Ladies and gentlemen, thank you for standing by, welcome to the full year report conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star followed by one on your telephone keypad. I must advise you that this conference is being recorded today, Thursday, 30th of January, 2014, at 2:00 P.M. Central European time. I would now like to hand the conference over to your speaker today, Mr. Nils Vinge , Head of Investor Relations. Please go ahead, sir.
Thank you. Welcome, everyone, to this telephone conference on the occasion of H&M's full year results for 2013. Our CFO, Jyrki Tervonen, is with me today, as always, we'll be happy to answer your questions after the presentation. You'll find the presentation slides to this telephone conference on h&m.com. Please look at the slide, fourth quarter 2013. H&M showed strong performance in the fourth quarter. Autumn collections were well-received, sales increased by 13% in local currency. Translated into SEK, sales including VAT amounted to SEK 42.6 billion. Sales developed particularly well in Asia and in Southern Europe. Online sales were also strong. Last year, H&M soft online expanded to the U.S., where it has been very well-received since the launch on the 1st of August. The rollout of online to more markets will continue in 2014. Gross profit in the fourth quarter increased by 11% to SEK 22.2 billion.
The gross margin was 60.8% compared to 61.6%. The difference in the gross margin is mainly due to currency exchange rate effect in connection with payments for the group's flow of goods and to year-end effects. Increased markdowns in relation to sales accounted for approximately 0.2 percentage points of the difference. External factors such as cotton prices, cost inflation, and the U.S. dollar were more or less neutral for sourcing to Q4 compared to the corresponding year earlier period. Cost control remains tight. SG&A increased by 11%. The increase was due to the expansion and to our continued long-term investments in several areas such as IT and online and our new fashion brand & Other Stories. Cost in comparable stores decreased compared to the fourth quarter in 2012, both in relation to sales and in absolute terms.
Operating profit increased to almost SEK 7.3 billion, with an operating margin of 19.9%, more or less unchanged year-on-year. Profit after financial items rose by 11% to SEK 7.3 billion. A good performance given the large long-term investments that we make. Net profit was SEK 5.6 billion, which equals earnings per share of SEK 3.39, an increase from SEK 3.19. Looking at the full year, please turn to the next slide. H&M continued growing and taking market share in 2013, although macroeconomic conditions remained challenging in many markets and marks on activity in the industry was high. Sales increased 9% in local currency, due to the strengthening of the Swedish krona, the increase in SEK was 6%. Sales including VAT amounted to SEK 150 billion. Looking at the development into the individual markets, please turn to the slide, sales per market. H&M now has stores in 53 countries.
Germany is still the largest market by far, with over 400 stores and more than SEK 30 billion in sales last year. H&M is still growing in Germany. The U.S. is H&M's second largest market, with a strong contribution from online since August and a total of 32 new stores during the year net. Sales increased by 13% in local currency. In France, which is the third largest market of the group, sales were strong, especially during the second half of the year. Sales developed well also elsewhere in Southern Europe. As an example, Greece increased sales by 34% in the fourth quarter. China is H&M's largest expansion market. The number of stores grew by 71 net to 205 stores by the end of the year, with a turnover of SEK 6.7 billion.
Now, if we continue with the results for the full year, please return to the slide full year 2013. Gross profit increased to SEK 76 billion, corresponding to a gross margin of 59.1% compared to 59.5% last year. Operating margin was 17.2% compared to 18% the year before. Profit after financial items increased to SEK 22.5 billion. Profit was negatively affected by the large long-term investments, increased markdowns, and negative currency translation effects of SEK 600 million compared to the previous year. Net profit for the year increased to SEK 17.2 billion, corresponding to earnings per share of SEK 10.36, up from SEK 10.19. Now looking at some other key figures. Please turn to the slide Key Data. Stock in trade increased by 10% compared to the same time the previous year. The increase is mainly explained by the expansion.
The composition of the stock in trade as of the 30th of November is considered good, even if the level was somewhat higher than planned. This means that markdowns in the first quarter of 2014 could end up at around the same level in relation to sales as in the first quarter 2013. Cash flow from current operations was SEK 23.8 billion, an increase of approximately SEK 5 billion. Investments in terms of CapEx amounted to SEK 8 billion. The increase is mainly due to the expansion but also the long-term investments. CapEx for 2014 is estimated to be between SEK 9 billion and SEK 9.5 billion at today's exchange rates. The financial position of the group remains strong. Liquid funds amounted to SEK 17.2 billion. The board of directors will propose to the annual general meeting a dividend of SEK 9.50 per share. Return on equity was 38.5%.
H&M created more than 12,000 jobs net within the group in 2013, and today we are more than 116,000 employees. That equals an average number in full-time employees of around 81,000. Now some words on H&M's expansion. Please turn to the slide Expansion 2014. We continue our strong expansion. Last year, we opened 356 new stores net. At the end of the year, the H&M Group had 3,132 stores in 53 countries. China and the U.S. were the largest expansion markets. One of the highlights during the autumn was the opening of the new H&M flagship store at Times Square in New York. More than 2,500 people were lined up outside the store, where Lady Gaga cut the ribbon together with the chairman of H&M. For the third consecutive year, H&M also added five new markets in 2013: Chile, Lithuania, Serbia, Estonia, and via franchise, Indonesia.
If you please turn to the next slide. Here you can see H&M's rapid global expansion in a longer perspective. Looking at 2014, please turn to the next slide. For 2014, a net addition of 375 new stores is planned. It is within our target to add 10%-15% new stores per year. China and the U.S. are expected to be the largest expansion markets. We see great potential for further expansion in other markets too, including Russia, Germany, Italy, and Poland. Several new flagship stores are planned in the absolute best locations in, for example, New York, Milano, Shanghai, Beijing, and Melbourne, to mention a few. As we have mentioned before, we are very much looking forward to the opening of H&M's first store in Australia.
The store will open in the first half of the year in a fabulous location in the old Melbourne General Post Office building. The autumn expansion will continue to the Philippines, where the first H&M store will open in the SM Megamall in Manila. In addition, a couple of other new markets are planned for late 2014 that we will come back to further ahead. In 2015, as we've already communicated, the first H&M store will open in South Africa. H&M's global expansion also takes place online. Following the successful start of H&M's online store in the U.S. last year, the rollout in more markets will continue this year. Four new online markets are planned to open in 2014. The next market for H&M Online will be France, with the launch planned sometime this spring or summer.
Three more large markets are planned for later 2014, and we look forward to come back with details later this year. Now some words on the newer brands of the group. Please turn to the slide COS. COS continued to perform very well in 2013, both in terms of sales and profitability. During the year, COS opened 21 new stores and added four new markets. COS has developed into an internationally well-established fashion brand in just a few years. It was launched in 2007 and has today 85 stores in 20 markets. In 2014, we plan to open more COS stores than in 2013. For example, in the U.S., the first COS store will open in SoHo, Manhattan, together with the launch of online sales for COS in the U.S. market. Australia, South Korea, and Switzerland will also become new COS markets this year.
To have a look at the newest fashion brand of the group, please turn to the next slide, & Other Stories. & Other Stories has been very well received since the first store opened in March 2013. The investment in & Other Stories includes not only investments in developing an entirely new fashion brand, it will also involve costs for the continued rollout. In 2014, & Other Stories will open further stores in both existing and in new markets. Expansion also continues for the other brands of the group, like Monki, Weekday and Cheap Monday, as well as H&M Home. The H&M Home concept opened in around 10 new markets in 2013, and will open in another 15 new markets in 2014, in approximately 70 H&M stores. Expansion also includes the broadening of the product range of the H&M brand. Please turn to the slide, H&M Sport.
H&M Sport concept has been updated and renewed to include a significantly broader range than before. The new collections include fashionable and functional sportswear for various kinds of sporting activities for women, men, and children. The launch is gradual, and initially, new collections are available in 18 markets and online. We're also delighted that H&M will dress the Swedish Olympic teams for the upcoming Winter Olympics and Paralympics in Sochi, as well as for the Summer Olympics and Paralympics in Rio de Janeiro in 2016. Now, before we start the Q&A session, just a few comments to summarize. 2013 ended on a strong note, with strong sales and profitability in the fourth quarter. The new year has also started well. Sales in December increased by 10% in local currencies, corresponding to an increase of more than 12% calendar adjusted. In January, sales are expected to increase by 15%.
Although there are still macroeconomic challenges in several of our markets, we are optimistic about 2014, which will be an exciting year with new countries and new opportunities for H&M. We have a strong belief in our offering and are convinced that we will strengthen our market position even further during the year. With that, we are now happy to take your questions. Please remember to only ask one question at a time.
Thank you, sir. As a reminder, if you wish to ask a question, please press star followed by one on your telephone keypad and wait for your name to be announced. Your first question comes from Eric Carlson. Please state your company name and go ahead with your question.
Hello, gentlemen. Thanks for the good set of results. I just had a question on China, given that it's now your biggest market in terms of space expansion. Could you just tell us a little bit about how the profitability in China compares to other markets?
We are very happy with China and the development, we look forward to even more new stores in 2014. Could be as much as 80 or 90 new more stores. When it comes to profitability, we prefer not to comment profitability per market or concept. Sorry.
Thank you.
Your next question comes from Richard Chamberlain. Please announce the company name and go ahead with your question.
Thanks very much. Company name is BofA Merrill Lynch. A couple of questions around gross margin, please. Just number 1 would be, I wondered if you could just talk around the promotional activity you did in the quarter, whether that was more in store than online, which markets in particular were very promotional, and whether that was driven by just demand being very back-loaded. You had one very strong month, November, following a softer period. Did that contribute to it as well? Any comments you can make around promotions, please.
Yes. What I could say is that it was a historically very warm autumn, if you remember, September, October were historically warm. I think official statistics from the industry show they were very weak in most countries. I think that drove activities and markdown activities, price promotions in many of our markets. Of course, we had to follow suit in many markets. Also the fact that we had, as we commented in Q3, the outgoing inventory level from Q3 was slightly above plan. That's one of the reasons why our markdowns were slightly higher. It was only 20 basis points more compared to last year, so not a big deal.
Right. Okay, thanks, Nils Vinge. Just one other on the gross margin. I think you're expecting broadly neutral external factors on gross margin for Q1. I'm assuming there's a strong euro impact still to come through, but also, you've talked about some wage inflation in certain markets. Are they the most material factors to think about for the Q1 and the first half for this year?
Yeah, that's correct. For Q1, we aggregated, we estimate that those four or five main components that we used to talk about, this is more or less neutral, so also for Q2. For the period now that we are buying, it's slightly negative. Q1 and Q2, more or less a neutral effect.
Okay. It's slightly negative now, is that because of mainly the wage inflation that you're seeing?
Yeah, that's the most important factor. Again, this is not a proxy for gross margin, as we've said a number of times.
These are input costs and the gross margin that's dependent on how we work with our customer offering with consumer prices, taking them down or taking them up in different markets. We want to be clear on that. This is just the input cost and the market figures.
Right. Yeah, okay. Clear. Thank you.
Your next question comes from Anne Critchlow. Please go ahead, announcing the company name.
Hi there, it's from Société Générale.
Hello.
My question is about the online launch in four countries that you're intending for 2014. I'm just wondering whether you've taken any costs for that already, or whether all of the costs are ahead of us still.
No, this is, of course, something we've been talking about for a long time now, the global rollout that we are preparing for. Of course, we've taken a lot of costs, but we'll continue to take, of course, a lot of costs because this is a very ambitious plan that we are doing at the moment.
Okay. What are the costs annualizing? Should we expect a further step up for the year ahead?
If we talk of the long-term investments, including the online investments, IT investments in the new brand & Other Stories, and broadening of the assortment, the investment levels for 2014 will be higher than 2013, no drastic increases. Of course, as Nils said, an ambitious plan to open 4 new online markets. This year, 2013, we opened one market, the U.S., and now we have ahead of us 4 markets. Of course, the initial investments will be higher during 2014. As I said, no drastic increases.
Thank you.
The next question comes from Fraser Ramzan. Please go ahead announcing the company name.
Thanks very much. It's Nomura in London. Just, I guess a predictable question around the gross margin. Could you just explain what the year-end effects are that you're referring to? Also, I think you mentioned in your earlier description of the changes in the gross margin that the U.S. dollar was sort of neutral in the period. What are the currency exchange effects in relation to the flow of goods? That seems to be something different that you're referring to in the commentary.
Yeah, that's correct. It's a different currency effect. Let's start with the year-end effects.
Yeah.
That we have every year, it's mainly due to that we are recalculating the stock in trade based on a first in, first out.
Yeah.
The main part is relating to shrinkage. During the year, we are making provisions for shrinkage, then once a year, we have inventory taking, then we get the final results. There is, of course, always a difference between the final actual shrinkage and the provisions we have made. This year, normally this provision is higher than the actual shrinkage, so it's a positive effect, but this year it was less positive than the previous year.
That's the main effect.
I see
Coming back to the currency exchange rates, it's connected to when we are placing our order. The order placement and the actual hedging, there's a time difference because we are putting orders every day, then we are gathering them and then making the hedging three days later. There is the time difference. Also the order stock is constantly changing. Even though we have a finance policy where we aim to hedge 100%, in reality, it will never be 100% because the order stock is a moving part. We are putting in new orders, canceling orders, amending orders. It will be delays. So the actual hedging can sometimes be 98% or 102%. There are small differences every month or actually every week when we are doing this.
These effects are mostly insignificant when just looking at those single factor, like the currency could be affecting the gross margin by 10 basis points negative this year, and the same factor was plus 10 basis point last year. There you have already a negative effect year-on-year by 20 basis points. Looking into this, as we tried to explain in connection with the Q3 conf call, that differs from quarter to quarter. Looking at the yearly difference, if we are looking at these currency effects, it's more or less plus minus zero the year-on-year effect on an aggregated yearly level. It's only eight basis points.
I see.
Sometimes small insignificant changes during a quarter, if they go on the opposite directions between the years, they can cause. It can variate from quarter to quarter. I just looked back and in Q3, we had positive effects, approx. 60 to 80 basis points, when looking at the reported gross margin compared to last year. Now we have -80 basis points compared to last year. If we would aggregate Q3 and Q4, that would be more or less neutralized. Yeah, it's small effects that sometimes can go in different directions.
I see. I obviously don't want to put words into your mouth, if I think about this sort of in totality, you've got the effect of the stock take, which was maybe somewhat negative. You've got the effect of shrink, and you've got the effect of this currency volatility. Obviously, as analysts, we all try to analyze these things and predict them ahead of time. Broadly speaking, what you're saying is these are one-offs and quite unpredictable and could indeed move in the other direction next year.
Yes, that's correct.
Understood. Thank you very much.
Thank you.
Your next question comes from Charlie Southern. Please go ahead, announcing the company name.
Hi, good morning. Yes, I'm calling from Deutsche Bank in London. I had a question on the operating expense. You commented that in the fourth quarter, like-for-like store costs were down again, which was very good performance, clearly, given the positive like-for-like sales.
Yes.
Can you give us some color around what's driving that efficiency and whether we can expect that to continue as we go into next year? Also, returning to the question on long-term investments, when you say that it should grow year-over-year, but not by a huge amount, should we be expecting it to be growing faster than total sales or not on the non-like-for-like cost? Thanks.
First of all, the question about efficiency in the stores and in like-to-like stores. There are, of course, different parts, but the main part is relating to how good we are in our sales planning to estimate the coming week sales planning to be able to staff the stores in a correct way. There, of course, we are working with different tools to get more accurate in sales planning to get the staff hours in place when we need them. That's the main part in the efficiency side in like-for-like stores. The long-term investments and the OpEx growth year-on-year, of course, the main factor is our expansion, which is driving the year-on-year change. Also these long-term investments will affect it, but that will also vary from month to month and quarter to quarter. As I said, there will be no drastic increases.
Some quarters, it might be looking a little bit different than the previous one, but no exact guidance of what the percentage year-on-year change will be. We are comfortable that we are making those long-term investments that will enable us to strengthen our group. Also, we are comfortable with still working really good with cost efficiency.
Great. Thank you. On the expansion side, the capital guidance, CapEx guidance for the year ahead is perhaps a little ahead of the percentage growth in store numbers. Is that because it's more into other areas, are the stores bigger or are the stores more expensive? Thank you.
That's correct. The increase in CapEx is estimated. It's a higher percentage increase than the number of stores. One has to remember when we are giving this estimation in the beginning of the year, we have to remember that a lot of the contracts, or even we haven't decided which stores to open, and a lot of contracts are not negotiated. This CapEx increase is mainly due to that we will open more flagship stores, and that's really a fantastic thing which proves the strength of our brand. We will open a couple of flagship stores in New York, Manhattan, one in Milano, in Shanghai, East Nanjing Road. A lot of the new, really big, fantastic locations with good long-term contracts. That's the explanation. Also we will have more rebuilds during 2014 compared to 2013. That's the main reason behind the increase in CapEx.
You said more refits?
Yes. More refits. Looking at a normal H&M store, our investments are more or less on the same level. It's more refits and more flagshipped.
Very clear. Thank you.
Thanks.
The next question comes from Simon Irwin. Please go ahead, announcing the company name.
Afternoon, it's Simon Irwin at Credit Suisse. Could I just ask you, going back to what you were saying about input costs in the year ahead being broadly flat. Given that the FX movements that we know of through certainly the next two quarters, if not three, does that imply that there's going to be an implied investment in quality as we go through this year? You seem to be implying that costs are going up, I'm not certain that like-for-like costs in too many markets are actually going up.
No. Again, this is not a guidance regarding gross margin. This is what we try to estimate the market conditions. Of course, FX is one important factor, there are other parts as well. This is just more or less, this is not scientifically. I think what Jyrki said about cost inflation is the biggest driver. We've seen increases in Asia, double digit, which we think is good because it's from a sustainable perspective. You can't rule them out, so to speak. Going forward, later in the year, there is a pressure upwards it already started somewhat.
Can I ask just a follow-up in terms, you were talking about doing more refits or rebuilds in the year ahead, and obviously you're continuing to broaden the range. Can you just give us an idea of ultimately what % of stores the new sportswear will be present in? Generally, what your average store size will be doing in the medium term? Are you going to have to increase it to take all this broader range in?
That's correct. If you start with the sports collection, we just launched and had a very good reception so far. It's a gradual launch. We start in 18 countries in selected stores with a full range. We have a limited range in several stores, in a large number of stores. Of course, again, we will try this out and test and gradually roll it out as we learn and get customer reactions. I can't give you any much more flavor on that yet. Regarding store size, you're absolutely right. Already last year and the year before, we started to increase slightly the store size of H&M, because in order to get space for the new formats that we are rolling out, including H&M Home, H&M Sport, et cetera. We see that this trend will probably continue also this year.
Okay. Just a quick follow-up. How significant is the Super Bowl promotion that you're doing this year, in terms of being a much bigger step in terms of the way you promoted your business in the U.S.?
Well, it all depends on what you compare it to, but of course, we are investing a lot in marketing, and the U.S. is our second most important market. We continue to grow a lot. We're a national brand in the U.S. with lots of fans, and especially now with online, a really important player. This is not the first time we invest in it. It's actually the second time.
Great. Thank you very much.
Your next question comes from Chris Chavira. Please go ahead and announce the company name.
Hi, guys. The company name is Barclays. A lot of questions have been answered. I had one on the online launch in the U.S. Do you now offer click and collect there? Given that the sales growth has accelerated in the U.S., would you attribute some of that sales acceleration to the online launch you did because the fourth quarter acceleration coincides with the U.S. online launch? Staying in the U.S., could you tell us how big the Times Square flagship store is, and when it was opened exactly?
Chris, I think I said one question at a time.
Sorry.
I'm sorry. If you start with the first one that I remember, it was click and collect.
Yeah.
No, we don't offer that yet. Of course, it's something we look into. Regarding sales in Q4, very happy and of course it contributed, the online, the successful launch in the U.S. What was the third and fourth question? Sorry, I lost it.
Yeah, sorry about that. How big is the Times Square store, when you opened it exactly?
Okay, the Times Square. It's large, but I don't have the exact number, but we'll come back to that later in the call, okay?
4,000.
4,000 sq m or something. It's huge.
Okay. When was that opened exactly?
In November, I think.
Okay.
Mid-November. Yeah.
Okay, perfect.
Ask Lady Gaga, she knows.
Okay. Thank you.
The next question comes from Richard Jaffe. Please go ahead and announce the company name.
Thanks very much. A follow-up on your comment of in accelerating the growth of some of the new businesses, wondering what the outlook is for these businesses, particularly COS and & Other Stories. Do you anticipate the operating metrics, gross margin, sales per square foot, operating margins, and the return on invested capital to be equal or even better than H&M once you gain some economies of scale, some leverage?
Your first question. Primarily, COS and & Other Stories were very successful during the year. We plan to open in at least three or four new markets for COS this year, including the U.S. We're very happy to open the first store in SoHo, also the online launch of COS in the U.S. Regarding stores, again, we are looking at a lot of new opportunities in new markets, unfortunately, we can't tell you so much more in details. High ambitions and the number of stores will hopefully be at least as many as this year for both COS and & Other Stories. When it comes to profitability, I'm sorry, we don't disclose profitability or other profitability metrics per format or per country for competitive reasons.
Understandable. The behavior suggests some optimism, I guess. Could that be the argument?
We're always optimist, but also with respect.
Very good. Thank you.
Your next question comes from Niklas Ekman. Please go ahead, announcing the company name.
Yeah. Good afternoon. This is Nick Fhärm with SEB Equities. I was just going to ask you one question at a time, but two questions. Firstly, could you just educate me a bit on what type of costs are actually involved in setting up the French online business?
Yes. As I said, we have very ambitious plans. We're investing a lot. It's of course, starting with the infrastructure, IT platform systems, et cetera. We have logistics set up. We have customer support. We have distribution partners, et cetera. We have a payment structure. It's a long list.
Out of the major parts of those costs that you see you need to take, I would assume that some platform costs have already been taken because you've obviously been developing your business in your online business, to be able to launch most recently in the U.S. market. Is that correct?
Of course, we have been investing and spending a lot of money into online and IT and platform for the last couple of years, and we've continued to do so. Of course, the idea is to use some of those investments that we've made. Absolutely. The platform, if you talk about platform specific for the U.S., we are using part of that platform, but also part will be totally new for these four markets and ongoing.
Fantastic. Can I ask you, which part of the remaining costs that you need to take specifically for a new market would be the larger cost items? Would it be, for example, setting up the customer support operation, or would it be the logistics side, or what would be the main portion, in terms of new OpEx?
Yeah. Still, as Nils said, we have to take still investments in the system development. Even though we have more or less the same platform for these new countries to come up, we have to still adapt a lot of things to each market due to legislative things and to customer behavior, et cetera. Of course, distribution centers is a big part of the investment, and customer support as well. Aggregated, it's a big investment. Of course, in these cases, we will also gain the revenue much quicker than we have done now for some years when we have been in a development phase. Now we will get the revenue side as well when we are opening France.
Perfect. Final question. Would one of the four main online markets that you're set to open in 2014 be located in, say, Asia, like China?
I think you asked that question this morning. We'll come back to that when we have more information.
Thank you very much, guys.
Thank you. I have some information here before we go to the next. We got some information about Times Square, the store we opened there. It was opened on the 14th of November. It's 42,000 sq ft or 4,000 sq m.
The next question comes from Jamie Merriman. Please go ahead, announcing the company name.
Hi there. Thank you. It's Sanford Bernstein. My question's about the online and the systems integration that you talked about briefly in Q3 that needs to happen in the U.S., and specifically about integrating the store platform with the online system so that you can support returns in store. I was just wondering if you could give us an update on where you stand there, and also whether that's something that will need to be developed when you go into France, and the other markets that you'll launch on in 2014.
Yes. I'm sorry I can't give you much of an update more than, of course, we are working a lot in these areas. It's always a prioritization because now rolling out online in four new markets is of course, a huge and very ambitious move. There are lots of things that we want to improve as well as expand. I'm sorry, I can't give you any more details about when it will come through, so to speak, but it's going to be a gradual launch, of course, of not just new markets, but also improved functions as well, et cetera.
Okay. Will you be able to process returns in store in new markets, or was it a specific issue to the U.S., or is it something that whole platform will have to evolve over time?
Sorry, I can't give you more details about the launch and about the details, but we will come back to you as soon as we have more details.
Okay.
Your next question comes from Paul Rossington. Please go ahead announcing the company name.
Good afternoon. This is Paul Rossington at HSBC.
Hi.
Hi. There were some comments on Bloomberg earlier on today about your changing some of your sourcing, perhaps looking at Africa as potential markets. I appreciate China is still a major, or the Far East is still a major hub for your sourcing. Is this likely to see you perhaps move to a higher proportion of sourcing in Countries in closer proximity to some of your key markets, is there a strategic agenda to shortening the lead times to market at all?
This is nothing dramatic whatsoever. We are continuously looking at the sourcing just as we look at everything else in terms of trying to improve things, efficiency, looking at new markets and new ways to produce, et cetera. As we grow our retail operations, it's not a secret, we will open in South Africa. It's very natural, of course, to look at sourcing in proximity. Nevertheless, we need to always look at capacity growth, since we have very ambitious plans for H&M for many years to come. It's not about moving capacity from Asia to Africa or anything. It's more about building even more capacity.
Thank you.
Your next question comes from Geoff Ruddell. Please go ahead, announcing the company name.
Afternoon. I'm from Morgan Stanley. Just a question about your cash tax payments. I noticed that your cash tax payment this year was less than half of your cash tax payment last year, and was wondering what the reason for that was, and also what we should expect in terms of the difference between P&L tax charges and cash tax charges this year.
Cash tax payment is less than last year is simply that we have made less preliminary tax payments during the year. That's the simple answer. The second question was?
Just how should we expect the relationship between the cash tax payments and the P&L? You've obviously given us guidance for the P&L charge for tax this year. How should we think about the cash tax payments relative to that P&L charge?
Yeah. I think it will be no major changes. The tax rate for 2014 will most probably be between 23% and 24%. The big tax payments, of course, we are making preliminary tax payments during the year, and that can vary from year to year.
Because you had a low payment last year, should we assume you have a big payment this year?
No, it's no correlation because now we will add payments in December, January. We have a tax liability due to that in the balance sheet, and then we will pay that in December, January. Of course, we are estimating in Sweden what the profits will be, and the tax authorities will send us preliminary tax payments for 2014.
Okay, thank you. Just one follow-up, if I may. You're capitalizing, last year, I think you started capitalizing expenses. As I read the accounts, am I right in thinking you haven't yet started to amortize those?
For the major part, we haven't started to depreciate. This year, I think SEK 14 million was the depreciation connected to these capitalized assets that we have in the balance sheet. As quick as we are taking them in use, we start to depreciate them. I think these IT investment that is capitalized, we will depreciate them during 10 years.
Okay, that's great. Thank you very much.
Once again, if you wish to ask a question, please press star followed by one. # if you would like to cancel your request. We have a follow-up question from Anne Critchlow. Please go ahead.
Thanks. You've given us the store numbers for COS and Stories, and an idea of how many stores you'll put down this year. Could you do the same, please, for Monki, Weekday, Cheap Monday as a group?
Yes. Of course. We see very interesting potential for all of them, but the expansion is not as aggressive as for COS and & Other Stories and H&M Home. We will continue to expand. If you take Monki, for example, we opened some 20 stores, 2013, and the plan for 2014 is approximately the same level. Weekday is a bit more cautious. It was just one opening and one closure last year, and this year I think it's just one or two planned as well. Cheap Monday is primarily a wholesale brand, and we have around 2,000 customers across the globe in 35 countries, and only three of our own stores. I think we'll plan to open one or two stores for them, one in China, and one in Paris.
That's great. Thank you. Just a quick question on the H&M incentive plan. What impact that had within the gross margin in Q4, if any?
I think we wrote EUR 31 million was the total payment, right? Most of that was in OpEx, a smaller part was on OpEx, just a small part.
Okay.
Sorry. I said it wrong. The most part was in OpEx, and the rest on COGS.
Not a significant impact on
No
on COGS. Okay. Thank you.
No.
Your next question comes from Caroline Gulliver. Please go ahead, announcing the company name.
Hi, it's Caroline Gulliver from Jefferies. I just had a small clarification question around the gross margin, or rather the markdown that you expect in the first quarter.
Sure.
To clarify, I think you said that you expect it to remain stable in % of sales compared to 2013. Does that mean a flat impact on gross margin, or rather, do you mean that.
Right
there should be another negative.
No
margin impact.
Flat. Neutral effect.
Perfect.
Of course, that's the estimate. That could change, of course, in both ways, but that's the best estimate as of today. Okay.
We have another follow-up question from Christos Chaviaras. Please go ahead.
Hi. Yeah, guys, one last from me on the sportswear. I know you mentioned that you're growing the H&M stores in size so that you can accommodate sportswear and H&M Home. In the existing stores that you will be putting them in, what categories are you taking out in order to put sportswear in? How do you make space for sportswear in the existing stores?
It depends from case to case. In several cities, we have several H&M stores. Of course, each country organization is looking to have the best balance with the concept in different stores. If we don't get more space, of course, if we want to have sports in, we have to take out something else. In most cities, we have several stores, this will broaden our customer offering. That will be a gain for the customers as well as for H&M. That's done case by case.
It could also be that we add more space and we make refurbishment, et cetera. In connection to that, we put in H&M Sport.
Would you say that sportswear could be, say, something like 10% of the whole offering in a store, or is that too much?
I don't want to give any figures, sorry. We have lots of different concepts, we don't give figures for each one. I'm sorry.
Okay, no problem. Thank you very much.
Thank you.
Thank you.
Once again, please press star followed by one if you would like to ask a question. Thank you. Sir, we have no further questions at this time. Please continue.
Thank you all very much for participating in this conference call, and welcome back for the first quarter results on the 27th of March. Goodbye.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect. Thank you.