is a very good complement to the offline. And so we're talking about seamless omnichannel shopping experience. So 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 forward.
Okay. Last one for me. If we think very long term because now you do your growth markets 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 different geographies have very, very similar gross margins?
Of course, there are different margin 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. Then of course, gross margin can differ from market to market depending on different cost levels, different import costs, VAT, etcetera.
But the spread between the countries from a price perspective is quite limited.
And in the long term, it's dependent on what's happening on the market. So if the market is trending towards lower gross margins or higher gross margins, of course, we are following the markets. But as Neil said, we always start from the customer offering and that's the main focus in our business. As you said, long term, that's a word we like.
As it stands today, can you say that the gross margin as it stands today is higher in the emerging markets versus the established markets or not really?
1st of all, we don't split up the word 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.
Cool. Okay. Thank you very much.
Thank you. And the next question comes from the line of Charlie Muir Sandoz. Please ask your question.
Yes. Thank you very much. Good afternoon.
Good afternoon.
I had some follow-up questions on the operating costs. Firstly, further to Rebecca's question about the long term investments. I think given what you indicated through the 1st three quarters, even if we're going to go slightly over €800,000,000 for the full year, that implies a substantial drop in that cost in the Q4. I just want to confirm that I'm interpreting that correctly. And then I've got a
follow-up question on store costs. Thanks.
Yes. We don't give any figures for the Q4 when it comes to these. But our guidance is that full year will be slightly above SEK 800,000,000. So I think in average, I would say it's more or less on the same level as the 3 1st quarters have been in average. So I think it's no major changes.
Maybe then slightly less than in Q3, but no major differences in level.
Okay, great. And then you alluded that costs in existing stores rose less than the sales in those existing stores. Correct. So if I just say simply like for like store costs rose slightly. That would be the first time that that has happened in over a year.
I'm just wondering is this the annualization of specific cost savings initiatives? And we should therefore think that, Or how can we think about the dynamics there? Thanks. Yes. So, Or 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 Q3, the normal situation is, of course, that we have to add a lot of more hours in the stores, in the logistic organization, etcetera. So 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 very good cost controls.
As you said, we are increasing the absolute figures, but still as a share of sales, it's better than last year. But for me, still a very good cost control. And then also there are differences in quarters even though the sales development might be the same like Q2 plus 20, Q3 plus 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 like a big summer sale, of course, you handle much more volumes, both in the logistical chain and also in the stores.
So it's a little bit tougher to have a leverage during big reduction quarters. So but I think I'm convinced that we will also in the future have a very good cost controls in our comparable stores.
Understood. And 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 kind of 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, absolutely.
Yes. Thank you.
Thank you. And the next question comes from the line of Anne Critchlow. Please ask your question. Thanks. Good afternoon.
My question concerns the launch of the 8 to 10 online markets in 2015. I'm wondering how much of the investments for that fell into 2014 or falls into 2014?
What was the question? The long term investments, how much of the part from 2015 will fall in 2014 or?
Yes. For the 8 to 10 online markets that will be launched in 2015, how much of that falls into 2014?
Exactly how much. But of course, we will start and already have been starting to make preparations with those 8 to 10 new online markets that we are going to open in 2015. But exactly how much that will land in this current year, it depends on how good we are in getting the process ahead. So that's for sure. We have been working simultaneously with these A10 markets already now and will continue now in the Q4.
Okay. Thank
you. Welcome.
Thank you. And 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 sort of 2 bits to it really. The first, when you think about your conscious collection, your sort of 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 EUR 600,000,000 to EUR 800,000,000. They are not included in that figure.
But still they are very long term.
They are very long term, but not in that sense.
And in terms of your sort of 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
We absorb it.
We absorb it.
And in the medium term, would you expect your proportion of sort of sustainable cotton, organic cotton, etcetera to increase overall?
Yes. The goal is that by 2020, all copper should be for more sustainable sources.
And how much do you think that would cost you?
A lot. But this is something we think is very of course, it's an investment. But for us, it's very as we as Kavir Johan writes in the report, we're investing in our common future.
And 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. And so I think it shouldn't be looked as a cost. I think it's customer offering. So I think it's very basic for us that, of course, we should do this.
I think you're certainly ahead of the game. But 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 €800,000,000 plus.
Okay. Fine. Secondly, in terms of those long term investment costs 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?
Yes. But these investments that we are activating in the balance sheet, of course, they will start to be depreciated. So of course, the cost will come into that online business as well. Now we activate in the balance sheet and now we already have been starting to make some depreciations of them.
So But I see what you mean. We don't break it down in more details because we also invest for, like I said, omni channel, which is for both channels. It's not we don't see it so clearly separate, but it's absolutely clear that it's not what you were asking for is it margin dilutive or not? No, it's
not. It's not margin dilutive including all of the allocated costs?
No. No.
Okay. Thank you. Thank you.
And 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 is one of the key countries for future store openings. And 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. So the first question is, are you seeing that? And then 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 and we have several expansion teams in place and monitor the expansion and just be 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. And of course, in that sense, it's very important and very good to have a strong brand. And H and M is one of the strongest brands in fashion apparel globally and in China.
And it
doesn't make you there's no 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 do want to grow with quantity as we say. So there is a lot of work going on and careful benchmarking between the different options. And we feel very comfortable with the expansion pace we have at the moment.
Great. Thank you. And the next question comes from the line of Donna Talfi. 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? And with the level of markdowns given the slower September, how are you gauging the level of markdowns? And then lastly on the compensation expenses
Please, Dana, please one question at a time for all the listeners. Okay.
No problem.
Okay. So the first question, if we see differences, yes, of course, we do. And we feel that's one way of analyzing whether it's a collection. And there are of course differences depending on what country you have. And in some countries where it's been very cold, of course, that's affecting sales more.
And in some countries where it's been colder, we've seen very good sales development, of course.
And is the U. S. Different than Europe? Is it different markets different?
If you're talking about the first 2 weeks in September, I think the weather in Europe has been much warmer historically than maybe the situation in like North America.
Got it. And then in terms of compensation expense, how do you see that impact the change in compensation expense that impact on operating expense is going forward?
Compensation? Do you mean salary increase or
Yes. Yes. I think That you had mentioned.
Our own Insourcing. Insourcing or our own salary.
The compensation expense that the change that was made that was mentioned in the release, how does that impact the expense structure?
No. You're talking about our Incentive program?
Yes, exactly. Yes.
Okay. Okay. That is clear. That will be good that you mentioned it. The we call it HIP, H and M incentive program, which is for all staff or no matter what country you work in and no matter what salary you have.
And you have to work for 5 years at H and M to get included in the program. And the rules say that if H and M's profit year on year increases by 10% of the net profit after tax before HIP should be paid to HIP. So hopefully, if we continue like this, there will be a payout in Q4.
So it will affect the Q4 results? Yes.
Got it. Thank you.
Thank you. And the next question comes from the line of Geoff Lowery. Please ask your question.
Yes. Hi, team. Hi. Obviously, you don't disclose like for like anymore. But when you look at your store performance, what's driving the growth in same stores?
Is it are you managing to get more footfall in? Is it basket competitive
industries
you know, one of the most competitive industries in the globe perhaps and we
don't want to go reveal all
the details. Of course, we keep track of all these KPIs. But I think the most important thing is what we mentioned before, even stronger collections and better customer experience in the stores and online of course. Yes.
Cool. And just a totally unconnected follow-up. Did I hear you say you're going to open 180 stores in Q4? And is that gross or net?
Gross. Okay.
So we will yes, gross, yes. Perfect.
Thank you.
Thank you. And the next question comes from the line of Rebecca McClellan. Please ask your question.
Yes. Hi, again. Is your promotional policy online consistent with your promotional strategy in the stores?
Of course, but it has to be adjusted for the channel.
Right. So it isn't completely it doesn't completely reflect what's going on in store then?
Well, yes, I'm not. I mean, we've got a 1 H and M, but then each channel has to be adjusted for. So it could be that you sometimes have a markdown activity online and sometimes it's something that you would find in stores. But they of course it's coordinated centrally.
Okay. And my second question please is how has your average transaction value online trended since you sort of opened out into new markets? Have you seen an increase in the average transaction value or
The average transaction value.
The average order value or average basket size online?
That's of course, we monitor this very closely. And again, sorry, it's not something we want to go into detail.
Okay. Thank you.
Thank you. And the next question comes from the line of Paul Sigors. Please ask your question.
Yes. Hi, guys. Just one follow-up from me. As you expand into new geographies, obviously, Australia, next year South Africa, so 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're 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 until before we launched H and M in the Southern Hemisphere. And that's of course the complexity with the reverse season, because now when we have autumn, they have spring, etcetera. But 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. So 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. But exactly how we have sold it, it's not something we want to go into details regarding. But the most important thing is that the customers in the Southern Hemisphere can they can of course find the latest trends and seasonal products.
So 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.
Absolutely. Absolutely.
Thank you.
The next question comes from the line of Chris 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. But then 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?
Well, 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 that we point out 2 of them.
Is effect 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. So with that, thank you all very much for participating in this conference call and welcome back for the full year results on the 28th January next year.
Thank you very much. That does conclude the conference call for today. Thank you all for participating. You may now disconnect.