Good afternoon, ladies and gentlemen, and welcome to the six-month results 2014 conference call. At this time, all participants are in listen-only mode until conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your telephone. I'd now like to hand over to the chairperson, Mr. Nils Vinge. Please go ahead, sir, and I will be standing by.
Thank you, and welcome to this telephone conference on the occasion of H&M six-month results 2014. Jyrki Tervonen, our CFO, is with me today again, and we'll be happy to answer your questions after the presentation. You will find the presentation slides to this telephone conference on hm.com. Please look at the slide, second quarter 2014. Our collections have been well-received, and we continued to gain market share in the second quarter. H&M Group sales were strong, increasing 16% in local currencies. Converted into SEK, the increase was 20% as a result of the weakened Swedish krona against the most sales markets currency. All group brands contributed to the positive sales developments. H&M, COS, & Other Stories, Monki, Weekday, and Cheap Monday, as well as H&M Home. We're also very pleased that our new H&M Sport, which we are developing further, continued taking market share in the sports segment.
Before we move on, just to comment on current trading. Sales in June have started well, although there will be a negative calendar effect of 3-4 percentage points on the month as a whole. In May, we had a positive calendar effect of 3-4 percentage points, which will be reversed in June. Gross profit in the second quarter increased 19% to SEK 23 billion, corresponding to a gross margin of 60.8% compared to 61.1% a year ago. Markdowns in relation to sales decreased marginally compared to Q2 2013. The overall market situation for external factors such as cotton prices, the US dollar, and cost inflation was slightly negative for sourcing to the Q2 compared to a year earlier, mainly as a result of wage increases in the sourcing markets.
Looking at the sourcing period to the third quarter 2014, the market situation for the external factors is also considered to be slightly negative. Cost control in the H&M Group remains very good. In the second quarter, costs in comparable stores were unchanged compared to the same quarter last year in absolute terms and decreased as a share of sales. SG&A increased 16% to SEK 15.4 billion. In local currencies, the increase was 13%. The increase is mainly related to our expansion and our long-term investments in IT and online, but also in the broadening of the product range and establishment of the new fashion brands and other sales. Please turn to the slide, long-term investments. We see these investments 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. Some of them are starting to generate revenue, like & Other Stories in H&M's online store in the U.S. and France. Following H&M's online launch in the U.S. last autumn, we launched online shopping in France in the middle of March this year, and customer response has been very good. Long-term investments increased in the second quarter compared to the second quarter last year. In absolute terms, the cost increase in the second quarter was similar to the increase in the first quarter this year, but it did not have as big a percentage impact on results as in Q1. This is because Q2 is a much larger quarter, both in terms of sales and in terms of results.
In the second quarter, the cost increase for the long-term investments equaled around 50 basis points, half of which affected cost of goods sold and half affected operating costs. The long-term investments will continue. In 2014, costs will be at a higher level than in 2013. During the year, costs may be divided unequally between the quarters. To look at profitability in the quarter, please return to the slide, second quarter 2014. Operating profit increased by 26%, and the operating margin was 20% compared to 19% in the second quarter last year. Profit after financial items increased by 25%, or SEK 1.5 billion, to SEK 7.6 billion in the quarter. After a tax rate of 24%, net profit increased to SEK 5.8 billion, equaling earnings per share of SEK 3.51, up from SEK 2.81. Now, for some other key figures, please turn to the slide, key data.
Stock in trade as of 31st of May amounted to SEK 14.9 billion, an increase of 18% in SEK and 16% in local currencies. The increase is mainly explained by the expansion in stores and online. The level and composition of the stock in trade is considered good. Cash flow from current operations was SEK 11.9 billion compared to SEK 11.2 billion a year ago. The main explanation is the strong results. Investment in terms of CapEx totaled SEK 3.9 billion. This reflects our store expansion, but also continued investments in IT and logistics. The financial position of the group remains strong. Liquid funds amounted to SEK 9.6 billion, and return on equity was 50.5% rolling 12 months compared to 45% last year. Now some words on our expansion. Please turn to the slide, expansion. Our offering is reaching more and more customers, both through our stores and through e-commerce.
In the second quarter, we opened 93 new stores net, and as of the 31st of May, we have 3,285 stores in 54 markets. One of our most exciting happenings in the quarter was the opening of the first H&M store in Australia, a flagship store in the best location in Melbourne, the landmark General Post Office building. We realized that there would be great interest in H&M in Australia, but we were still surprised at the enormous attention that the opening attracted. More than 3,000 customers queued for several hours, and many had even spent the night outside the store to be sure of getting in first. We are looking forward to our continued expansion in Australia. Looking ahead, the global expansion of the H&M Group continues.
For 2014, we maintain our plan to open around 375 stores net within our expansion target of increasing the number of stores by 10%-15% per year. China and the U.S. are expected to remain the largest expansion markets. In just a few years, China has grown to become one of our largest markets, with over 240 stores today compared to 150 stores just a year ago. We also see room for continued expansion in other existing markets as well as in new markets. Three new countries will be added in total this year. Following the opening in Australia, the Philippines and India will become new markets for H&M in the second half of the year. Next year we will expand to Peru and South Africa. Please turn to the next slide.
Expansion continues also for the newer brands of the group, COS and & Other Stories, Monki, Weekday, and Cheap Monday, as well as H&M Home. Please turn to the slide H&M online. In order to carry through our multi-channel strategy, we will continue our long-term investments with expansion of H&M's online store to more countries. We are currently preparing to open H&M's online store in Spain and Italy earlier this autumn, later this year, we will launch H&M shop online in China. In total, we are adding online shopping in four large H&M markets this year. Looking ahead, the global rollout will continue next year. In 2015, we plan to add between eight and 10 new H&M online markets. We are also continuing to broaden our offering within H&M. Please turn to the next slide.
Already this autumn, H&M will launch an extended and improved shoe range for women, men, teenagers, and children. The extended collection will be available in select stores in nine markets, including China, the U.S., U.K., and Sweden, as well as online at hm.com. The new shoe concept will offer a variety of styles in different price categories, but as always, at H&M prices. This new extended shoe offering is part of our long-term investments. We also have a very interesting designer collaboration coming up at H&M this autumn with the U.S. designer Alexander Wang. Alexander Wang is based in New York, where he started his fashion label in 2007, today he is one of the most important voices in fashion. Wang is the first American designer who teams up with H&M. His tailoring is fashion-forward with a sporty look.
The collection, Alexander Wang and H&M, will feature apparel and accessories for women and men. It will be available from the 6th of November in around 250 H&M stores around the world and online at hm.com. With that, we are now happy to take your questions. Please remember to only ask one question at a time.
Thank you. Ladies and gentlemen, if you do have a question at this time, please press star followed by 1 on your telephone keypads and the hash or pound key to cancel. Once again, that's star followed by 1 to register your question. Our first question comes from Rebecca McClellan. Please go ahead.
Hi, Nils. Rebecca from Santander. Just a couple of questions, please. Firstly, can you confirm your CapEx budget for the full year, please?
Yeah. At this moment, the best estimate still remains that it will end up in SEK 9 billion-SEK 9.5 billion for the whole year.
Okay, thank you. My second question, the incremental longer-term investment cost is still going to be between SEK 600 million and SEK 800 million, is that right?
That's right.
Okay, thank you.
That's right.
Thank you. Our next question comes from Caroline Gulliver. Please go ahead.
Morning, everyone.
Morning.
The first question was just on, why have markdowns only decreased marginally when the sales were so strong? I just wondered if there had been any change in the promotional strategy over the quarter. Secondly, can you talk about any improvements you're making to your delivery offer online, and in particular, any plans to introduce click and collect?
The first question, markdown levels. I think when we are talking about the markdown levels, we also have to always not to have always a correlation. A good turnover doesn't have to mean always that the markdown levels go down, because it's always on different markets, a question of salesmanship. We are always reacting on what's happening on the market, we are pretty happy with the markdown levels we have. I think also, the most important thing is that we have a good customer offering, then we work with the markdown also as a tactical tool on each market. This quarter we ended up that they were more or less having 20 basis points less negative impact on gross margin compared to last year.
Regarding your second question, I think it was about free delivery and click and collect, et cetera. Is that right?
That's right, yes.
Right. Again, when it comes to e-commerce, we think it's important to talk about the total offering. It's about the fashion, quality, price, and of course, lead times, et cetera. We do offer free delivery sometimes in campaigns et cetera, but it's not a standard thing. We also think it's important to say that free delivery, someone has to pay for it. Either it's the customer in terms of, you put it in the price, so it's a high price, or it's the investor who at the end of the day perhaps don't get any returns on his investment. I think it's, in many cases, we charge for delivery, and that's straightforward. Again, it's the total offering that's important. When it comes to click and collect and a lot of other features, of course, we're looking to that.
At the moment, we don't offer click and collect.
Thank you.
Thank you. Our next question comes from Charlie Marchant. Please go ahead.
Thank you very much. I wanted to ask about China, as you say it's your most important expansion market. Sales there are growing very strongly but not as strongly as the store count. Can you confirm firstly that the like-for-like stores are still growing sales? Secondly, can you talk about the dynamics as to why the total revenue base is not growing as quickly as the store count? Is it square meters are not as fast as store numbers, or is it you're going into less productive space in perhaps cheaper locations? Thanks.
Yeah, I think we've touched upon this question many times before. First of all, we expand very quickly, so you can't just look at the numbers, because a lot of the stores that you see in the numbers have just opened and there's still not so much revenues in the numbers. Secondly, of course, we started initially in the largest cities like Hong Kong and Shanghai, then we have step-by-step moved into 2nd tiers, 3rd tiers, 4th tiers, et cetera. It's a combination of many factors. Sales are strong and developing very well.
Also to your question about the like-for-like development. We are happy with the like-for-like development in China. It's developing in a good way.
Thank you very much. If I can attempt some insight on your group level like-for-likes, I appreciate you don't disclose those in absolute terms anymore, but has the contribution from new space and new online stores accelerated versus the first quarter, or can we interpret your constant FX acceleration in Q2 as being mainly about like-for-like?
The store contribution, space contribution is more or less the same level as last year.
Great. Thank you very much.
Thank you. Our next question comes from Simon Irwin. Please go ahead.
Hi, gentlemen. Could you just talk a bit about the shoe collection? You already offer shoes across the range. What's different about this relaunched category?
It's a big investment, even though it's not as big as H&M Sport. It's about broadening the range and a lot of product development. For example, in comfort and materials, et cetera. There is a greater variety of products with many different types of models.
Would we expect then that there'll be a broader price range on these shoes?
That's right.
Is this similar to what you've been doing in other parts of the offer, of kind of generally broadening the offer and, obviously, in some cases, increasing price points along with, say, the premium lines?
This is specifically on shoes, as you said, we will have a wider price range and a lot wider collection, so to speak. Initially, as I said before, it's going to be selected in nine countries, around 30 selected stores. They will be displayed in clear areas in menswear and ladieswear, children, et cetera.
Also that even though we are spreading the price range, it's still very good value for money.
Sure. Just in terms of the China launch, I know you've given us a considerable degree of disclosure about kind of one-off or development costs through the course of this year. Is China in itself, with the e-com launch, going to be a kind of significantly lumpy element that we'd actually see in the P&L? Or is it just part and parcel?
It's part of the parcel, I would say.
It's all being done in-house, or are you going to be using any third parties in terms of distributional websites or anything like that?
When it comes to distribution, we will be working with third parties, but the rest of it will be in-house.
Okay. Thank you.
Thank you. Just remind participants, that is star followed by one to register your questions. Our next question comes from Chris Chaveras. Please go ahead.
Hi, guys. Two questions from me, one at a time. First question on your online launches. It seems that you accelerate now the amount of countries that you are launching on. Do you leverage existing infrastructure, or is there some incremental investments associated with these launches that are worth mentioning?
Of course, we are capitalizing on existing infrastructure and the IT systems, et cetera. For each country, there is a lot of additional work to be done. You have to adapt a lot of different payment system, cards, et cetera, and also logistics. We are ramping up the number of new countries, but in terms of sales, we already cover maybe 60%, 70% of the group revenues.
Okay. That is helpful. The other question on a big pickup in the admin expenses, and I know it is not a big part of your costs, but they did grow more than double what your stores grew. Any color there that you could give?
Yeah, it's mostly related to the long-term investments, of course. As we said, it's more or less in the same range, the amount as in Q1. Half of it is on cost of goods sold. The remaining part is in the operating expenses. Also most of them maybe in the admin expenses. That's the main reason to the bump up in admin.
Okay, that's perfect. If I may add on your core stores, because you've mentioned that you will open more stores this year than last year, You've just opened nine stores. Now should we expect an acceleration of store openings for COS in the second half?
We plan to open more in the second half than first half for COS, yes.
Okay. Thank you.
Thank you. Our next question comes from Anne Critchlow. Please go ahead.
Thank you. It's Anne Critchlow from SG. Hi there. My first question is about & Other Stories. You say in the statement that's now generating revenue, I guess it's been generating revenue for some time, ever since you opened the doors of the first store. Did you mean EBIT, so making a contribution to profits?
No, it was more, of course, the generating nice revenues increased.
Okay. Is it making a positive contribution to profit now?
We don't comment on profitability per concept, but we are happy with the development, absolutely.
Okay, thank you. The second question concerns your Southern Hemisphere sales. You've got quite a few areas now, so I'm wondering if your experience of what sells there is helping inform you of trends that might sell in Europe six months later.
I don't think it's that simple. Of course, having both online and sales in the Southern Hemisphere helps us to get a better picture of how fashion moves and changes. Absolutely.
Thank you.
Thank you. Our next question comes from Jamie Merriman. Please go ahead.
Thanks very much. It's Jamie Merriman from Bernstein.
Hello.
Hi. My question is about the sustainability initiatives that you've been working on and some of your comments about rising manufacturing wages that you're seeing in Asia. Can you give us some indication about the level at which you're experiencing that increase? Also just philosophically is your view that customers are understanding of that and willing to pay a bit more for a product that's more sustainable? Thanks.
Yes. I'm glad you noticed that. For us, sustainability is very, very important, and we take this very seriously. When it comes to salaries, one example is, of course, in Bangladesh, where minimum salaries were up 78% as of 1st of December. Of course, this is reflected in the cost. That's what we say with increased salary cost inflation among the suppliers. Of course, that's part of we have to pay that, but we also see positive things coming out of this. We see that in long-term, it leads to better stability and better quality and less unrest. It's a very good thing. First of all, of course, sustainability is good for the people and the environment. That was the salary record. What was the second question, please?
It was just about, are you seeing indications from customers that?
Yes
They understand your work on sustainability and are willing to absorb some of that cost?
Yes. We see definitely that this is not a short-term. This is something that's becoming more and more important, and we see that more and more customers are asking for it. We also see that when we look for employees, they want to work for a good company. It's very important. It helps us in that perspective as well, and also for us to work within the company. We want to be proud of what we do, and I'm very proud of what my colleagues and the company does.
Okay, thanks very much.
Just to add one more thing. When it comes to the increased cost from the suppliers, we decide not to pass that on to the consumers. That's reflected in the gross margin.
Thank you.
Thank you.
Our next question comes from Dana Telsey. Please go ahead.
Good morning, everyone.
Good morning.
Can you please comment on the H&M Sport collection, how well it's been received, and how many stores it's being expanded into? Any updates on raw material prices, cost inflation and currency, and the outlook for their impact on the gross margin? Thank you.
Yeah, please remind one question at a time. First question, Sport has been very well received. We are very happy, and so far we have the extended range in around 50 stores, and we have a number of stores with the Sport, and generally a number of stores, around 2,000 stores with mainline sports , et cetera. We have now decided to expand this going further as a result of the very good reception. Your second question was about trying to quantify the increased cost, it is very difficult for us to quantify it. That is why we say it is increasing, but it is difficult to quantify.
Just when you mention the long-term incremental investments for this year, should we expect that going forward also?
This year we have quantified it to around SEK 600 million-SEK 800 million. During next year, they will continue, but we will have to come back about the level, whether it's going to be increased even further or decreased. Let's come back to that later on.
Thank you.
Thank you. Our next question comes from Geoff Lowery. Please go ahead.
Yeah. Hi. A question on online, please. In your big existing online markets, what proportion of the overall H&M range is actually available online to markets like U.K., U.S., Germany, and how quickly do you expect to close that gap, as it were?
In many countries, actually, we offer most products both online and offline. I don't think the target is to be 100. Some products will be available only online and some products only offline. This is a case by case. You could say that most products now are available in both channels.
Good stuff. A second very anarchic one, how big is the store in Melbourne?
It is around 5,000 sq m.
Great. Thank you.
Thank you. Our next question comes from Andrew Hughes. Please go ahead.
Yes. Hi, guys.
Hi.
Hi.
Just going back to your comments on supply chain and sustainability and minimum wage increases. Just looking at it from the customer's perspective, what do your surveys show about whether people actually care about it and whether they're changing their shopping habits? I'm just trying to gauge whether we're right at the start of you getting benefit from it, or you're already seeing that come through in shopping habits.
Yeah, more and more people are asking for it's becoming more and more important. Of course, we want to be proactive.
That's showing up in all your survey work?
Absolutely.
Yeah. Okay. A second question on footwear. Again, what's the opportunity there? Footwear, presumably as a % of sales currently is minuscule. Would that be the right word?
We wouldn't invest in shoes if we didn't see a very interesting potential.
as a percentage of sales currently, are we talking about what, just one or 2%?
I let you guys do that kind of guessing. We don't disclose the different parts, sorry.
Right. Okay. That would be a guess if I had to.
Yeah
Perhaps just one last one. I know that, following on from Anne's question about & Other Stories, you said that all the other non-H&M brands contributed.
Yeah.
What did you mean by that? Did you mean that all together, those non-H&M brands saw profit growth?
No, I said we talk about revenue increase. They all contributed to the revenue increase.
The revenue increase. I should hope so on that bit. No comment on non-H&M profitability, just all combined?
I'm terribly sorry. No.
Okay. All right. Thanks anyway.
Thank you.
Thank you.
Final reminder to participants, press star followed by one to register a question. Our next question comes from Fraser Ramzan. Please go ahead.
Oh, thanks very much. It is Fraser Ramzan at Nomura.
Yes.
Hi. It was just a point of clarification. I think I have a very bad phone line and therefore missed something. Did you indicate, you had, 16%-17% of revenue online in answer to Chris's question?
No, we don't disclose how much we sell online. Must have been a confusion somewhere.
Okay.
What question I answered.
You gave no indication. You also indicated you had to absorb a minimum wage increase in Bangladesh. What was the number?
The minimum salary increase was 78% in Bangladesh.
78%. Thank you very much. Sorry, two geeky questions, thank you very much. Bye.
Thank you. Our next question comes from Rebecca McClellan. Please go ahead.
Yeah. Hello, Rebecca McClellan at Santander again. If you adjust the gross margin in the second quarter for the markdown and for the longer-term investment, it looks like the external factor contribution was down 25 basis points. Is that what you're thinking for the third quarter as well?
Again.
That particular level.
Yeah. What the gross margin becomes is, of course, at the end of the day, what we do with the offering, with the mark-up, and then the fabrics and whatever. There are lots of different factors that affect the gross margin. We say that the external factors are more or less at the same level, as we see it, for Q3 as Q2.
Okay. Just another question. In fact, has there been any change in the average selling price over spring/summer versus the previous seasons?
When it comes to pricing, for competitive reasons, we choose not to comment on our pricing. Sorry.
Okay. Thank you.
Thank you. Our next question comes from Paul Rossington. Please go ahead.
Good afternoon, gents.
Good afternoon.
Good afternoon.
I was just wondering if you could put a little bit of color on your performance or experience of the U.S. market recently. There's been a lot of discussion about how value-based propositions are taking share at the expense of some of the incumbent brands in that space. Are you able to give us a few lines of how you're finding that market right now?
Well, the U.S. is, as always, very highly competitive, but we are doing well, and we increased sales with 22% in the quarter. Of course, we're very happy, especially with our online launch.
Are you seeing it I presume by default, because of the rates of growth you're achieving, you're taking share, albeit off a relatively low base within that market. Is there anything to suggest that it is kind of a structural shift in spending habits in that market at all?
I think it's very difficult for us to see that. As you said, we're still a very small player in the U.S. market, even though we are now nationwide and we have 313 stores, and we're expanding quickly. We continue to take market share, and we continue to see great potential for H&M. I think the U.S. shoppers have taken H&M to their hearts, and they appreciate fashion quality at the best price.
Thank you very much.
Thank you. Our next question comes from Chris Chaveras. Please go ahead.
Yeah. Sorry, Nils, one more question for you. You mentioned that costs will be higher in 2014. I wanted to clarify, is that mainly because of stores, or did you mean there is incremental cost investment beyond previous guidance of the SEK 600-800? Just to clarify that.
Sorry, what costs?
You mentioned in the beginning of the call that the costs in 2014 will be higher than in 2013. That's natural to assume given that you have store growth, but I wanted to clarify if you meant the cost investment will be higher in 2014 rather than.
The long-term investments, they will be approx SEK 600 million-SEK 800 million, higher 2014 compared to 2013.
Okay. That's fine.
Exactly the same message as in Q1.
Yeah. Fine.
Just to be clear. Yeah.
Cool. Okay, thanks. Thank you.
Thank you. We have a follow-up question from Charlie Marchant. Please go ahead.
Yeah, sorry. I wanted to ask about your thoughts on the external factors for the gross margin in the fourth quarter. I know it's a little bit further off, but given the recent decline in the cost and price, I wondered whether you see any sort of lagged effect perhaps trickling through from then on, or whether the wage pressures will continue to result in a sort of net negative.
Well, we definitely see that the wage pressure will continue. As you said, there are lots of different factors, and we're still buying for Q4. All in all, I would say pretty much the same picture as for Q3, which is negative.
Great. Thank you very much.
Thank you. We appear to have no further questions at this time. I now hand back to you.
Okay. Thank you all very much for participating in this conference call. We wish you all a great summer. For those of you in the southern hemisphere, we wish you a great winter. Welcome back for the nine-month results on the twenty-sixth of September.
Thank you. Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now all disconnect your lines. Once again, thank you.