Thank you for standing by, welcome to the first quarterly results for 2014 conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone. I must advise you that this conference is being recorded today, Thursday the 27th of March, 2014. I would now like to hand the conference over to your speaker today, Mr. Nils Vinge. Please go ahead, sir.
Thank you. Welcome to this telephone conference on the occasion of H&M's first quarter results 2014. I am our CFO, Jyrki Tervonen, we'll be happy to answer your questions after the presentation. You'll find the presentation slides to this telephone conference on hm.com. Please look at the slide, first quarter 2014. H&M group sales were good in the first quarter, we kept on taking market share. Sales including VAT amounted to SEK 37.5 billion, an increase of 13% in the market still affected by challenging macroeconomic conditions in many countries. In local currencies, the increase was 12%. Gross profit increased 13% to SEK 17.6 billion, corresponding to a gross margin of 54.9% compared to 55.2% a year ago. Markdowns in relation to sales increased marginally compared to Q1 2013.
The overall market situation for external factors such as cotton prices, the US dollar, and cost inflation was more or less neutral for sourcing to Q1 compared to last year. Looking at the sourcing period to the second quarter 2014, the market situation for the external factors remained more or less neutral to slightly negative. Cost inflation increased towards the end of the sourcing period. Cost control in the H&M group remains very good. In the first quarter, costs in comparable stores decreased slightly compared to the same quarter last year, both in absolute terms and as a share of sales. SG&A increased by 13% to SEK 14.2 billion in the first quarter. The increase is entirely related to our expansion and substantial long-term investments in IT and online, as well as the broadening of the product range and the establishment of the new fashion brand & Other Stories.
Among other things, the increased investments made it possible to open H&M's online store in France already on the 13th of March. Our long-term investments are very important as they are aimed at further strengthening our market position and securing future expansion. These long-term investments will continue, in 2014, costs will be at a higher level than in 2013. During 2014, these costs may be divided unequally between the quarters. As Q1 is H&M's smallest quarter, the cost increase has a higher percentage impact on profits in Q1 than in the other quarters of the year. Operating profit increased by 9% to SEK 3.4 billion. Excluding the long-term investments, the profit increase would have been 14%. Operating margin was 10.6% compared to 11%. Profit after financial items increased by 8% to SEK 3.5 billion.
After a tax rate of 24%, net profit increased to SEK 2.6 billion, equaling earnings per share of SEK 1.60, up from SEK 1.49. Now for some other key figures. Please turn to the slide, key data. Stock in trade as of the 28th of February amounted to SEK 15.9 billion, an increase of 15% in SEK and 14% in local currencies. The increase is mainly explained by the expansion in stores and online. The level and composition of the stock in trade are considered good. Cash flow from current operations was SEK 2.7 billion compared to SEK 3.8 billion a year ago. The main explanation is higher tax payments in the quarter. Investments in terms of CapEx total SEK 1.6 billion, and for the full year, we expect CapEx of between SEK 9 billion and SEK 9.5 billion at today's exchange rate. The financial position of the group remains strong.
Liquid funds amounted to SEK 18.2 billion, and return on equity was 37.2% growth in 12 months compared to 36.3%. Now some words on H&M's expansion. Please turn to the slide, expansion. The global expansion of the H&M group continues. In the first quarter, we opened a net of 60 new stores, and at the end of the quarter, the total number of stores was 3,192 in 53 countries, all brands included. For 2014, we plan to open around 375 new stores net within our expansion target of increasing the number of stores by 10%-15% per year. China and the U.S. are again expected to be the largest expansion markets. Later today, for example, the very first H&M store in Hawaii will open. It's a flagship store in the best location in Waikiki, Honolulu. We see room for continued expansion in other existing markets and in new markets.
In 2014, we will open more H&M flagship stores than last year. Planned locations include, for example, East Nanjing Road in Shanghai and Weinstraße in Munich. In New York, where we opened a spectacular H&M store in Times Square recently, two more flagship stores are planned to open this year on Fifth Avenue and Herald Square. Next week, on the 5th of April, Australia will become a new market for H&M with the opening of a flagship store in Melbourne. It will be a three-level store in the historical General Post Office building, which is a real landmark in Melbourne. In the second half of the year, the Philippines and India will also become new H&M markets, with openings planned in Manila and Delhi. Next year, expansion will continue in the Southern Hemisphere.
We will open the first H&M store in Lima in Peru and the first store in South Africa. Expansion continues also for the newer brands of the group, like COS, & Other Stories, Monki, Weekday, and Cheap Monday, as well as H&M Home. COS has over 90 stores in more than 20 markets and a very good performance. Last year, COS opened around 20 new stores, and at least as many are planned for this year. New markets for COS this year will be Australia, the U.S., with stores both in New York and Los Angeles, and South Korea as well as Switzerland, which opened in February. & Other Stories develops very well, with eight stores today and at least the same number will be added in 2014. & Other Stories will also open in new markets, the U.S., Belgium, and the Netherlands.
Both COS and Stories will launch online sales in the U.S. in 2014, and Austria and Ireland will become new online markets for Stories. We have also extended our sports range, H&M Sport. Please turn to the next slide. We have a strong offering, and we are constantly working to further develop and broaden our product range. One example is the updated H&M Sport range, which has been very well received by customers. The new H&M Sport is available in selected stores in 18 markets and online. Continued rollout to more stores and countries is planned, as well as further broadening of the sports range. Our brands reach more and more customers, and we are expanding H&M's online presence to more markets globally. Please turn to the slide H&M Online.
Following the successful start of H&M's online store in the U.S. last year, we launched shop online in France this March. Initial reception by our customers has been very good, the global rollout continues. Next in line will be Spain and Italy early autumn, we also plan to open H&M Online in China at the end of 2014. Now, before we start the Q&A session, just a few comments to summarize. If we look at current trading, sales increased 12% in local currencies from the 1st to the 25th March compared to the same period last year. Looking ahead, we still have respect for the macroeconomic situation that remains challenging in many markets. We are optimistic about the future for the H&M Group.
With many great collections, a strong market position, and great potential for continued expansion, we keep investing long term to strengthen the position of the group even further. With that, we are now happy to take your questions. Please remember to only ask one question at a time.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, that's star and one on your telephone. Your first question today comes from the line of Erik Carlson from AKO Capital. Please ask your question.
Hello. Thanks for taking my question. I was wondering on the comparable store development for SG&A, which was down this year in absolute terms, and I believe it was down last year again. It's been very controlled there. How do you look at that going forward, assuming positive like-for-like growth on the sales line? How should we look at that development?
That's correct. They were slightly down in comparable stores in Q1 and also I think last year as well. In the long term, of course, it's hard to always come down in comparable stores. Of course, we are working to try to find efficiencies in the store operations. Of course, in the long run, with the underlying cost inflation, et cetera, we of course need a positive like-for-like development.
Are there any particular initiatives you're taking there to have that impressive relevance at the moment?
There are a lot of initiatives in the stores. Of course, as we have said previously, we are looking to better tools for planning our sales and staffing the hours in a more correct way that we don't make, so to say, easy mistakes, trying to find the calendar effects, et cetera. We are working and trying to find new tools to help the stores to plan better. Also in different areas for electricity consumption, we are looking in how to be more efficient in the consumption because the prices are increasing in many countries. There are, of course, a lot of different initiatives that we are constantly working on in our daily operations.
Thank you very much.
You're welcome.
Thank you. Your next question today comes from the line of Richard Chamberlain from Merrill Lynch. Please ask your question.
Thanks very much. Morning. Sorry, afternoon, everybody.
Afternoon.
Question on the OPEX impact, please. It obviously looks like it was around SEK 170 million in Q1 in terms of the impact for the long-term growth investments. I just wondered whether we should expect the full year impact to be around four times that, or will the impact reduce in the coming quarters, in terms of an absolute amount as well as a percentage of sales. Thanks.
Okay. As we said in connection with Q4, the long-term investments during 2014 will be on a higher level than 2013. Our best estimate for the full year is that it will be in the range of SEK 600 million-SEK 800 million on a yearly level. Always to remember, that can differ from quarter to quarter and also the impact, of course, is higher in a small quarter like Q1 compared maybe to Q2 or Q4. That's our best estimate and as you know, all bigger projects, there are so many dependencies, so it can vary, but best estimate on a yearly level is SEK 600 million-SEK 800 million.
Okay, thank you. Okay, great. Just one more, please. On the China online launch, why is that taking place after the launches in Spain and Italy? What additional steps need to be taken to start online in the China market?
For every online launch, there is a lot of adaptations to each country. Obviously, since we now have France up and running and some other countries within EU, it's much easier to launch in Spain and Italy, which is now EU. China is of course very different in many aspects and therefore more complex.
Okay, thanks.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Please ask only one question per person. Your next question today comes from the line of Omar Saad from ISI Group, New York. Please ask your question.
Hi, thank you. This is Vickram Mohan in for Omar. Just wondering if you could talk a bit about the competitive landscape globally and if you see new competition affecting your business in any region. Thank you.
Yes, I think, in general, fashion apparel is perhaps one of the most competitive industries in the world to start with. I think competition is always by default getting stronger and stronger because everyone wants to improve. At the same time, of course, there are new competitors coming aboard and developing well, and there are others who have problems. It varies, of course, from market to market. That's the reason why, since it's so tough competition, we can never relax, as I said, it's always about improving things. Constant improvement is one of the most important values in H&M.
Thank you. Secondly, do you see the promotionality that affected your gross margins a bit? Do you see that continuing this year or subsiding and leveling off a bit? Thank you.
It's very difficult to say because it varies from market to market. We are present today in 53 countries, and of course, we have to adjust to the prevailing market conditions everywhere. If you start with the U.S., it has been extremely intensive last year with promotions and marketing activities, and of course we have to respond to that.
Thank you.
Thank you. Your next question today comes from the line of Rebecca McClellan from Santander. Please ask your question.
Yep. Good afternoon. Can you hear me?
Yes, we can.
Hi there. Hello. Against the SEK 600 million-SEK 800 million longer-term investment expected for this year, would you expect a similar sort of envelope for next year? Should that level of investment start to fade as of 2015?
What we can say about 2015, the long-term investments will still be on a high level, exactly the amount that we have to come back to in connection maybe in the full year report. These investments, they are not only here and now. They will continue, and also going more and more to omnichannel. We have to also update our technology in the stores, et cetera. Our estimate is that they will remain on a high level in 2015 as well. We have to remember that a lot of those initiatives that we have taken or are taking now, they will also start to generate revenues, and some of them already have, but not maybe in full scale. Of course, in the long term, these investments are aimed to generate revenues and bottom line.
Okay.
We still see them as very important.
All right. Thank you. Secondly, could you just develop slightly your commentary vis-a-vis a pickup in sourcing cost inflation as of the end of second quarter. What sort of areas are you seeing? Where are you seeing that inflation coming through?
Well, actually, we think this is positive because it's something we've been actively pushing for, especially in countries like Bangladesh and Cambodia for sustainability reasons. We see that increased salaries there leads to better stability and a more sustainable situation, of course. That's actually very positive.
Okay.
Yeah, sorry. I also think this is becoming more and more important for our customers. I think if you don't do these important investments, I think that will be a mistake. I think everybody of us, me and the most probably all of us, are going into that direction and understand the necessity of thinking sustainable in all areas in life. I think that's also a very important aspect to have in mind.
I see. The inflation's coming through from the wage inflation, right?
Primarily, yes.
Yes. Sorry, just to confirm then, because the dollar is at 138 or whatever to the euro right now, you're not seeing that as a benefit to offset some of this wage inflation, or?
Well, it's definitely, in the short term, a positive, absolutely. The total picture of all these external factors are becoming more negative. That is not the same as saying that the margins will go down, because that's a totally different thing, as we said many times before.
Yes.
It's of course, up to us how we handle them, how we work with them, and of course, how we position ourselves and work with the customer offering.
Okay. Thank you very much.
Thank you. Your next question today comes from the line of Jamie Merriman from Sanford Bernstein. Please ask your question.
Good afternoon. Hello.
Good afternoon.
My question is actually about some of the new and more geographically distant markets that you're entering this year and in the coming years. Can you talk a little bit about how you're handling distribution for those markets and logistics? Are you starting to build distribution centers for them now, or are you fulfilling from other locations, and how are you thinking about that in the long term?
Well, one of the views about continuing to grow with the same pace every year is that you gradually build up the logistic infrastructure. For us, it's not big thing. Of course, it's a lot of work to set up in a new country, but we have now a lot of good experience, good people, and good processes in order to scale this up to country to country, the next country to the next country. We have already set up, as you know, in the Southern Hemisphere, and we are scaling this up. It's nothing dramatic.
Okay. Thank you.
Thank you. As another reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Please ask only one question per person. The next question today comes from the line of Christodoulos Chaviaras from Barclays. Please ask your question.
Hello, guys. My question on the investments there, this SEK 170 million for this quarter and the continuation of the rest of the year, does this include investing in your click and collect capability, and can you remind us where you offer click and collect? If I remember well, you do not offer that yet in the U.S. Any plans there?
It's interesting that you mention one. There are a lot of different things included in these long-term investments where it's primarily IT and online, but it's also, just to remind you, another store is H&M Sport, et cetera. Of course, we are investing in platform-related IT questions, but also in expansion to set up organization and staff, et cetera. Of course, in improving the features like click and collect could be one of them. It's not just that, of course not.
Do you plan to offer click and collect in the U.S.? Any intention?
As I said, at any given point of time, there are lots of different features that we want to improve, and click and collect is one of them, but I can't tell you when or if it's going to be.
Okay. All right. One more question, please, if I may, then.
In terms of a little bit more short-term is this one, Alfred. In terms of your March sales, the one that you've reported there, should we be aware of any calendar effects? How do you see calendar effects progress into next month because of the difference in Easter from year-to-year in March and April? Maybe you could help us understand how this could deviate.
Sure. Again, Easter is very difficult to quantify, but it's true that now this week, right now we are meeting last year's Easter week. I would say that it is a slight negative effect this year. The calendar impact is slightly negative. It's important always to look at March, April, and I would say May together, because every year you have shifts of these holidays like Easter and other holidays, and also when the spring weather is very volatile as well. When you look at our monthly figures some years back, they are very volatile. Just to remind you, it seems like last year was a weak month, but it was upon a very strong 2012. I think we increased 24% or 26% or something. Yeah, to summarize, you should look at the three months together.
Okay. That means that then even April, that looks relatively strong last year, if we see it on a two-month or even three-month basis, then potentially it was not as weak last year, so potentially we could expect a bit of spillover into April from March. Is that what you're implying?
I didn't quite follow you there.
I mean in terms of the sales, because you said that March last year wasn't as weak as it looked. We then assume that also April last year wasn't as strong as it looked.
Well, yeah, of course, it goes in both ways. I also said that the Easter week we're facing now is a slight negative that will be reversed, so a slight positive in April, of course.
Okay. Well, thank you very much.
Welcome.
Thank you. Your next question today comes from the line of Charlie Muir-Sands from Deutsche Bank. Please ask your question.
Good afternoon.
Good afternoon.
Hi there. The first question I have is on these long-term project costs, the SEK 600 million-SEK 800 million. Can I just be clear that is incremental growth in long-term cost spend of SEK 600-SEK 800 versus-
Yes
last year? In aggregate, what is that level of spend? That's the first question.
We prefer not to aggregate the total long-term investment. We think that we are making huge investments, but we prefer not to exactly quantify the aggregate amount on investment. We wanted to give you a better guidance of what we're talking about for 2014 compared to 2013. Our best estimate is that the increase will be around SEK 600-SEK 800 during this year compared to last year.
Thank you. That is very helpful. The second question on cost is, was the FX impact on your operating costs very similar to the impact on sales that you used to give?
Yes. They increased 12% in local currencies.
Fantastic. Then on inventory, you described the composition and level of inventory as good. I think that's the first quarter in about six or seven that you've been able to use that adjective. Does that mean that there's a chance that we could start to see markdown recover from here? You have a multi-year soft comp at the markdown level. Thanks.
Yeah. It's far too early. We are beginning of the season, so it's far, but of course, if we continue to have a strong development in the top line, and then, of course, our aim is also to be more efficient and better when it comes to markdowns. Yeah, let's see. It's far too early. It's still two strong months ahead of us, and we don't know how the turnover development will be.
Understood. Sorry, one final cheeky question. The contribution from net new space and net new online stores to revenue, was that similar in Q1 to Q4? I suppose I'm asking.
Say again.
backwards. What was the like-for-like you used to disclose it?
The like-for-like in the quarter was positive, we don't quantify the exact number.
Okay, thanks.
Thank you. Your next question comes from the line of Adam Cochrane from UBS. Please ask your question.
Hi, guys. Just one simple question from me. In terms of the gross margin, is there a difference between different geographies on the gross margin? As your geographic mix changes, is there any sort of geographic mix shift either upwards or downwards in the gross margin that we should be thinking about?
Of course, there are slight differences between the different countries, but no major. Starting from the customer offering, our price spread between different countries is actually, I would say, very small and smaller compared to most peers. No, there isn't any simple pattern for geographical reasons depending on our expansion, no.
If you were to overlay the markdown that you've seen over the last couple of years on top of that pretty standard gross margin. Does that make a large difference in gross margin by territory post-markdown?
Could you repeat again, please? I'm trying to understand what you're aiming at.
Is your level of markdown primarily in a certain number of countries?
Okay, I got you. No, it's of course, depending from country to country, but it varies over time due to competition and how much we have bought, et cetera. Again, there is no simple pattern in that. It's not focused on a certain few countries. It's spread pretty evenly across the group.
Okay, thank you.
Thank you. Your next question comes from the line of Simon Bowler from Exane. Please ask your question.
Hi, gentlemen. It's just one more on these long-term investments, if that's okay.
Sure.
I'm just wondering, when we're thinking about the costs that are going in here, particularly with those related to the launch of online, are these costs that you'd very much consider to be one-off, that once an online store has launched and if we look a few years forward, once all of your global online stores have launched, these costs drop out? Or are any way these costs related to kind of just the ongoing running cost of having an online offer?
Some of the costs are, of course, one-off, but a lot of those costs will still be taken when we open up Spain and Italy and China. When looking at the different cost structure, comparing normal retailing compared to online, of course, the cost structure is quite different. It's so much more IT intense when opening up an online store. They will, of course, still be generating costs, but also generating top line and bottom line in the future. It's important to maybe address that it's not only technical solutions that is driving costs. One should maybe think that this is one huge, big store, where we need people for merchandising the goods. We need a logistic chain. There are, of course, a lot of different additional costs that is connected to launching a new online market.
I don't know if that was a clear answer to your question, but some of them, of course, are one-offs, but there are still investments and costs to come.
Okay. No, that's very useful. In terms of if we do think about this, therefore, as one big store, as you say, over what kind of period of time does it take to get leverage out of that big store? How do you expect that to flow through as these online businesses gather pace in those key markets?
It's very difficult to tell you, but the reason why we invest so much in this is, of course, that we see it's very, very interesting. It's growing very fast now. We see that the multi-channel strategy is very interesting. To have the store network in combination with online and a strong brand is very, very important. Exactly when the payoff is not that interesting, and of course it depends from market to market. It's not that we say, "Okay, now we invest for France, now we invest for Italy," blah, blah. We invest a lot for the group. Then, of course, we can capitalize on this for each of the new countries that we're launching, with the necessary adjustments that we need to do. Also, just to finalize, this is not ending with China.
Of course, this is a global rollout, next year, of course, this will be followed by more countries to come.
Okay. Very clear. Thank you very much.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Please only ask one question per person. Your next question comes from the line of Fraser Ramzan from Nomura. Please ask your question.
Thanks very much. Good afternoon. Sorry to disappoint you. I'm going to ask about the long-term costs again.
What a surprise.
I genuinely think I must be quite stupid because I don't understand, frankly, what the difference between something that is a regular cost and a long-term cost is. When does something go from being a long-term cost to being in your regular P&L in terms of operating costs? I'm using the word cost because I always thought investments went on the balance sheet and costs went through the P&L.
Yeah, it's simply that, of course, long-term is some part, as we have said, will be capitalized in the balance sheet. Some are more, you can say startup costs. Of course, a lot of these costs will be in the running cost when we are starting to fully generate revenues. Opening up, for instance, a big flagship store, there we have also quite high startup costs compared to a more normal store. Of course, there is no exactly clear cut when it starts to come operating. Let's say after a full year of running in a normal store, then of course, it's purely running costs. The first year, it's a lot of startup cost involved in the P&L for that store.
Thank you.
Was that clear?
I believe Mr. Ramzan has unfortunately disconnected.
Oh.
Aha.
Your next-
You can come back again if you want.
Your next question today comes from the line of Erik Carlson from AKO Capital. Please ask your question.
Thanks for taking another question. Just curious how the online launch in France went, given it's your first country on the new, more standardized platform.
Yes. Very good, thank you. The customers are happy, and so are we.
Very good. Thank you.
Thank you. As a final reminder, if you do wish to ask a question today, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. The next question today comes from the line of Paul Rossington from HSBC. Please ask your question.
Good afternoon, gentlemen.
Good afternoon.
Just a point of clarification. I may have missed it earlier on the call. Have you actually said what the actual markdown impact was in basis points at all?
Oh, I think we only just said marginal. If you want to, it's 10 bips maybe, it's more or less nothing.
Thanks very much.
Thank you. There are no further questions at this time. As a final reminder, if you do wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Mr. Ramzan has reconnected. I'll just open his line again.
Hi there. Welcome.
Hello.
Hello.
I'm very sorry for anyone else. I completely missed the answer. Apologies. Okay. I was just trying to say that some of these long-term investments, of course, a part of these are going to be capitalized in the balance sheet, but some can be looked more as a start-up cost.
Right.
I tried to compare to opening of a flagship store. Of course, the first year, there are a huge amount of start-up costs.
Yeah.
Maybe the second year running, then it's more normal operations.
Therefore, the profit and loss for a new open store, the P&L for that store for that year is, of course, hit a lot of start-up costs. That's the same opening up a new online market. Before you get the scale, the volume, and et cetera, you have to have the platform, the organization, you have to have the people, you don't get the full-scale revenue and profitability in the beginning. Of course, when it's up and running, then it's going to more normal operation. It's not a long-term investment. Also when looking at, for instance, our new formats, for instance, & Other Stories, of course, we have been opening eight stores last year, planning to open at least eight this year as well.
Before we have the volume, before we have the full economies of scale, the bottom line is of course not on that level that we want to have it in the long run. You can also classify that it's a long-term investment before we are up in that volume and the economies of scale, when it's really going to benefit and give a bottom line that we are expecting in the long run. In a way, the stores are in normal operation, but you are not there in full scale where you want to be. In a way, you can classify that as well. That's a long-term investment to invest in.
Right. You wouldn't do that for an H&M store, for example, would you? Although presumably, most of those do not drag on margin when you first open them.
Exactly. You are correctly right. It's totally different to open up one additional H&M store compared to open up a new format.
A new H&M country might drag on your margin, though. Would that go in long-term investment?
Yes. Exactly. We don't. We don't call that for H&M. There we have a much better foundation in the group to take care of a new country. In smaller formats, we don't have maybe that broad base. For opening up a new H&M country, of course, it will have a lot of start-up costs, for sure.
Right. I apologize for hogging the phone here. With your investments being SEK 600 million-SEK 800 million incremental in the current year, that, on my calculations, is about a half a percentage point drag to your operating margin as a business. That would be in addition to whatever else you might achieve as a business. Do you think, as you keep referring to long-term investments continuing, that this will keep, therefore, dragging down your operating margin for some years to come as you launch additional countries, or it won't? I think we all get a little confused between absolute and percent of sales here when you talk about it.
Yeah. For this year, as you have been calculating, we have to see next year on what level we will have this long-term investment increase compared to 2014. Yes, as you said, you can see it as this will be affecting the EBIT. If it's landing SEK 600 million-SEK 800 million, that, of course, will give that effect. I see. Okay. Thank you for your help. Thank you. Thanks.
Thank you. Your next question today comes from the line of Andreas Lundberg from ABG. Please ask your question.
Yeah. Hi, good afternoon. Andreas Lundberg with ABG Stockholm.
Good afternoon.
Can I ask you about the Q1 leverage here? Are you surprised that you didn't get even more positive leverage in the quarter on operations, given a positive like-for-like, and also that the currencies turned positive year-on-year, and that you also get some costs down on a comparable perspective?
No, not really. There was a slight positive like-for-like, absolutely. There is not much leverage on that because you always have inflation and increases, et cetera. We did get, as I said, cost in comparable stores were flat or down actually, and sales were up. The increase is all about the expansion in stores and online and these long-term investments. That's exactly why we decided to quantify them to show that on the running business, we have 100% control and it's doing very well. To add in, they are according to our plan. We have planned for this increase in the cost OPEX. It's no surprise for us.
Could I ask on your sourcing cost, would you say they are structurally much higher today given your increased focus on sustainability? Thank you.
I would say yes, of course, we invest a lot in sustainability, but it also pays off. It's a win-win, I would say.
Okay, thanks.
Thank you. Your next question comes from the line of Geoff Lowery from Redburn in London. Please ask your question.
Yeah, hi there. Just on online, does the scale of the investments that you've had to make in new markets and capability fundamentally alter your medium-term view about the profitability of online, which I think you've said in the past approaches that of stores?
No, it doesn't.
Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your next question today comes from the line of Simon Bowler from Exane. Please ask your question.
Hello, sorry, it is back on the old topic. On the SEK 600 million-SEK 800 million, just looking to understand how you have calculated that number. If I was to use the new store analogy, one could calculate that cost from considering just the startup costs, or you could consider the startup costs and the net trading performance of that new store. How did you come to that 600 to 800?
Yeah, it is according when we are looking at the investments we have to do, remember, this is not only the online and IT investment, there are also a lot of other connected costs that we are taking for development, our existing assortment, et cetera. We have purely looked into our budgets and plans, what we are planning to do during the year, and how that will affect our cost increase in those specific areas that we are classifying as long-term investments. That is some of the IT projects that we are classifying long-term investments, online expansion to new countries to build up the new platform, and also looking into broadening our existing offer. That is purely that we are looking how much we need in staffing up the organization, how much adaptations we have to do in existing technology and systems, et cetera.
We add up in this amount. It is simple as that.
Okay. There is no kind of net trading performance within there. If opening up online is initially loss-making, for example, then
No
kind of net loss wouldn't be included in that figure?
No.
Okay. Absolutely. Very clear. Thank you.
Thank you. Your next question today comes from the line of Niklas Farn from SEB Equity. Please ask your question.
Thank you, good afternoon.
Good afternoon.
Could I ask you on online versus physical store rollouts, given your longer-term guidance and hopes to grow by 10%-15% per annum, in the case that the online channel, actually, even in your business plan, achieves basically the same penetration as in several of the markets that you operate in, would you still open up the same amount of physical stores to fulfill the long-term guidance range?
We still see huge potential to open up physical stores despite the fact that online and e-commerce is growing.
10%-15% is a number we feel that we can keep for many years. As long as we can do that, with continued high profitability and quality, we will continue. Of course, somewhere in the future, I'm sure that we need to slow down, or online, et cetera, will change the picture. As of today, no changes.
Would you care to elaborate on where that threshold lies? Let's say that you derive 5% of your total group revenue from online sales, or 10%. Would that, do you think, change the rollout of actual physical stores?
No, I don't think it's that simple. There are so many other things in the total equation. Just to remind you, we have had online sales in Sweden for many, many years, and we still add new stores because there is a need for it in some places still.
Thank you very much, guys.
Any more questions, please? If not, I would say I would like to thank you all very much for participating in this conference call, and welcome back for the six-month results on the 18th of June.
Can you-
Are there any more questions?
There are no further questions at this time. Please continue.
No, I just said, since there were no questions, again, I repeat, thank you very much for participating. Welcome back for the six months results on the 18th of June. Goodbye.
Thank you. That does conclude our conference call today. Thank you for participating. You may now all disconnect.