Afternoon, ladies and gentlemen, and welcome to the Sigmundshall's 2014 Conference Call. At this time, all participants are in a listen only mode to conduct a question and answer session I'd now like to turn the chairperson, Mr. Niels Vinh. Please go ahead, sir. Hello, we'll be standing by.
Thank you, and welcome to this telephone conference on the occasion of H&M's 6 month results 2014. Jyrki Tervan, our CFO, is with me today again, and we'll be happy to answer your questions after the presentation. You'll find the presentation slides to this teleconferenceonhm.com. Please look at the slide Q2 2014. Our collections have been well received and we continue to gain market share in the 2nd quarter.
H and 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 host sales market currency. All group brands contributed to the positive sales development. H and M, Kos and Other Stories, Monkey, Weekday and Cheap Monday as well as H and M Home. We're also very pleased that our new H and M Sport, which we are developing further, continued taking market share in the Sports segment.
And 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 to 4 percentage points on the month as a whole. In May, we had a positive calendar effect of 3 to 4 percentage points, which will be reversed in June. Gross profit in the 2nd quarter increased 19% to $23,000,000,000 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 U. S. Dollar and cost inflation a 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 Q3 2014, the market situation for the external factors is also considered to be slightly negative. Cost control in the H and M Group remains very good.
In the Q2, costs in comparable stores were unchanged compared to the same quarter last year in absolute terms and decreased as a share of sales. SG and A increased 16% to $15,400,000,000 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 establishment of the new fashion brand and other segments. Please turn to the slide long term investments. We see these investments 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. Some of them are starting to generate revenue like and Other Stories in H and M's online store in the U. S. And France.
Following H and M's online launch in the U. S. Last autumn, we launched online shopping in France in the middle of March in this year and customer response has been very good. Long term investments increased in the Q2 compared to the Q2 last year. In absolute terms, the cost increase in the Q2 was similar to the increase in the Q1 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 Q2, 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 quarter, please return to the slide Q2 2014. Operating profit increased by 26% and the operating margin was 20% compared to 19% in the Q2 last year. Profit after financial items increased by 20 percent to 25 percent or DKK 1,500,000,000 to DKK 7,600,000,000 in the quarter. After a tax rate of 24%, net profit increased to DKK 5,800,000,000 equaling earnings per share of DKK 3.51, up from DKK 2.81. And now for some other key figures, please turn to the Slide key data.
Stock in trade as of 31st May amounted to $14,900,000,000 an increase of 18% in Swedish krona and 16% in online. The level and composition of the stocking phase is considered good. Cash flow from current operations was DKK 11,900,000,000 compared to DKK 11,200,000,000 a year ago. The main explanation is the strong results. Investments in terms of CapEx totaled $3,900,000,000 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 €9,600,000,000 and return on equity was 50.5% rolling 12 months compared to 45 last year. And 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 Q2, we opened 93 new stores next. And as of the 31st 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 and 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 and 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 them first.
We are looking forward to our continued expansion in Australia. And looking ahead, the global expansion of the H and N Group continues. For 2014, we maintain our plan to open around 3 75 stores net, within our expansion target of increasing the number of stores by 10% to 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 2 40 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. 3 new countries will be added in total this year following the opening in Australia, the Philippines and India will become new markets for H and M in the second half of the year. And 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, Kos and Other Stories, Monkey, Weekday and Chief Monde as well as H and M Home. Please turn to the slide H and M online. In order to carry through our multichannel strategy, we will continue our long term investments with expansion of H and M's online store to more countries. We are currently preparing to open H and M's online store in Spain and Italy earlier this autumn.
And later this year, we will launch H and M Shop Online in China. So in total, we're adding online shopping in 4 large H and M markets this year. And looking ahead, the global rollout will continue next year. In 2015, we plan to add between 8 10 new H and M online markets. We're also continuing to broaden our offering within H and M.
Please turn to the next slide. Already this autumn, H and M will launch an extended and improved shoe range for women, men, teenagers and children. The extended collection will be available in selected stores in 9 markets, including China, the U. S, U. K.
And Sweden as well as online athm.com. The new shoe concept will offer a variety of styles in different price categories, but as always at H and 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 Resort with a U. S.
Designer, Alexander Wang. Alexander Wang is based in New York, where he started his fashion label in 2007, and today he is one of the most important voices in fashion. Wang is the 1st American designer who teams up with H and M. He's tailoring his fashion forward with a sporty look. The collection Alexander Wang in H and M will feature apparel and accessories for women and men.
It will be available from the 6th of the number in around 2 50 H and M stores around the world and online at hm.com. And with that, we are now happy to take your questions. Please remember to only ask one question at a time.
Thank you. Our first question comes from Rebecca McCollan. Please go ahead.
Hi, Neil from the Oki. Rebecca from Santander. Just a couple of questions, please. Firstly, can you confirm your CapEx budget for the full year, please?
Yes. At this moment, the best estimate still remains that it will end up in SEK 9,000,000,000 to SEK 9,500,000,000 for the whole year.
Okay. Thank you. And my second question, the incremental longer term investment cost is still going to be between €600,000,000 €800,000,000 is that right?
That's right.
Okay. Thanks.
That's great. Thank you. Our next question comes from Caroline Gulliver. Please go ahead.
Good morning, everyone. Good morning. The first question was just on why has markdowns decreased marginally when the sales were so strong? I just wondered if there has been any change in the promotional strategy over the quarter. And then 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?
Yes. 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, 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. And we are pretty happy with the markdown levels we have.
And I think also the most important thing is that we have a good customer offering. And then we work with the markdowns, so also as a technical tool on each market. So and this quarter, we ended up that they were more or less 20 basis points having 20 basis points less negative impact on gross margin compared to last year.
And regarding your second question, I think it was about free delivery and click and collect, etcetera. Is that right?
That's right, yes.
Right. Again, this is when it comes to e commerce, we think it's important to talk about the total offering. So it's about the fashion quality of price and of course, lead times, etcetera. And I mean, we do offer free delivery sometimes in campaigns, etcetera, but it's not a standard thing. And we also think it's important to say that free delivery, I mean, someone has to pay for it, either it's the customer in terms of you put in the price, so it's a higher price or it's the investor who at the end of the day perhaps don't get any returns on his investments.
But so I think it's in many cases, we charge for delivery and that's straightforward. But again, it's the total offering that's important. And when it comes to Click and Collect and a lot of other features, of course, we'll look into that. But at the moment, we don't offer Click and Collect.
Thank you.
Our next question comes from Charlie Mersanz. 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?
And secondly, can you talk about the dynamics as to why the total revenue base is not growing as quickly as the store counts? 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.
Yes. I think we've touched upon this question many times before. And first of all, we expand very quickly. So we can't just look at the numbers because a lot of the stores that you see in the number are just have just opened and there's still not so much revenues in the numbers. And secondly, of course, we started initially in the largest cities like Hong Kong and Shanghai, and then we have step by step moved into 2nd tiers, 3rd tiers, 4th tiers, etcetera.
So it's a combination of many factors, but sales are strong and developing very well.
And then also to your question about the like for like development, so we are happy with the like for like development in China. It's developing in a good way.
Thank you very much. And if I can attempt some insight on your group level like for like. 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 Q1? Or can we interpret your constant FX acceleration in Q2 as being mainly about like for like?
It's I mean 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? I mean you already offer shoes across the range. So what's different about this relaunched category?
It's a big investment even though it's not as big as sports, but it's about broadening the range and a lot of product development. So for example, comfort and materials, etcetera. And there is a greater variety of products with many different types of models.
And would we expect then that there'll be a broader price range on these shoes to accompany the and 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.
Yes. But this is specifically on shoes. And we are as you said, we have we will have a wider price range and a lot wider collection, so to speak. And initially, as I said before, it's going to be selected in 9 countries and around 30 selected stores. And they will be displayed in clear areas in menswear and ladies wear, children, etcetera.
Yes. And also that even though we are spreading the price range, it's still very, very good value for money.
Sure. And just in terms of the China launch, I mean, I know you've given us a considerable degree of disclosure about kind of 1 off or development costs through the course of this year. But is China in itself with the e comm launch going to be a kind of significantly lumpy element that we'd actually see in the P and L? Or is it just part and parcel?
It's part of the parcel, I would say.
And 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're working with 3rd parties, but the rest of it will be in house. Okay.
Thank you. Thank you. Our next question comes from Chris Tavarez. Please go ahead.
Hi, guys. So two questions for me one at a time. So first question on your online launches. It seems that you have 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, etcetera. But for each country, there's a lot of additional work to be done and have to adapt a lot of different payment system, cards, etcetera and also logistics. But we are ramping up the number of new countries. But in terms of sales, we already cover maybe 6% to 70% of the group revenues.
Okay. Okay. That's helpful. And the other question on a big pickup in the admin expenses. And I know it's 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?
Yes. It's mostly related to the long term investments, of course. And as we said, it's more or less in the same range, the amount that's in Q1, and half of it is on cost of goods sold and the remaining part is in the operating expenses and also most of them maybe in the admin expenses. So that's the main reason to the bump up in admin.
Okay. That's perfect. And if I may, on your cost stores, because you've mentioned that you will open more stores this year than last year, but you've just opened 9 stores. And now should we expect an acceleration of store openings for Kos in the second half?
More we plan to open more in the second half than first half for costs, yes.
Okay. Thank you.
Thank you. Our next question comes from Anne Critchlow. Please go ahead.
Thank you. It's Anne Critchlow from SG. My first question is about hi there. My first question is about Andover Stories. You say in the statement that's now generating revenue, but 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, we have generating nice revenues increased.
Okay. And is it making a positive contribution to profit now?
We don't comment on productivity for a constant, but we are happy with the development absolutely.
Okay. Thank you. And then 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 you is helping inform you of trends that might sell in Europe 6 months later.
I don't think it's that simple. But 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. This is Jamie Merriman from Bernstein. My question is about the sustainability initiatives that you've been working on and some of your comments about rising manufacturing regions that you're seeing in Asia. Can you give us some indication about the level at which you're experiencing that increase? And 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 product 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 December. And of course, this is reflected in the cost.
That's what we say with increased salary cost inflation among the suppliers. And 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 the long term, it leads to better stability and better quality and less unrest. So it's a very good thing.
And first of all, of course, sustainability is good for the people and the environment. So that was extraordinary. What was the second question, please?
It was just about are you seeing indications from customers that 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 our when we look for employer employees, they want to work for the good company. So it's very important.
It helps us in that perspective as well. And also for us to work within the company, I mean, we want to be proud of what we do and I'm very proud of what my colleagues in the company does.
Okay. Thanks very much.
And just to add one more thing. When it comes to the increased cost for the from the suppliers, we don't we decide not to pass it on to the consumers. That's part of the reflection in the that's reflected in the gross margin.
Thank you.
Thank you.
Our next question comes from Donna Talsley. Please go ahead.
Good morning, everyone. Good morning. Please comment on the H and M Sport collection, how well it's been received and how many stores it's being expanded into? And then any updates on raw material prices, cost inflation and currency and the outlook for their impact on the gross margin? Thank you.
Yes. Please remind one question at a time. First question, sports have been very well received. We're 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 made in sports etcetera. 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 in and it's very difficult for us to quantify it. So that's why we say it's increasing, but it's difficult to quantify.
And just when you mentioned the long term incremental investments for this year, should we expect that going forward also?
This year, we have quantified it to around SEK 600,000,000 to SEK 800,000,000. Early next year, they will continue, but we will have to come back about the level of whether it's going to be increasing further or decrease. But let's come back to that later on.
Thank you.
Thank you. Our next question comes from Jeff Lowry. Please go ahead. Yes, hi. A question on online, please.
In your big existing online markets, what proportion of the overall H and 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?
We are in many countries actually we offer most products both online and offline. But I don't think the target is to be 100. Some products will be available only online and some products only offline. So this is a case by case. But it's you could say that most products now are available in both channels.
Good stuff. And the second very NRIQ one, how big is the store in Melbourne?
It's around 5,000 square meters.
Great. Thank you. Thank you. Our next question comes from Andrew Hughes. Please go ahead.
Yes. Hi, guys.
Hi, Andrew.
Just going back to your comments on supply chain and sustainability and minimum wage increases. Just looking at it from the customers' 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?
Yes. More and more people are asking for it and it's becoming more and more important. And of course, we want to be proactive.
And that's showing up in all your survey work?
Absolutely.
Yes. Okay. And second question on footwear. Again, what's the opportunity there? I mean footwear
presumably as
a percentage of sales currently is minuscule. Is that would that be the right word?
We wouldn't invest in shoes. We wouldn't see a very interesting potential.
So as a percentage of sales currently, are we talking about what just 1% or 2%?
I let you guys do that kind of guessing. We don't disclose a different part, sorry.
Right. Okay. That would be a guess if I had to do that. And perhaps just one last one. I know that following on from Anne's question about Anne's Other Stories.
I mean, you said that all the other non H and N brands contributed. And what did you mean by that? Did you mean that altogether those non H and N brands saw profit growth?
No. I said that we talked about revenue increase and they all contributed to the revenue increase.
I just hope so on that. But no comment on non H and N profitability just all combined?
I'm terribly sorry, no.
Okay. All right. Thanks anyway.
Thank you.
Thank you.
Our next question comes from Fraser Ramsden. Please go ahead.
Thanks very much. It's Fraser Ramsden at Nomura. Actually, it was just Hi. 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%
to 17% of revenue online in answer to Chris' question?
No, we don't disclose how much we sell online. It must have been a confusion somewhere. What was the question I answered.
Okay. So you gave no indication. And 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, 2 geeky questions, but thank you very much. Bye.
Thank you. Our next question comes from Rebecca McCollum. Please go ahead.
Yes. Hello. Rebecca McCollum at Santander again. If you adjust the gross margin in the Q2 for the markdown and for the longer term investment, it looks like the external factor contribution was down 25 bps. Is that what you're thinking for the Q3 as well?
Again, the yes
That's because we had the wrong
Yes. What the gross margin becomes is of course at the end of the day our what we do with the offering with the markup and then the fabrics and whatever. There are lots of different factors that affect their gross margin. But we see that we say that the external factors are more or less at the same level for as we see it for Q3 as Q3.
And just another question in fact, is there any change in the average selling price over the spring summer versus the previous seasons?
When it comes to pricing, we 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 as 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, very highly competitive, but we are doing well and we increased sales with 23% in the quarter. And of course, we're very happy especially with our online growth.
And are you seeing it I mean, I presume it by default because of the rates of growth you're achieving, you're taking share albeit off a relatively low base than the market. Is there anything to suggest that there 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. But as you said, we're still very small player in the U. S. Market even though we are now nationwide and we have 3 13 stores that we're expanding quickly. And we continue to take market share and we'll continue to see a great potential for H and M.
I think U. S. Shoppers have taken H and M to their hearts and they appreciate Fashion Quad at the best price.
Thank you very much.
Thank you. Our next question comes from Chris Chavaraz. Please go ahead.
Sorry. Niels, one more question for you. You mentioned that costs will be higher in 2014. I wanted to clarify that mainly because of stores or did you mean there is incremental cost investment beyond previous guidance of the SEK 600,000,000 to SEK 800,000,000 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. Now that's natural to assume given that you have store growth, but I wanted to clarify if you meant the cost investments will be higher in 2014 rather than 2000?
The long term investments, they will be approx SEK 600,000,000 to SEK 800,000,000. Higher 2014 compared to 2013.
Okay. That's Exactly the same message just in Q1.
Yes, yes, my
right. Yes. Yes. Yes. Yes.
Okay. Thanks. Thank you.
Thank you. We have a follow-up question from Charlie Muir Sands. Please go ahead. Yes. Sorry, I want
to ask about your thoughts on the external factors for the gross margin in the Q4. I know it's a little bit further off. But given the recent decline in the cotton price, I wonder whether you see any sort of lag effects perhaps trickling through from then on or whether the wage pressures will continue to result in sort of net negative?
Well, we definitely can see that the wage pressure will continue. But as you said, I mean, there are lots of different factors and we're still buying for Q4. But 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'll now hand back to you.
Okay. Thank you all very much for participating in this conference call. We wish you all a great summer. And for those of you in the Southern Hemisphere, we wish you a great winter. And we'll come back for the 9 months results on the 25th December.
Thank you. Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now all disconnect your lines. And once again,