Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to H&M first quarter results 2013 conference call. At this time, all participants are on 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 one on your telephone keypad. I must advise you that this conference is being recorded today, Thursday the 21st of March 2013 at one o'clock U.K. time. I'd now like to hand the conference over to your speaker today, Karl-Johan. Please begin your meeting, sir.
Thank you. Welcome to this telephone conference on the occasion of H&M's first quarter results for 2013. I have our CFO, Jyrki Tervonen with me today, and we'll be happy to answer your questions after the presentation. There are a lot of things going on at H&M. This weekend, we are opening the very first H&M store in the southern hemisphere in South America. We're also very happy that next year, Australia will become a new market for H&M. Next year, H&M will also launch an extended sports concept with updated and developed collections of functional sportswear in a wide range. We're also very excited about the successful launch of our entirely new fashion brand & Other Stories. & Other Stories has been very well received by customers with fantastic reviews, and sales have exceeded our own high expectations. Not least, today, we have published our new sustainability report.
Our sustainability work is very important to us, and we recommend you to read the report, which is available on our website, hm.com. On hm.com, you will also find the presentation slides for this telephone conference. There is a lot going on, but let's start with the first quarter. Please turn to the slide, first quarter 2013. The market for fashion retail remained challenging in several of our markets in the first quarter. Even though sales were strong in Asia and our fully mobile-adapted H&M shop online was very well received in our eight online markets, group sales did not live up to our own expectations. This was mainly a result of continued macroeconomic uncertainty in many countries, and also due to unfavorable weather during parts of the quarter, especially in Europe and North America.
Now in March, the unusually cold weather with snow storms has delayed the start of the spring season in many of our markets. Furthermore, sales in March, which will be published on sixteenth of April 2013, should be seen in the light of very strong sales increase of 26% in March 2012. Coming back to the first quarter, H&M increased sales including VAT by 6% in local currencies. In comparable units, sales decreased 3%. The calendar effect was negative, just over two percentage points, mainly due to the leap year adding one extra day last year. The Swedish krona continued to strengthen against most other currencies. Again, currency translation had a negative effect on sales and results. The negative effect on sales from the currency translation was approximately 1.3 billion SEK in the first quarter, using the same currency rates as in Q1 2012.
Reported net sales in SEK in the first quarter grew by 2% to SEK 28.4 billion. Looking at sales in some of our markets, please turn to slide, sales per market. We are present in 48 markets today, and we clearly see that in regions that were not as negatively affected by external factors, our collections have been well-received. Sales were strong in Asia, with China in the lead, and development was also very good in our new Asian markets, Singapore, Malaysia, and Thailand. The start of the year has been slow for fashion apparel in Germany, our biggest market. H&M in Germany has developed in line with or better than the market, and this should also be seen against stronger comparables from last year. The U.S. is the second biggest market in the group, and H&M is growing fast.
We are looking forward to the launch of H&M shop online in the U.S. this summer, as well as the opening of two new spectacular flagship stores in Manhattan later this year. In the U.K., development was not as strong in the first quarter, but should be seen against stronger comparables from last year. Going back, let's look at some profit numbers. Please return to the slide, first quarter 2013. Gross profit increased marginally to SEK 16.7 billion from SEK 15.5 billion, corresponding to gross margin of 65.2% compared to 65.8% in the first quarter of 2012. H&M's gross margin is a result of many different factors, both external and internal, and is also affected by the decisions we take based on the strategy to always have the best customer offering in each market.
The overall effect from external factors such as cotton prices, cost inflation, and the U.S. dollar was more or less neutral on purchases for the first quarter compared to the corresponding period two years before. Markdowns in the quarter increased as a consequence of sales not increasing as much as planned, and markdowns in relation to sales had a negative impact of approximately 50 basis points on the gross margin. We're currently in a period of large long-term investments, and we've been so for some time. We are investing in online IT at the same time as we are developing and launching our new fashion brand & Other Stories and broadening our product range with, for example, extended sports concept. The fantastic reception by customers of & Other Stories clearly shows that extensive and long-term work behind this new fashion brand has been the right thing to do.
All of these long-term investments will strengthen H&M's position even further in the future. Meanwhile, cost control on running operations in the group remains very good. SG&A was SEK 12.5 billion in the quarter, up 4% in SEK and 8% in local currencies. The increase is fully explained by the expansion and the longer-term investments. In comparable stores, costs were down. The operating margin was 11% compared to 12.7% last year. After a tax rate of 24%, net profit amounted to SEK 2.5 billion compared to SEK 2.7 billion last year, and earnings per share amounted to SEK 1.49 compared to SEK 1.65. Now looking at some other key figures, please turn to the slide Key Data. Stock in trade amounted to SEK 13.8 billion, an increase of 12% in SEK and 14% in local currencies compared to the same time last year.
The increase is mainly explained by expansion, but also due to sales not increasing as much as planned. The inventory level as of the 28th of February was somewhat higher than planned, although the composition of the stock-in-trade was satisfactory. As you can see on the next slide, stock-in-trade in relation to sales rolling 12 months was 11.4%, which is still okay seen over time. If you please go back to the slide Key Data. Cash flow from current operations was SEK 3.8 billion, an increase of SEK 1.6 billion. Investments in terms of CapEx rose to SEK 1.6 billion. This reflects the higher rate of expansion and also that we continue with our long-term investments in IT, online, and other stores, and broadening our product range. Our estimated CapEx for 2013 could be in the higher range of SEK 7 billion-SEK 7.5 billion at current exchange rates.
Some words on our expansion. Please turn to the slide Expansion. We are ramping up the pace of expansion to around 350 stores net from previously announced 325. Today, we have more than 2,800 stores and our global presence is strong. Our exposure to Asia is growing increasingly with China as the market where H&M will open the largest number of stores also in 2013. We have opened in more than one new country per year in Asia during the past five years, and today H&M has stores in six Asian markets. The potential for H&M is large in this part of the world also for the future, and we're looking at more markets, also in the Southern Hemisphere. Already on Saturday, this weekend, we will take the first step into the Southern Hemisphere with the opening of H&M's very first store in South America, in Chile.
We see great anticipation ahead of the opening. It will be a flagship store in the very best location in the shopping mall of Costanera Center in Santiago de Chile. Other new markets this year will be Estonia, Lithuania, Serbia, and via franchise, Indonesia. In total, we will add five new markets also in 2013 for the third year in a row. Looking to the next year, we are very happy to reveal that our expansion in the Southern Hemisphere will continue when we will open in Australia in 2014. The other brands of the H&M Group are also expanding. COS, in particular, is growing strongly. We're also very happy to have added yet another new brand to the H&M Group, & Other Stories. Please turn to the next slide.
Our new fashion brand, & Other Stories, opened its first store in London two weeks ago on Regent Street. On the same day, shop online on stories.com started in 10 markets: Belgium, Denmark, England, France, Italy, the Netherlands, Spain, the U.K., Sweden, and Germany. The second store opened in Copenhagen last week. Everywhere, the response by customers has been very positive. Sales, both in stores and online, have exceeded our own high expectations. Tomorrow, & Other Stories will open here in Stockholm at the PK-huset, and we see a huge interest from customers ahead of the opening. & Other Stories has attracted great attention in press and social media. During the spring, openings will follow in Barcelona, Berlin, Milan, and Paris. We are convinced that & Other Stories will become an important part of the H&M Group in the future. In parallel, we're also preparing H&M product ranges. Please turn to the slide H&M Sport.
H&M plans to launch an updated and expanded sports concept already at the beginning of 2014. This new sports concept will be launched for women, men, and children. The ranges will be considerably wider than today and will include sportswear and accessories in functional qualities with specific ranges for various sports activities. The new sports concepts will be launched in H&M's existing online markets and in selected H&M stores, initially in approximately 15 countries. Concept development like this enables us to further strengthen our customer offering as well as the H&M brand. A strong customer offering also includes that H&M should be the more sustainable choice for our increasingly aware customers. Sustainability is therefore high on our daily agenda and has been an integral part of our business for some time. Please turn to the next slide.
We invest substantial resources and work actively in order to promote social development and reduce environmental impact in the communities in which H&M is active, as well as to ensure sustainable development for H&M long term. We also encourage our customers to make more sustainable choices. Today we're launching our yearly spring collection under the label Conscious Collection. This collection for women and men includes garments with materials such as organic cotton, recycled polyester, and Tencel. The collection will be accompanied by a red carpet collection for women, a Conscious Exclusive Collection that will be launched on the fourth of April. H&M is already the world's largest user of organic cotton since a couple of years. Our goal is that by the year 2020, all cotton in H&M garments should come from more sustainable sources. Sustainable sources include, above all, cotton grown under the Better Cotton Initiative, BCI.
It's an initiative which works to improve social, economic, as well as environmental aspects of traditional cotton cultivation. More sustainable sources also include organic as well as recycled cotton. H&M is the first fashion brand in the world to offer customers the opportunity to hand in old clothes for recycling. We offer this garment collection initiative in selected stores in all our markets worldwide. Further ahead, garment collecting will be expanded to more H&M stores. To learn more about our extensive sustainability work, please visit hm.com where you can read and download the H&M sustainability report. Before we start the Q&A session, a few comments to summarize. H&M is in a strong position, and we are making significant long-term investments in order to ensure sustainable development and an even stronger company.
Going forward, we see a challenging and exciting year ahead of us with continued strong expansion with around 360 new stores net, with five new more markets in 2013, and preparations to open in Australia in 2014. We're also continuing our long-term work within IT online and & Other Stories, as well as to broaden our product range with, for example, the new H&M Sport concept already in the beginning of next year.
H&M is, in other words, well-positioned for many more years of continued sustainable and successful growth. Now we're happy to take your questions.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to be removed from this, please press the hash key. Our first question comes from the line of Amy Davis. You can go ahead with your question.
Good morning. Thanks very much. I was wondering if we could talk about China a bit, given that you say it's the number one country for your store expansion. When I look at the sales development in China, it looks as though the volume per store must be below your group average, and I was just wondering if you could talk about that, what you're seeing, and how you expect that to develop.
Yes, that's true. It's not a secret that sales density in China is lower than the other markets. At the same time, we see that it's growing very fast. What you see is also a reflection of the fact that we are expanding very quickly also, not just in first years, but also in second, third, and fourth years.
Okay. You'd expect the sales densities to get better as you continue to expand. Is that fair at all?
Well, over time, as we see the economy in China is growing very rapidly. Absolutely, we expect that sales density will pick up.
Okay. Thanks very much.
Our next question comes from the line of [Richard Chamberlain]. You can go ahead with your question.
Yeah, thanks. Afternoon, everybody.
Afternoon.
Hello. One question, please, just on the additional store openings plan for this year. I guess, high level, could you say why you've chosen to accelerate the store expansion and also maybe just give a little bit of color about where you're doing that? Presumably, it's China and the U.S. I wonder, are you getting now more attractive rental terms in those markets?
Ramping up the expansion, I think it shows that we are a strong brand and also in tough economic environment, it opens up a lot of new opportunities. This is a proof point that even though the macro environment is tough, there are always other opportunities that a strong retail with a strong brand and the finances to last long term can take advantage of.
Okay. Most of the additional 25 stores located in China and the U.S.?
They are spread around. Of course, I don't have the exact split. I think also that China and U.S. will probably have more than the main markets in Europe. They are in different markets.
Right. Okay, thanks very much.
Our next question comes from the line of [Simon Rogers] . Please go ahead with your question.
Hi, guys. I just wonder, on the last question, in terms of the additional stores that are going down, are they mostly H&M brands or is this some of the other brands that we're seeing being accelerated?
It's mostly H&M brands.
Okay, great. If that's okay to return to my core question, which was regarding the year-end within the intangible, which you disclosed in the amount under capitalized expenditures , which I believe you mentioned related to workforce development costs. I was just wondering if there's been any further additions to that balance in the last quarter?
Yes, around SEK 200 million.
SEK a couple of hundred million. Okay, fantastic. Thank you.
Ladies and gentlemen, that is star one to register a question and the hashtag or pound key to cancel. Our next question comes from the line of Alex Smith. You can go ahead with your question.
Good afternoon, everyone. Just on you announcing today that you engaged with Beyoncé. What is the biggest face you've featured other than maybe someone like David Beckham, and how much did Beyoncé get paid for this?
I'm sorry, I didn't get the first. The biggest what? The biggest star? The biggest-
Yeah, the biggest face, the biggest star.
That was all, I think, very subjective. We are proud to have her. Regarding the financial part, again, I can't disclose that.
Sure.
How much we paid for-
Sorry, the line went very bad there. Could you repeat the last point?
You asked how much we paid for the deal between her and us.
Yeah. Is it more than David Beckham?
Well, I won't comment on his, actually, sorry.
Okay. Thank you very much.
Our next question comes from the line of Simon Irwin. Please go ahead with your question.
Good afternoon, gentlemen. Could you just talk specifically about the FX effect on buying at the moment? You talked about the overall impact of cotton buying, et cetera, has been broadly flat. Certainly according to my former understanding of the way you bought and hedged, the FX impact in itself ought to be quite negative. I'm just wondering if you could add some color to that.
Yeah, that's correct. Purchases we did for the first quarter, the US dollar effect was negative, and it will still be negative for the purchases we've done for Q2, but not as much as for Q1. I also want to say that this is a very theoretical model based on a six-month lead time . Of course, we have lead times in weeks, and some lead times are even longer than six months. This is not an exact truth, more a theoretical thinking.
Right. It's still negative. Where are you picking up? If you try to look at purely on a theoretical six months basis, it's double digits amount, isn't it? You're obviously picking up some fairly significant time gains in other areas.
Absolutely. As always, there are lots of different factors in the equation. The overall effect is more or less neutral, as I said. Yes, there are some other risks going the other direction, such as we still have seen positive effects from cotton prices, et cetera.
Okay. Just looking into Q2. I think at the year-end, you expected to see a flat markdown Q1 and Q2. Obviously, it is a bit worse than that. Do you have any similar thoughts for Q2?
Coming back to what we said in the connection with the Q4 press conference teleconference, that was our best estimate to go flat for the markdowns compared to Q1 2012. We also added during the earnings call that will be dependent on the sales development in February. The development in February increase was not as high as we had planned. Therefore, the markdown levels increased compared to last year. Your second question for the second quarter, it is still over two months of this quarter. We have to come back to that. Of course, if the sales is not meeting our own expectations and we see that market development in our main markets are tough, of course we will see that the whole market competitors start to make campaigns, markdowns aggressively.
Of course, it will force a reaction for all players in the market. As I said, it is far too early, since we have more than two months to go.
Yeah. Could you just give us an idea of the calendar effect for March in particular?
It's a negative calendar effect. We have the Easter, which is very difficult to calculate. I can't give you an exact number. Easter is very difficult. That's why, again, you have Easter, you have holidays in calendar, and you have the weather impact in the spring. That's why just look at the monthly development. It's very volatile. Here you can see that it's back in our historical figures. You should see the development over the season. I would say March, April, and May together gives the best estimate.
Thank you very much.
Next question comes the line of Fraser Rampton. Please state your question.
Thanks very much. Good afternoon. Just sort of a bit of a general question, really. I mean, given how weak your sales have been over the last quarter or two or more, do you think you've really invested enough in your offer? I mean, it's intriguing that you've gained all these purchasing related gains before currency impact. Clearly that's not gone back into the offer.
I'm not sure if I'm having the same opinion. Looking back for 2012, we increased turnover by 11%, and in like for like figures, plus 1%. Of course, we're always aiming for better. We are never happy. We have to look at the circumstances, and we clearly saw that we are gaining market shares during the last year. I think that we have got the payoff. As Nils just recently said, we should look over a season. Of course, first quarter is really in the season break, just hearing one isolated quarter, I don't think that's always the best thing. I think you should be looking to March, April, and May together. I think we have a strong customer offering, and we are regularly doing customer surveys, and we see our offering today is stronger than it was one year ago.
I think we have got the payoff for those investments we've done.
You said your investments are long-term, it's not just about a season, is it? Are we going to see even more going forward we can't really expect any improvement for some time in the margin dynamics of the business?
I think we always are looking for H&M in the long term, exactly how that will bring different quarters. Of course, also it's dependent what the competitors are doing. Of course, we are following the development in the different markets where we are. I also think that we really want to stick to our business idea of having fashion and quality to the best price. I would say it could be quite easy to start to increase prices, but if you go down in quality, it will take a while before the customers will notice that. I think that's not smart in the long term. We will stick to our business purpose.
Are you at the best price, though? Because there's lots of composition out there now.
Yes. When we are looking at the whole combination, when looking at the combination of fashion, quality, and price, combining those three components, then we have the best price.
Yeah.
And that-
Thanks for your opinion on it. Thank you very much.
Alex, I see it comes from the line of Charlie Sanders. Please go ahead with your question.
Hi. Good afternoon, guys. I had three questions, if I can. Firstly, just on the gross margin, just Simon's question. I wondered if you could just comment on the outlook for Q2. Surely, overall for external factors, I think you said on the last call that for Q1 they broadly neutral. What are your thoughts on Q2?
Yeah. Same message. That, again, the external factors, more or less neutral for Q2. Again, that's not a guidance for the gross margin. It's entirely how we choose to act and what we do with the customer offering, et cetera, and of course, the markdown.
Yes, of course. The second question on costs. Well, firstly, within that, what was the effect on cost of lacking the leap day? Do you effectively have very little extra cost? Did you save on costs or was it very similar year-on-year for having an extra day a year last year?
I wouldn't say it's a dramatic thing, because if you're looking at the cost, of course, if you have a fixed rent, the rent is still running, compared to last year when we had 29 days , then we gained one more selling day. If we have a turnover, the rent, of course, it will not then have a positive effect. There are no major implication on the cost just for the one day leap year. It's more the turnover that we calculated to be a bit slightly more than three percentage units.
Right. Yeah.
Negative effect.
For sure. Slightly slower growth in the first quarter. Is that as a one-time effect ? Or when you look at your multi-year investment cycle, are we at the point of inflection of that investment growth versus sales growth?
When it comes to our long-term investments, we have said in Q4 that the investments should be on a higher level in 2013 than they were in 2012. I wouldn't say there's anything dramatic, and they might differ a little bit from quarter to quarter. I think by looking at [inaudible] three or four quarters and looking at the [inaudible ] and development within openings, then you probably will see that there are no major fluctuations. They will be on a higher level, but we don't see anything dramatic. They will continue during 2013. As I just previously said, I think we have the financial strength and the long-term thinking that even in a tough environment, we will continue to work on these long-term investments.
Okay. Thanks. Sorry, my final question, just hogging the line. You've hinted on & Other Stories that the reception's been so good that you're planning on now expanding more widely and faster than originally planned. You've only had these stores and only some of them open for a handful of weeks. What gives you conviction that, after that limited period, you really can roll this out in a material way at group level?
You're right. It's a very short time, obviously. We just said, it opens up opportunities for us. If this continues, of course, it's likely that we could speed up the expansion and also broaden it so we can open in malls, et cetera.
Yeah.
Clearly, we believe very much in the offering. We always knew this from launch, when we saw this tremendous reception, we see that as a very clear read. Also on the online, it's been a very good reception.
As Nils said, yeah, I fully agree. It is a short time we have seen it, but we have been able to also look how it was at COS, which is very today, and we opened up the COS Regent Street. We opened up another store on Regent Street. We opened up COS in Copenhagen. We opened up another store. We have a good comparison. Of course, it is too early. As Nils said, it opens up the possibility to go even broader in this concept and also in a faster pace than we initially planned. Let's see.
This year, we stick to the approximately 10 stores.
Yep.
Great. Thank you.
Once again, ladies and gentlemen, that is dial one to register a question from the hash key to cancel. Our next question comes from the line of Christodoulos Chaviaras. Please go ahead with your question.
Good afternoon, guys. I have three questions. I won't take a lot of time. My first question is on inventory. I was a bit surprised to see that inventory was higher than planned, yet inventory is up 14% on a constant currency. Store growth is on 13%. Has anything changed for you wanting to plan for [quality like- for- like]? Because if you do, then the math would work if inventory is at the right level, isn't it?
Yeah. As we said, we have to remember it's a snapshot of a certain time, our own judgment is that the inventory level is on a higher level than we planned. It's nothing dramatic when it comes to the model, the composition is on a good level as well. We had planned for a lower trade for this period. The reason for not having the planned is the tough sales in February.
Right. Okay. Yeah, the composition is a little bit worse than you had expected, nothing dramatic. My second question then would be on that new concept that you'll be developing. This sports concept, in your mind, is it going to have the same expansion, the same growth opportunity as & Other Stories? In other words, are you going to make a similar investment in order to develop that as you did with & Other Stories, or is it going to be less or more?
First of all, this is different from & Other Stories because, of course, it's a completely separate fashion chain. H&M Sport is a concept within the H&M brand. Of course, we never rule out we can have a separate store. Initially, it's going to be within H&M stores. We have been working with this initiative for some time now and have invested substantially in this development already, and we'll continue to do so. It's difficult to compare with other stores, the future will tell how big it will be. We see very interesting potential.
You're not employing more buyers, for example. Is that within the existing infrastructure of H&M?
We are absolutely employing a lot of experts and expertise and buyers in sports and design, et cetera. This is really a big thing.
Okay. Since I'm holding the line, a very quick one. You see if you want to answer that. I've seen that & Other Stories is quite more in higher end than H&M, and the prices are quite different, even a bit higher than COS. Maybe I'm wrong there. The margin differential that you expect to have on & Other Stories, is it much more than COS' or kind of similar level, even though it's higher quality?
Well, first of all, I would say that from a price segment, yes, it's a higher price segment than H&M, typical COS. At the start, you can find things for EUR 6, EUR 7, to start with, then it expands up to EUR 250 or EUR 300. There's a wider price range compared to H&M and COS. Second Sorry, you talked about higher-
The margin differential. Yeah.
The similarity between the brands is that you always get very much fashion and quality for the money also at COS.
A similar group margin is a fair assumption in terms of the gross margin.
Long-term, our growth target is to add 10%-15% new stores per annum with continued high profitability, but we don't comment the different margins per different store concepts.
Fair enough. No problem. Thank you, guys.
Next question comes from the line of Erwan Rambourg. Please go ahead with your question.
Thank you. It's Erwan Rambourg from [inaudible] . Was there any impact on the Q1 gross margin from lower initial pricing? Not just markdowns, but prices initially.
What do you mean lower initial price?
I meant the markups. The price that you started with. Ignoring markdowns and promotions, was there any impact on the Q1 gross margin from price?
Oh, you mean investment in customer offering.
Yes
like we discussed before. We talked a lot about investing in customer offering one or two years ago. Since then, we haven't talked so much about it because, for competitive reasons, we don't want to give out too many details. For us, it's always about having the right balance between fashion, quality, price. This is an ongoing process, and we're not going to give you details, but there is no dramatic changes, I would say.
Okay. Thank you.
Next question comes from the line of [Clay Marcoe]. Please go ahead with your question.
Hi, this is Vic Mohan in for Omar. With respect to your supply chain, are you happy with your current lead times right now? Are you trying to shorten them to suit the market?
There is always a lot of work going on to improve the business model and the processes and, of course, to be even quicker. We are quick already today, but it's also about having the right lead time on the right products and having it in the right place. There are things going on all the time, but again, nothing dramatic.
Next.
Next question comes from the line of Richard Jeffries. Go ahead with your question.
Thanks very much, guys. Good afternoon. Just two sort of bigger picture thoughts. One is on the internet opportunity and the other side of that coin, the risk of cannibalization of your bricks and mortar stores and possibly undermining the leverage on that bricks and mortar investment with the success of your internet. Have you guys weighed the balance there between internet growth and square feet growth as you enter new markets? A follow-on question about franchises, if you could. The internet first.
Yeah. This is, of course, becoming more and more important for the industry and for us. That's why we are investing so much in rolling out online in all our stores, in all our markets, and of course, very excited about the launch in the U.S. this summer. We see it, again, as seamless or multi-channel. That's the important thing. By having bricks and mortar and online, and really being able for the customers to go through the different channels in the same way, that's the goal. We see that our big, our extensive store part is a very good complement to online and vice versa, so to speak. We don't see any cannibalism. We see that they complement each other, when we have launched online in existing countries where we have it.
Net, is it a gain in revenues for both venues?
I think, the future is going more and more to giving the customers more and more touching points. It's mobile, it's iPad, it's laptop, it's bricks and mortar. I think it's a complement, as Nils said. Of course, you didn't know in the really long term, 15 years, 20 years, what will happen with the physical stores. As we see it now, I think that this will gain a positive effect for retailers in general and especially for strong brands like H&M to be able to offer more and more touchpoints for the customers. We don't see this as taking away anything from the physical stores or vice versa. I think they complement each other in a really good way.
Excellent. Thank you. The franchise opportunity, is that a component that you could see accelerating? Obviously, it's an easy way into more countries, perhaps, that you might find more difficult to enter, and potentially means to accelerate growth as well.
Well, the preferred path is always to do it ourselves organically within H&M. You're right, in certain countries where it's very difficult or where by law are not allowed our own H&M stores, yes, we're open for franchise. So far, it's limited to the Middle East and Southeast Asia.
Okay. Thank you very much.
You're welcome.
Next question comes from the line of Jeff Laury. Please go ahead with your question.
Yeah. Hi. Two questions, please. Firstly, in terms of operating costs, can you help us out with the currency impact on OpEx growth in the quarter?
Yeah. The increase in first quarter in Swedish krona was 4%. In local currencies, it was 8%. 4%, if you have a difference.
Great. Thank you. Second, in light of your increased store growth targets for the year, can you update your CapEx, your capital expenditure guidance, please?
Same as I said before.
Yeah. As Nils said in the introduction, that the CapEx that we came out with as an estimate for this year, it was between SEK 7 billion and SEK 7.5 billion. Now it's leaning more to the SEK 7.5 billion. One has to remember still that a lot of those contracts are still not negotiated, so this is a moving target. Of course, we will give you new updates, in the coming quarters, if there will be some changes.
Great. All right. Great. Thanks so much.
Okay. You're welcome.
Next question comes from the line of Stefan Alk. Please go ahead with your question.
Yeah. Thank you very much for taking my question. Just, I'm surprised by the very large negative print a lot of questions, especially at the beginning, cut to the chase with a knife, so to speak. With no down, I guess they're having a [inaudible] . My question is, OpEx to sales as a percentage, does this quarter mark a turn? As we know, you've been investing a lot in OpEx for long term, for IT, for online, and as U.S. The e-commerce launch will finally happen. Are we going to see, as a percentage of sales, these OpEx costs be more like the first quarter, sort of going forward in the year? In absolute amount, you said you're going to be up, but in percentage of sales, the opportunity is to be able to go down.
My second question is, you introduced mobile applications. Do you see a potential for acceleration of the online sales from basically these more touch points that you mentioned? We see that in many other businesses where multi-channel, especially mobile, is really gaining very high growth in terms of users, especially young users.
The first question, the outlays. We prefer not to I think it's so dependent on the sales performance during a quarter. I think it's more relevant to look for the year-on-year change between the Q1 this year and the Q1 last year. Because if we have a strong top line with a percentage of sales, we'll of course look better than when we have had a little bit weaker top line. Like I said earlier in this conference call, I don't see any really dramatic changes when it comes to OpEx development. We have a really good cost control for our operations, and these long-term investments, they will continue during the year. I would maybe suggest to look at the development during Just go back one year to Q1 2012. I think it has been quite stable, the OpEx development year-to-year when looking at different quarters.
You have to look at the local currency because.
I guess what led that question is you obviously had a relatively strong Q1 in terms of sales, relatively what you expected. If you were able to basically improve, I guess, from your viewpoint, which is kind of what the market thought, in this core sales quarter, it means you have some more flexibility in your costs than we've been accustomed to.
Yeah. Of course, it didn't meet up to our own plans when it comes to the sales. I think, of course, when we are doing local currency 6% in a quarter, of course, the share of sales could have been looking better if we had met our own plans for the top line. As I said, I think this is so volatile, just looking and trying to estimate what the share of sales will be when it comes to OpEx. I think it's more accurate to look at the year-on-year change. Coming back to the touchpoint questions that you had, of course, I think all the retailers see that giving the customers the opportunity to look at the fashion, buy fashion from different touchpoints, I think it's good for the customers, and it's good for the retailers.
I think that's the way more or less all major retailers are looking for the business. It's definitely not a negative for us.
Yes, we see that it's growing. Absolutely. The reception has been very good so far.
Terrific. Thank you.
The next question comes from the line of Stacy Downs. Please go ahead with your question.
Hi. Can you ask for more information about the garment industry scheme? H&M won't be profiting from the clothes, and instead of donating any revenues to local charity organizations and invested in new recycling innovation. I'm just wondering if you could add anything to that?
Could you say that question again, please? There was a bad line. Could you repeat your question, please?
Can you ask for more clarity about the garment industry scheme? H&M won't be profiting from the clothes, and instead revenues will be donated to charity organizations and invested in new recycling innovation.
Exactly. That's what we want. It will be given to charity and to research, to help to recycle fibers so we can produce clothes too.
Are there any clothes can match that?
Sorry, I cannot hear you.
The next question comes from the line of Peter Testa. Please go ahead with your question.
Good afternoon. Actually, the colleague of Peter Testa, Carlo Testa. I just had one question, again, on operating expenses. Q1, is this lower increase of operating expenses in Q1 the result of a pullback of marketing costs? Thank you.
No. Of course, the flexibility we have when looking at the operations we have, and when we are facing a tougher quarter, of course, we try to adapt the costs as much as possible. We still are thinking long term. Just having one tougher month or a tougher quarter, we do not start to take away activities from our activity plan in the short term. It is more to adapt to the operations in the stores that we can, on a short-term basis, work with. It is more reflecting that the top line was lower than we estimated, and accordingly, we adapted our cost behavior.
Our next question comes from the line of [Richard Chamberlain]. Please go ahead with your question.
Oh, thanks. Just a couple of follow-ups from me, please. Just going back to this extended sports concept. How many markets is sportswear sold in at the moment, please?
At the moment we have it in all markets. This extension would initially be in 15 countries.
Okay. Presumably, it'll be countries like Switzerland and Norway and so on, are a bit more sort of sporty in nature. Is that reasonable?
We can't answer that.
All right. Just another one on two of the other formats, Monki and Weekday. It sounds like you're expanding these internationally now. I just wondered if whether we're seeing an acceleration in international expansion for these formats, whether you're sort of happy and well with their performance, and you're able to accelerate their expansion internationally now.
It's correct that we are expanding, for example, in Japan and some other countries. We are not yet there to be in the long term, so we are not accelerating yet.
Okay. How are they performing in a market like Germany, for instance? How's that going? A few years ago, they were sort of, or a year ago, they were at quite a challenging start there.
They are doing okay. As I said, we are still fine-tuning and developing, we want to be absolutely sure before we really press the button to accelerate. That goes for all the markets.
Okay. No real change then in the international expansion plans for those.
No, we are expanding.
For the few markets, yeah.
Yeah. Most likely fall.
Right. Okay. All right, thanks.
We have a follow-up question from the line of [Simon Rogers]. Please go ahead with your question.
Hello, Johan. Just a couple more actually, if that's okay. Starting with a follow-up on the sports concept. Just wondering, it sounds like they're in existing stores. Is there any specific product categories that it'd be replacing with the space that it's taking? What work is done to understand how that sportswear range fits alongside your existing range? The second I will then follow up with another account one, unfortunately.
I'm sorry, I didn't fully get your first question. Sorry. We expanded much of the concept that will be in selective stores in approximately 15 different markets. It depends on the stores. Sometimes we take additional space. Sometimes we have the space already. Sometimes we are creating concepts, looking into the, for instance, a region just to find one store or two stores with the extended sports concept, taking out some other concepts, putting in neighboring store, et cetera. It will depend. Sometimes we will increase the store square meters. Sometimes we will take out other concepts. It will be in existing stores. Of course, in the online stores as well, in those markets where we launched the online space.
Okay, that's great. Just to follow up then, to come back to capitalized expenditures. You've obviously been running and developing websites for a number of years now. I'm just wondering if similar expenses that you've had in previous years, have they also been capitalized and perhaps disclosed elsewhere? Or is this a change in your accounting treatment? If so, what's driven the reasons for that change?
If looking at the capitalized IT investments, which is one part of our long-term investment, it's according to IAS accounting rules, when those kind of investments are coming into a development phase, then according to IAS accounting rules, they should be capitalized. That's what we started to do last year and also continuing for that part during 2013. Nothing changed in our accounting rules or the treatment. It's just that we haven't had these kind of huge long-term investments before.
Okay. Slightly surprising given that you have launched websites before, I would have thought that involved in building those websites would have been relevant costs that would have been shown in previous years. Sounds like that's not the case.
No, it was more, upgrading of these websites that we did, I think it was 2 years ago with updating our existing online stores. These are IT systems, and we have done this for a couple of years. In the beginning, they were more on a planning phase. When they enter into the development phase, then the IAS accounting rules states that they should be capitalized.
Okay. That's great. Thanks so much for that. Apologies for following up on it.
Our next question comes from the line of [Adam Karlsson]. Please go ahead with your question.
Good afternoon or evening, whichever it is now. two questions for Jyrki, really. First of all, you mentioned before about not just the U.S. online launch. You were trying to accelerate the other countries as well. I just wanted to confirm that was still ongoing as planned. Then secondly, on OpEx investments. Is it right to look at this as you have a couple of years where they've gone up and then they'll annualize at these rates? Or are some of these investments and the & Other Stories, of course, is a, not quite a one-off, but is it a two-off, sort of sticking up for a few years, it will tail off afterwards? Or should we just use the increase as a sort of ongoing run rate? Thanks.
Okay. If I take the first one with the global expansion of online. Yes, of course, we continue. Unfortunately, we can't give you a date for the next country yet, but we're working, putting a lot of resources into this now. Of course, we want to have it out in the rest of the group as well.
When it comes to these OpEx investments, of course, there are differences in the investment levels. For instance, the mobile adoption is a small example of this. Of course, we're starting to develop this mobile-adjusted site. There are a lot of investments in connection with that. When we are ready with that phase, then of course, that goes away as an investment, and then it starts to come more and more maintenance costs. We have still these huge H&M online projects ongoing. We are tailoring to modern concepts within H&M. I think, I hope that we will continue to develop our business and build a stronger H&M in the future. As I said, I think this is a normal way of doing business for a company like H&M, to always looking to the long term.
If you're thinking about OpEx sales in the medium term, it's fair to assume that the ratio improvement will come from the top line increasing rather than the OpEx necessarily decreasing once these investments are in place.
Yeah, all things equal. Of course, just looking at an isolated part, for instance, we have development costs for U.S. launch of online, and we don't get any revenues. Of course, the ratio will totally be different when we start to sell online. Of course, that's the mechanism behind it. That's correct that we have been investing. We will invest a lot, and we haven't got the revenues from many of these projects.
Well, I'm looking forward to you sweeping them out as soon as they come through.
Our next question comes from the line of Paul Rossington. Please go ahead with your question.
Good afternoon, gents. Just a quick question on the non-H&M brand sales. Can you give us any indication what they actually represent as a portion of group revenues now? Trying to work out how relevant these brands actually are in terms of putting our revenue forecast together.
They are still represent a very small part of the total sales, of course, but we see great potential for them in the long term.
Less than 5% would be accurate?
I won't give you any numbers because we don't speak out the different formats. Still, the vast majority, of course, is the core H&M, and it's likely to remain that for many years. We thought long-term, there will be great potential for each of the new formats.
Thank you.
Our next question comes from the line of Peter Farren. Please go ahead with your question.
Yes, hello. Just a couple of questions from me. The first one is, I was wondering whether you had confirmed the U.S. online launch for this summer. The second one is on the sportswear offering. Is anything from Footwear included with this offering?
Regarding I'm sorry, I lost.
The online launch for this summer.
Yeah. The online launch will be in the U.S. this summer. We haven't committed to a date yet, though, but it will be this summer. Regarding the sportswear, it will be, I think, sportswear and accessories in functional qualities, with specific ranges for various activities. It will be no hard, I mean, like tennis rackets or golf clubs or whatever.
That includes footwear.
Not footwear, as far as I know. No.
Okay. Okay, fine. It is going to be technical in terms of.
Functional qualities. Yeah.
Okay. Okay, fine. Okay, thank you.
We appear to have no further questions at this time. I'll hand the conference back to you.
Thank you all very much for participating and all these questions in this long conference call. Welcome back for the six months results on the 19th of June.
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