You for standing by and welcome to the H and M Full Year Report 20 12 Conference Call. At this time, all participants are in a listen only mode. There will be I must advise you this conference is being recorded today, Wednesday, 30th January, 2013 at 2 pm CET. I would now like to hand the conference over to your speaker today, Mr. Niel Svenja, Head of Investor Relations.
Please go ahead, sir.
Thank you very much. Welcome to this telephone conference on the occasion of H and M's 4th quarter and full year results for 2012. Presentation slides are found on our website, hm.com. With me is our CFO, Jyrki Teivonen and we'll be happy to answer your questions after the presentation. H and M continued to stand strong in the challenging markets, which in many countries was even more demanding in 2012 than in 2011.
Looking at the Q4, the bottom was characterized by macroeconomic uncertainty, particularly in Europe and most markets displayed weak statistics for fashion apparel. Still H and M increased sales including VAT by 9% in local currencies in the 4th quarter. In comparable units, sales were unchanged. We view the performance as satisfactory given the tough macroeconomic climate and the effect it had on consumption in many countries. The market conditions led to many price campaigns and high markdown activity in fashion retail.
Net sales in the 4th quarter grew by 5% to SEK 32,500,000,000 The Swedish krona continued to strengthen against most other currencies. And again, currency translation had a negative effect on sales and results. Gross profit increased to €20,000,000,000 from $19,200,000,000 corresponding to a gross margin of 61.6 percent, approximately the same level as in the Q4 2011. The overall effect from external factors At H and M, we have a long term approach and we invest for the future in several areas in online and IT and extending the total offering of the group with for example entirely new fashion brand and other stores and in broadening H and M's product range. These large long term investments that are intended to secure future expansion and further strengthen H&M's position long term have to a large extent not started to generate any revenue yet.
Although this has meant cost increases, cost control in the group remains good. SG and A was €13,500,000,000 in the quarter, up 8% in SEK and 11% in local currencies. The increase is explained mainly by the expansion and by our large long term investments. In comparable stores, costs as a share of sales were up somewhat in the quarter, mainly because sales didn't increase as much as planned. Profitability was still good with an operating margin of 20.1%.
Despite large long term investments and despite negative currency translation effects of €240,000,000 net profit for the quarter was more or less unchanged from the year before. Net profit amounted to $5,300,000,000 corresponding to earnings per share of 3.19 kroner. And now please turn to the slide full year 2012. H and M is present in 48 countries with a varying consumer climate. In this environment, H and M continued to gain market share, thanks to our strong customer offering, fashion and quality at the best price.
Sales including VAT increased 11% in local currencies and were up 1% in comparable units. We think this is a solid performance, which proves that customers like our collections appreciate our strong offering. Net sales increased 10% to €121,000,000 Looking at sales in some of our markets, please turn to the slide sales per market. Among the countries with the best sales development is the U. S, Canada, China and Russia.
The U. S. Is the 2nd biggest market of the group. Last year, H and M opened nearly 40 stores in the U. S.
And increased sales by 24% in local currency. In China, growth is even stronger. China is the fastest growing market for H and M. We opened 52 stores in 2012 and by the end of the year, the number of stores was 134. Sales increased by more than 40% in local currency.
Japan is also developing well, which is gratifying to see with a sales increase of 53% for the year. We continue to expand. Asia by now represents more than 7% of total sales of the group. And with the same growth rate, it will soon make 10% of the group revenue. Sales were also good very good in all of the 5 new markets that H and M came to in 2012: Bulgaria, Latvia, Malaysia, Thailand and Mexico.
In Southern Europe, consumption has been affected by economic uncertainty, which has been visible also in H and M's numbers in for example Greece, Spain, Portugal and Italy. H and M has however continued to perform well relative to the market in these countries where we continue to see room for expansion. Also franchise developed well. There are now a total of 88 H and M franchise stores in the Middle East and now also in Thailand. Going back to the results for the full year, please return to the slide for year 2012.
Gross profit increased to $71,900,000,000 corresponding to a gross margin of 59.5 percent compared to 60.1% the year before. H and M's gross margin
is a result
of many different factors, both external and internal, but most of all affected by the decisions we make based on the strategy to always have the best customer offering in each market. The overall effect from external factors that we mentioned earlier was negative for sourcing costs for the full year. Looking at markdowns in relation to sales, they were at the same level as in the previous year. Now over to operational costs. SG and A increased by 11% in local currencies and 12% in Swedish kroner to approximately €50,000,000,000 The main reasons are the strong expansion.
We increased the number of stores by more than 12% last year and the long term investments. In comparable store, cost as a share of sales were unchanged due to good cost control. Operating margin was 18% compared to 18.5% the year before. Net financial income for the year was $531,000,000 compared to $563,000,000 the year before. After a tax rate of 24.3 percent, net profit amounted to $16,900,000,000 that is an increase of 7% for the year or more than DKK 1,000,000,000 despite the long term investment despite negative currency translation effects of €290,000,000 Earnings per share increased to 10.19 kroner from $9.56 And now looking at some other key figures.
Please turn to the slide key data. Stock in trade was €15,200,000,000 an increase of 10% in Swedish Krona and 11% in local currencies compared to the same time last year. The increase is mainly explained by the expansion, but also by the fact that sales didn't rise as much as in the 4th quarter. The inventory level as of the 30th November 2012 was somewhat higher than planned, which means that markdowns in relation to sales for the Q1 of 2013 are expected as of today to end up at around the same level as in Q1 last year. The composition of the stock in trade was good.
As you can see on the curve on the next slide, stock and trade in relation to sales was 12.6%, which is the same level as the year before and still good seen over time. Back to the slide key data. Cash flow from current operations was DKK 18,900,000,000 an increase of DKK 1,500,000,000. Dollars Investments in terms of CapEx rose to $6,800,000,000 mainly for new stores and partly also because of increased long term investments to secure future expansion and further strengthen H and M's position long term. Our finances remain strong.
Liquid funds and short term investments amounted to €17,100,000,000 The Board of Directors will propose to the Annual General Meeting a dividend of NOK 9.50 per share corresponding to 93% of net profit for the year. Return on equity was 38.4% compared to 35.8% last year. H and M created 10,000 jobs within the group in 2012 and today we are more than 104,000 employees. That equals an average number of full ton employees of 72,276. Now some words about our expansion.
Please turn to the slide expansion 2012. We ramped up expansion further in 2012 and instead of an originally planned 275 new stores net, we added a net of 304 stores, of which 147 in the 4th quarter. The group had a total of 2,776 stores at the end of the financial year. And of these, 2,628 were H&M, 64 costs, 59 monkey, 21 Weekday and 4 Cheap Monday. Of the total, 88 are franchised stores.
H and M's strong brand attracts customers all over the world. Today, we have a strong global presence and the current number of stores is already above 2,800 in 48 markets. We're growing in all our markets. China was the largest expansion market last year followed by the U. S.
In the U. S, we have opened some fantastic new stores for example in Miami Lincoln Road in Miami Beach and in Aventura Mall. Expansion on Manhattan continues. H and M will open a new flagship store on Fifth Avenue this year. It will be the biggest store in the group.
A new store will also open at Times Square where H and M will become a real landmark and also add to the New York City skyline. We had several other large expansion markets in 2012 such as Russia, Italy, Poland, France, Spain and the U. K. We also added 5 new markets: Bulgaria, Latvia, Malaysia, Thailand and Mexico. Customer response has been amazing everywhere.
The tremendous demand for H and M in connection with the openings both in existing markets and in new places underlines the great potential for future expansion. Our other brands expand too. Kos in particular continues to do very well exceeding our own high expectations. Kos opened 19 stores and came to 6 new markets in 2012. And at the end of the year, Kross had 64 stores in 15 markets and a shop online in 18 European markets.
If we take a look at the current year, please turn to the slide expansion 2013. For 2013, the rapid expansion continues. H and M grows within the target of 10% to 15% new stores per year and plans to open around 325 new stores net. That's more or less one new store opening per day. And just like last year, expansion will be the strongest in China and the U.
S. There are also great opportunities for continued expansion in markets such as Russia, Germany, U. K, Italy, Poland and France. And also for 2013, 5 new markets are planned: Chile, Estonia, Lithuania, Serbia and via franchise Indonesia. The store in Santiobre de Chile will open in March.
We're looking forward very much to offer H and M's fashion to customers in South America and the Southern Hemisphere. H and M is also growing with shop online where we see significant opportunities ahead. For fashion retail online, market growth is particularly strong for shopping via smartphones and tablets. 2 weeks ago, we launched a completely mobile adapted shop online in our 8 existing online markets to cater to this rapid development. We have also intensified work on the future rollout of H and M Shop Online to other markets in the group.
Now we are preparing for the launch of H and M Shop Online in the U. S. This summer. We are looking forward very much to offering our customers this opportunity in the world's largest online market. The group also continues expanding with store openings of all the other brands Koss, Monkey, Weekday and Cheap Monday.
We're also looking very much forward to offering our customers a completely new fashion brand and other stores. Please turn to the next slide. And other stores, we launched its first collection this spring in 10 European markets. This new fashion brand will offer women a wide range of shoes, bags, accessories, cosmetics and clothes, allowing women to create their own personal style or story. The collections are diverse with everything from masculine tailoring to feminine chic and are designed to provide endless styling choices.
And other stories collections are being created in studios in Paris and Stockholm and designed with striking attention to detail and quality. Prices will be affordable and in a wide span. The collections have received very positive response in fashion press around Europe. First stores will open in Barcelona, Berlin, Copenhagen, London, Milan, Paris and Stockholm. To begin with 8 stores in total of which 2 in Berlin.
The 10 countries where shop online will be available at stores.com are except for the ones just mentioned, we also will open in Belgium and the Netherlands and Finland. Before we start the Q and A session, a few to summarize. Please turn to the next slide. Just to illustrate H and M's rapid international growth. Before the end of this year, we will have more than 3,000 stores worldwide.
It means that H and M has opened 1,000 stores in less than 4 years. And to give you some perspective, it took 57 years to expand with the first 1,000 stores. H and M has a strong global presence today and continues to stand strong in a challenging clothing retail market. The fact that we increased sales by 11% in local currencies and 1% in comparable units, whilst continuing to gain market share in a very demand market proves once again the customers like our collection and appreciate our strong offering. We increased profit by DKK 1,000,000,000 or 7% despite the large long term investments and despite negative currency translation effects.
Meantime, we have great respect for the current macroeconomic climate in many countries and the effect it may have on consumption in our markets. And looking at current trading, sales in local currencies increased by 8% in December and sales in January are expected to increase by 5% compared to the same month last year. From mid January onwards, sales were negatively affected by very cold weather in many of H and M's markets in Europe. But we believe strongly in our offering and are convinced that H and M will continue to maintain its strong position. Even now in times of economic worries in many places, we keep on growing.
Only last year, we created more than 10,000 jobs within H and M. We invest in online and IT. We launched an entirely new fashion brand and other stores and we brought in our product range. In other words, we see significant opportunities for continued growth for the H and M Group for many, many years. And we are now happy to take your questions.
Thank you. Your first question comes from Simon Bauer. Please ask your question.
Good morning, guys. I was just first of all, just hoping just to clarify some commentary I saw coming out of your earlier call around the gross margin. Just to share, were you saying on that call that the net impact of currency and input costs you're expecting to be neutral across the first half of the year ahead?
Yeah. If we isolate it look at those mainly three things cotton prices, U. S. Dollar effect and cost inflation, Altogether, we see that they are more or less having a neutral effect on our purchase prices for the Q1.
Okay. Fantastic. That's very clear. And then just a couple of other quick things. One, just of the increase that we saw in OpEx come through from the Q4, could you give us any sense of how much of that might have been attributable to your online expansion, I guess, in particular within the U.
S? And how we should think about that cost line going forward next year?
Yes. As we already in connection with the 3rd quarter report stated that we will efforts and investments in rolling out online in new markets, existing markets and also the mobile adoption to have a fully adopted mobile site. So that's the reason for the increase in the OpEx in Q4. But still we have a really good cost control. Looking at the full year, we actually I think as a share of sales decreased the share by 10 basis points.
So but as you said, the long term investments are affecting the SG and A.
And they will continue going forward as well. Yes. That's the question right.
Yes. Yes. Okay. Fantastic. Of a kind of similar quantums that we saw across the Q4, should we think about?
Or is there kind of another step up in online costs that you're expecting to see come through?
Yes. We also said in previous conference calls, we will have a higher level on the long term investments during 2013. But exactly
2012. But of course cost of sales will depend on the top line development, which is simple to say. And it's not just the pure online investments. This is as Jyrki said all the long term related investments including the new offering and the broadening etcetera.
Yes. Sure. Okay. And then just one final one. Just on the balance sheet, there's a new category called capitalized expenditures that's coming about DKK 631,000,000 Can you just give us some color on what that is?
Is that in any way linked to online?
Yes. That's one part of it is online. It's our long term investments in online, IT, etcetera. And the IAS accounting rules say that we have to capitalize those costs when we are in a development phase. So it's IT systems, etcetera, that has to be capitalized.
Okay. And in previous years, I presume there would have been similar costs coming through for IT expenditure. Was that previously being expensed through the P and L? Or was it being held elsewhere within your fixed assets or
No. We didn't have any such capitalized expenses because we were more in a research phase when looking at our and then those costs has to be expensed in the income statement. But when we are moving to development phase, then the IIS rule states that then you have to capitalize those costs.
Okay. Fantastic. Very clear. Thanks very much,
gents. Your next question comes from Cedric Le Carsten. Please ask your question.
Yes. Good afternoon, gentlemen. Just a question on your ForEx and the impact of the U. S. Dollar to euro currencies.
Could you maybe help us understanding your hedging dynamics? And if currencies were staying at current levels in through the whole year, what kind of impact should we be looking at for 2013? Thank you very much.
Yes. If you start with the transaction impact meaning when we buy place orders today and most of that is done in U. S. Dollars because around 80% of the sourcing is done in Asia where we still pay most of the garment in U. S.
Dollar. And of course, if the dollar is more expensive compared to the euro that is a negative in the short term and vice versa. And right now, I think that the currency is about the same level as last year, perhaps slightly less expensive. So if they say like this that's pretty much neutral going forward. But the since we hedge continuously, theoretically you can say that what we buy today, you will see in the figures, let's say, 3, 4, 5, 6 months from now in the P and L.
And then you have the translation effect, which is, of course, when we translate all the results from the subsidiaries into SEK. And if the SEK has appreciated as it has now, there will be a negative effect from this compared to last year, because we get less top line and less profit when we translate to SEK. And right now, the SEK is stronger compared to most currencies compared to a year ago.
And on the transaction impact, could you isolate or help us isolate the impact last year on your gross margin?
Well, it varies from quarter to quarter. But we said that, I mean, the combined effect of currency transaction effects and cost of prices, etcetera, were negative for the year.
Okay. Well, thank you. Thank you very much.
Your next question comes from Anne Critchlow. Please ask your question.
It's Ann Critchlow from SocGen.
Hi there.
Hey. Are the current investments you're making going to allow you to roll out online after you've rolled out in the U. S. More quickly than you might have done otherwise?
That's the idea, yes. But we are very cautious to give you a date. But that's of course the intention to roll it out as quick as possible, but still with high quality.
Could we expect a country after the U. S. Within a year after that perhaps?
Again, if we've learned something, we're very humble with dates. But of course, it's in our own interest to launch it as quick as possible. But I promise you, we'll come back to you as soon as we have something new to tell you.
Okay. Thanks. And then just very quickly, CapEx guidance for the current year sorry if I missed that.
It's somewhere between SEK 7,000,000,000 SEK 7,500,000,000 for 20 13. But you have to remember that this is just an estimation. We have to remember that we haven't signed a lot of contracts that we are planning. So it can differ up and down during the year. But we will come back to that later during the year if we see some significant changes.
Thank you. Your next question comes from Jorg Noricchi. Please ask your question.
Good afternoon.
Good afternoon, Jorg.
Can you hear me? Yes.
Okay, perfect. I would
have. My first question is actually a question I've been asking you for years, but I'm not giving up, you never gave me an answer. Can you give me a figure on how much turnover H and M is doing online with the Mail Auto business?
Yes. You said asked the question and it's a good question. And my answer, of course, it will be the same. However, I can give you some more flavor perhaps. And it is, of course, that on line is becoming more and more important for the industry and of course for H and M.
That's why we invest even more in online. And we just launched the mobile adaptive site 2 weeks ago, which has been very well received. And we are looking forward to again to the U. S. Launch this summer.
And as we said before, we are investing a lot to be able to roll out online sales in all our markets.
But unfortunately
for competitive reasons, we don't break out the different parts. And also, I think it's very important, we talk about the multi channel strategy and it's all linked to the online and the retail numbers. I mean, a lot of customers they go online and they buy something and then they maybe go to the store and return it. They buy something in the store. So what is online and what is retail?
It doesn't really matter.
Overall, the growth rate online is the same as the general growth in the market in online business? Is that
Could you say again please?
Is your growth in online business the same as or in line with the growth rate of online business in general?
Sorry, I didn't get to it. The growth rates in the industry are online.
By doing it, it's online business. Is it about the same growth rate as it is for the market in general for fashion retailing?
Well, we don't break out the different parts. But I mean as in general, of course, online sales are growing faster since they started from a lower from almost nothing 10 years ago. And of course, I expect that online sales will become even more important for the industry and for H and M going forward.
Another question. International retailers like Mango and even Best Seller did work on their prices and offering now lower prices. And then of course there is the incredible success of Primark. Is H and M working on lower prices? Or will you maintain the prices?
We will always work with our customer offering. It's not all about price. It's a combination of price, quality and fashion. And also we are focusing a lot on the sustainability part as well. So we will keep to our business idea to have the best combination of these and that we will stick
to. When exactly is End of the Stories opening? Can you say that? And then you were mentioning 2 stores in Germany. I only knew about
one. Yes. There will be 2 in Berlin. Okay. 1 in Kurfurstendam 234 and 1 in Neuer Schonhauser Strasse 15.
Sorry for my German.
That's okay. And they will open simultaneously like all the stores will open?
No. But they will open during the spring. We don't have an exact date yet, sorry. We'll come back to that.
Okay. Thank you.
Your next question comes from Rebecca McLaren. Please ask your question.
Yes. Hi, good afternoon. I've got a couple of questions, please. Firstly, can you confirm in the 4th quarter you talked about comparable store OpEx to sales ratio deteriorating partly because of sales, but the suggestion is that the comp store OpEx is inflating on a year on year basis. Could you give us the sort of like for like OpEx inflation please?
I don't want to quantify, but of course there's always an OpEx inflation when it comes to indexations for rents and also salaries. But they vary from country to country and of course over time.
And that's the reason why we are planning for increase in like for like sales every year because of Snilte there is an underlying inflation. But we have been managing to keep a good cost control and react on the sales figures. But in the long run, of course, it's important that we have a positive like for like.
Sure. So does that is your operating breakeven about 1% or 2% like for like then more or less?
I don't want to give such a figure because it's too stiff. It's not flexible enough. We always work with improvements in efficiency etcetera. And so that figure can vary.
Okay.
And we've proven historically where we had I think it was 3 years ago, we had minus 5% like for like through the year and we managed to balance that very well by being more efficient in the stores. So I don't want to give such a fixed number.
Okay, great. And then my next question please. When you talk about broadening the product range, could you just give me an example of what you mean by that?
Yes, of course, it could be adding a new concept like we did a couple of years ago with H&M Home or Shoes, but it can also be to broaden an existing concept or format that we have.
Okay. So it's just okay. And then finally, can you confirm that can you confirm if the group level is 100, what is the China sales in comparison to that 100?
It's lower.
By a noticeable amount or just marginally?
It's up to you to estimate. I give you it is lower because the retail market is still premature, but it's developing quickly.
Okay. Thank you very much. Your next question comes from Fraser Ramsden. Please ask your question.
Thanks very much. Good afternoon. Actually wanted to come back to these investments through the gross margin and in OpEx on new concepts and online. You said that the investments will continue going forward. And you also said they will have a higher level in 2013.
Can you confirm that the investments you made this year were not sort of one off startup costs in nature, but instead ongoing costs you have to bear in the business such as people? And can you sort of indicate whether or not in Quantum in SEK 2013 is planned to be a bigger incremental number or the same number or less please?
Yes. Coming back, when if it's start up cost or cost that will continue, it's of course a mix. Some of them are start up costs. Some of them will continue during 20 13. And we don't want to give you any forecast how much it will be during 2013.
But as we said, it will be on a high level still. We have investments, long term investments that we will continue during 2013. And the our assessment is that they will be on a higher level than in 2012. But we have to remember we have been investing a lot during 2011, 2012. But of course, we will see future revenues as well.
Up to date, we haven't seen much of the revenues because are
long
are long term investments which are necessary and will build up the strong HFM for the future.
Okay. So to be clear the SEK amount both in gross margin and operating costs will be a larger total in 2013 than 2012. Whether or not it's a lower percent of sales is a different question, but it will be a larger absolute amount.
Yes. Per definition, if we are expanding the SAK in Swedish krona, if you mean that, that will increase from year to year when we are continuing our expansion.
Okay. But you're not necessarily saying all riders are the center of sales?
No. It's depending on how the top line is developing.
Great. Thank you very much.
Thank
you, Quakon. Your next question comes from Simon Irwin. Please ask your question.
Good afternoon, gentlemen. Could I just come back Fred on your gross margin guidance one last time. And simply because you're talking about relatively flat input costs. Now obviously, we given what you were saying about your hedging policy on the dollar first half, we can then be reasonably confident that the adverse dollar movement will be high single digit negative. Therefore, which bit of buying terms then are a similar magnitude positive?
I'm just intrigued by which part of the of at least dollar costs are coming down still?
Just to be clear, we haven't given any guidance when it comes to gross margins. What we said is looking at those maybe 3 or 4 main external things cotton prices, cost inflation, U. S. Dollar, we see that those altogether have a neutral effect on the purchases that we have done for the Q4 and also for Q1. But how the gross margin will develop that's totally up to the decisions that we will take when it comes to our customer offerings.
So this was not the guidance. This was these 3, 4 isolated main input factors that we were commenting on.
All right. And point taken. And just it's I think it's been a couple of years since you initially signaled that you were prepared to invest in price in order to drive the top line, obviously, kind of selectively market by market, etcetera. And kind of 2 years in, do you think that investment has paid off? And do you expect to continue to do so given that your like for likes are kind of broadly tracking flat at the moment?
Well, we're absolutely happy with the decision and we will continue. I mean, we always we're very long term as you know. But of course and we always strive to work with improvements starting with the customer offering Whether how much we invest meaning taking the markdown down that's another question. But at the same time we work with efficiency gains etcetera, etcetera. And yes, the consumer environment is very demanding and very difficult at the moment.
And I think last year, the 11% increase in the top line is a proof again that I mean we're on the right track and it's going in the right direction. The customers appreciate what we do. But for this year, I mean, it's we still think it's going to be very demanding, but we have a great belief in our offering and what we do and actually see potential not just for this year, but for many years going forward.
Okay. And just one final question in terms of stores. Given that your store expansion now includes 4 smaller formats going forward. How should we think about your average store size? Is that going to start declining as these smaller formats make up a larger number percent as a whole?
Or are they still going to be too small to influence the overall kind of average square kind of impact from new space?
Well, that could vary. If you look at about 2012, the average store size is actually somewhat larger. So I mean the smaller format hasn't had any greater impact yet, but who knows about the future. And then another thing is that even though they might be smaller in square meters, they're not necessarily smaller in top line, I mean, if you have a strong sales density. Right.
Fine. And just a final point in terms of depreciation. Presumably that capitalized depreciation number goes into the pot for the current year. And you're also talking about an acceleration in CapEx in the year ahead. So should we be thinking about that depreciation line starting to move ahead fairly rapidly over the next couple of years?
Yes. Of course, we capitalized the intangible assets that we have in the balance sheet EUR 600,000,000. Of course, when we are starting to depreciate, of course, it will. But I it will not be a dramatical thing. So but of course, when we are starting to take and use those intangibles, so of course the depreciation will be there.
Tremendous. Thank you very much.
Welcome. Your next question comes from Richard Chamberlain. Please ask your question.
Yes. Thanks. Afternoon, everybody. Just so just to follow-up on Simon's question. And on depreciation, why did depreciation go up so much in the second half please?
Was that to do those large long term investments you were talking about?
Yes, yes partly. But the main reason is that you probably have seen in the previous years as well during the first, second and third quarter, we are doing calculated depreciations. And then when we are ending up the year in Q4, then we are calculating it more exactly. And all the effects will land in the Q4. So that's the reason.
But looking at the yearly level, it's increased by 13% something. But that's the way we are doing it. And all the corrections when it comes to depreciations are done in Q4.
Understood. Okay. Thanks. And then just another quick accounting one then. Why was the cash tax paid figure this year so much higher than the P and L charge for last year well, this year actually.
But the amount of cash tax is quite a bit higher. Is there a reason for that?
Yes. And if we look at the effective tax rate for instance, we have some tax receivables in the balance sheet and that's due to that we have made an accrual funds this year due to the lower tax rate. The Swedish tax rate has gone down from 26.3 percent to 22 percent. And in Sweden, you have the possibility every year to set one quarter of the Swedish profits to accrual fund to postpone its kind of untaxed reserve. So therefore, this year the paid tax has been higher.
I see. So what's your tax what's your effective tax rate outside Sweden at the moment?
It differs very much from Ireland. I think they have 12.5 percent to But on
a blended basis?
It's somewhere between the total average as you see in the income statement. The blended average is more or less what you see here in the profit and loss. Around half
of the profit are taxed in Sweden.
Right. Got it. Yes. Okay. Thanks.
And just one on the again on the gross margin. I mean just reading the same in it. It looks like you were expecting a lower level of markdown in the Q1. And I wondered why that was. Is that just because of the base of comparison?
Or should we assume that you are planning a lower level of markdown for the full year and will be running the business accordingly?
Actually what we state in the report in the Q4 report, we are our best estimate for the Q1 is that we will as a part as a relation to sales that the reductions will be on the same level as in Q1 last year. But of course, that's our best destination. If you remember last year, we said in connection with the year end report that we had a little bit too high stock with winter garments and that ended up in Q1 with a 90 basis points more reductions compared to Q1 twenty ten. So what we say now is that our best estimate at this point is that the it will be a neutral effect on the gross margin compared to last year's Q1. But as always, we still have 1 month to go.
And looking at the market, it's still a lot of reduced garments on the market. And of course, if the market is starting to aggressively making campaigns and having it's dependent also if we it's dependent also. If we don't get the good sales development during February, then it will not most probably be flat compared to last year. Then it will increase. So but it's still too early to say.
Right. Okay. But just to be clear, you were planning a lower level of markdown in Q1, were you?
No. No, we are planning our best assessment. Our planning is to that we will end up on the same level as the previous year as a share of sales.
Okay. I'm with you. Okay. All right. Yes.
Thanks. Yes.
So no, no. It's a neutral effect on the gross margin. But what I said just that's that can be a difference after February.
Yes. No, sure. Okay. Thanks very much. Thanks.
Your next question comes from Niklas Vaal, Baeshiqa. Please ask your question.
Yes. Good afternoon. I also have a question on accounting in the quarter. I was looking at accounts payable in terms of days to sales. I just noticed that they're now down about 10% on a full year basis to around 12 days versus 14 days in last year.
And my question is really sorry in 2011. And my question is then is are you giving suppliers better cash flow terms and in exchange for that perhaps being rewarded with lower purchasing prices?
I wouldn't go exactly, but there has been no dramatic changes. So of course, we always it's part of the negotiations with the suppliers, but nothing dramatically changed compared to last year. So
Okay. Perfect. Thanks. And just a final question, which I think I've been touched on before. But anyway, are you saying basically just for the record that given your store given your expansion mix in terms of store concepts that we should expect a similar space conversion rate in this year as in 2012?
Same answer as before, I mean, we don't see any dramatic changes in the space commercial.
Thank you very much.
Thank you.
Your next question comes from Peter Farrin. Please ask your question.
All answers for me. Thanks. Although, I just could maybe follow-up on the OpEx. I was wondering if you could tell us if assuming 11% currency mutual growth for 20 13 is reasonable? I mean, I've heard everything you've had to say.
It was basically a yes or no answer I'm looking for.
As you probably know by now, we never give any forecast regarding these kind of figures more than seeing that we always have a very tight cost control and very cost conscious in the group.
Okay. Thanks. And then regarding tax rates for 2013, is 24% a reasonable assumption?
We want to be cautious when it comes to the tax rate when showing the tax rate calculating it for Q1, Q2 and Q3. And then we will make the final calculation in connection with the year end closing. For 2012, we used 26% during Q1, Q2, Q3 and ended up with 24.3%. So we want to be cautious and we will use 24% as a tax rate during Q1, Q2, Q3. And most probably as it looks now, we will end up in a lower tax rate than for the full financial year.
Yes. Okay. Thank you.
Your next question comes from Andrew Hughes. Please ask your question.
Yes. Andrew Hughes from UBS. Hi. Hi, guys. Just going back to cash flow where the last 2 years we've seen some quite significant cash outflows.
Should we see that as you still being relaxed because you've got DKK 17,000,000,000 left or a little bit more concerned on the basis that you might be looking at other metrics or the scale of that outflow? Yes.
It's correct as you say. But still we have a strong financial positions within HFM and have the opportunity to take the opportunities which come up. And also it shows that we are continuing with our high expansion rates. We have the long term investments etcetera. So we are confident that we have the opportunities to continue to invest and expand in a really good rapid pace.
Right. So if conditions did remain difficult, you'd be happy to run with another cash outflow at least in the current financial year?
Yes. I would just go of course, looking into the future, it's really difficult to speculate about that. But I think that the main point is that we have a good financial position and continue our long term investments. That shows our strength in really tough macro environment during 2011 2012.
Right. Okay. And just one follow-up.
I think you mentioned a couple of times that markets are more promotional. Are there any particular countries where that's been the case? Is it Southern Europe? Or is there other markets where you've had to follow with more promotional activity?
Well, I mean, we are running the business in probably 48 different markets. It's very difficult for us to specify in each market. And in some countries, it's been worse. In some others, maybe not as tough. So I don't want to go into detail for each market, sorry.
Any comment on
the top six markets then?
We don't need to comment on all
rather, what we give you is the consolidated or the aggregated view that we have for
the group.
But the picture is that the activity is on a high level when it comes to markdowns on more or less all the markets. And I think the reason is that it's the same global players in most of the countries and everybody faces tough macro environment. So but of course going into detail there might be some markets where it's a little bit tougher. And of course Southern Europe the macro environment is of course much tougher than in maybe Northern Europe. But most retailers probably also have adopted the inventory levels to tougher conditions in those markets.
Okay. Thanks very much.
Your next question comes from Richard Jazz. Please ask your question.
Thanks very much. And just a follow on regarding the U. S. Internet business and its upcoming launch. Will the online offerings duplicate what we find in stores?
Will it actually be a broader assortment than we find in stores? Give us a sense of the strategy for online in the U. S.
Right. The current online store we have in 8 countries have around 50 plus percent of the total assortment. And I don't think the U. S. Will differ dramatically from that.
But this is something that's continuously developing and who knows about the future and it's still some months to go before we launch in the U. S. But at the moment, it's not 100%.
Is the capacity in the U. S. Sufficient to allow for some flexibility from that 50% level? I know you spent some time building out the infrastructure here.
What kind of capacity? I mean, are we talking about SKUs now? Or what kind
of capacity?
SKUs in your distribution facility to have a broader array of offerings, I'm sure the electronic platform is scalable to accommodate more. But wondering if the decision were to ramp up the offerings that that is a possibility fairly seamlessly?
It's definitely possible to do it, but there are lots of different things in the equation. And that's the reason why we don't have 100% yet. But as I said, the development is going in that direction. We have a couple of years ago, it was just maybe 25% of the total collection. Now we're more than 50%.
So it's increasing year by year.
Very good. Thank you.
Your next question comes from Chris Chebyouz. Please ask your question.
Good afternoon, guys. I had one question actually, again, regarding your kind of longer term thoughts on the investment. So I was about to ask when the investments in the IT and the online capabilities will annualize, but then you said that you're going to continue with those. So I was wondering, are there any big projects that we should be aware in the next year?
We are how should I put this? There are lots of different projects and some of them will be launched. And we just as I said, we launched 2 weeks ago, we launched the mobile adapted online site. And actually today, we launched online sales in our 18 countries for weekday. So there will be deliveries throughout the year.
And when it comes to new projects, who knows, but there is nothing that we have communicated as of today. But I hope there will be new projects going forward.
Agreed. But then is that we're just seeing that even that you had all this one off investment these will annualize and then the level of investment will fall just because the big projects are out of the way until for now. Isn't that a fair assumption, no?
Yes. But as we said for 2013, we see that these long term investments, of course, some of them will be annualized and but some of them will continue. But looking aggregated, the long term investments in 2013 will be on a high level and even higher level than 2012. But of course, in the long run, who knows in 2014 or 2015. But as Nils said, we most probably will have always long term investments.
But of course, now we have really much bigger the online. Online is one big. Then we have looking into IT systems, IT platform, etcetera. But still for 2013, the long term investment level will be on a high level.
Okay. Okay. Thanks for that. My other one is on the profitability of the online model. I know you don't split it out, but are you happy with the profits that this generates?
Are you totally indifferent of whether the incremental sale comes from the online platform or comes from your store?
We are very happy. It's very profitable. And we said it's in line with the retail operation.
Right. Okay. Thank you very much. Thanks for that.
Your next question comes from Carla Kelsley. Please ask your question.
Hi. Good morning, everyone.
Good morning.
Good morning. I'd like to follow-up on First Cause Collection of Style. What is driving their success and how did their metrics differ from H and M? And just secondly, the expansion of the store network that you've been having globally, what benefit do you see from it in terms of economies of scale? Does it help in terms of store opening costs, advertising and real estate?
And just lastly on design collaborations, they've been an element of your success. And what are the plans for 2013? Thank you.
Okay. I
see if I remember. The first one was KOS. As you said, we're happy with cost and the development and also made an exception to the rule. We commented that the profitability is also very high. It's in line with H and M already.
The reason for the success, again, I don't think there is just one, but the customers they love it. And I think the combination of fashion, quality and price in higher price segments have been very successful. And there is a great demand for cost in actually globally today I would say. So we're very happy about that. Your second question was could you repeat again please expansion?
Sure. What benefit does the store does the expansion of the store network provide in terms of economies of scale? Store opening costs, advertising, real estate, as you open more, do you get more leverage on occupancy costs or occupancy costs lower? Is it more important to developers?
Of course, we get economies of scale. And we are if you start with the brand H and M, we are today a global brand and very highly rated. We talked ranked by the top 20 brands in the world, which of course gives us a lot of advantages when not just the customers ask for our products, but also that landlords they want us as anchors. We're an important tenant. Of course, that gives us a strong negotiation position.
And then when it comes to other synergies, of course, we have processes for opening stores, for refurbishing, etcetera, etcetera. I mean, everybody, every company wants to expand, but it's easier said than done. I mean we do it every day. We open literally one store per day this year. And on top of that we refurbish even more.
So we get a lot of economies of scale by expanding the way we do.
And then just design collaborations, what
are you expecting for 2013?
We are very happy with the design collaboration we've done. And the last one was Margiela, very appreciated again by customers. And we always try to come up with new things. The next design or the next collection we are very proud to present is the conscious collection that we will launch in March. And it's made by our own designers and we expect it to be a very big success again.
And of course, conscious collection is made by sustainable material. And you can read more about it on the website. When it comes to external design collaborations, I mean, we never talk about them really so much in advance because we want them to be a future. So we will see we want them to be a surprise, sorry. So we will see in the future.
Thank you.
Your next question comes from Omar Saad. Please ask your question.
Thank you. Thanks for all the information. It's very helpful guys. I wanted to ask a quick question on inventory. It seems like it popped up a little bit in the Q4 relative to the sales growth relative to the change you historically see to see some change from Q3 to Q4.
Do you have any thoughts on that you could share?
Yes. I mean you shouldn't see it sequentially if you see it year by year year on year and it's at the same level as last year compared to sales. But already as Jyrki said last year it was higher than expected due to the extremely warm autumn in 2011. And unfortunately, we had enough we didn't increase sales as much as planned this autumn 2012. Again, so the level is somewhat higher than planned and thus the reduction we talk about that they will probably be in the remain at about the same level as last year, which were higher than the year before.
Understood. Thanks. And then just quickly back on the online opportunity. As you think about really building out that business globally, does it change the way you think about your store openings and your kind of long term how many stores you can have in the marketplace? Do you think of it holistically total sales to the consumer through both channels?
And could you see eventually if online becomes ultimately very successful, that's kind of a slower physical store growth rate.
I know that there's a lot of talk about this in industry and I'm sure in long term that will probably could happen. But for us, no, we're not there yet. We see a big opportunity to continue the physical store bricks and mortar rollout and we see that channels really complement each other in a very good way.
Got it. Last and really quick lastly, any thoughts on the dividend this year? You didn't see it bump up last year, but historically been very kind of consistent dividend growers. Any thoughts? Are you hoping to raise it again this year?
The dividend, it's a question for the Board of Directors and finally for the Annual General Meeting. So the Board of Directors they have made an assessment based on our dividend policy and that is that the company should have a financial strength and continued freedom of action. So I think this is monitored in the dividend proposal for the Annual General Meeting to be held in April.
Perfect. Thank you very much.
Welcome. Your next question comes from Erik Karlsson. Please ask your question.
Yes. Hello. Thanks for taking my question. First of all, thanks very much for launching an iPad friendly app now. So I already bought a shirt and it works very well.
Very nice app. Thanks very much.
I saw online sales increase today. Thanks to that. You bet. Just a quick question. How do
you feel your price competitive ness is at the moment?
It's good. I mean and we see that in customer service that we do regularly. And of course, it can always be better. That's why we always work with improvements. But we are happier today than we were in the past, because we have we are working with continuous improvement.
Very clear. Thank you very much.
Your next question Your next question comes from Rebecca MacPhelan. Please ask your question.
Yes. Hi, there again. Just to confirm that the €7,000,000,000 to €7,500,000,000 €1,000,000,000 CapEx that you sort of guided towards for 2013 compares to €6,800,000,000 in 2012? Yes. So it's not the 6, it's a 6.8, yes?
Yes.
Okay. Thank you.
Welcome.
Your next question comes from Simon Bauer. Please ask your question.
Hi, Jeff. Just a quick follow-up for myself. Just being you've mentioned the revenue uplifts to come through from long term investments. And obviously, we've got some visibility now on when we should get some revenue uplift through from the new brands, when we should get some revenue uplifts coming through from online in the U. S.
In particular. But it sounds like there's other long term investments that you're making within the amount you're putting in. I was just wondering what the time frame is around seeing any uplift or your hopes around seeing any revenue uplift come through from other investments that you're making?
We hope to come back to you during the year about the other. But so far we have nothing more to but we are working with different things. And probably not anything this year that you'll see anything this year, hopefully next year.
Okay. Very clear. Thank you very much.
Your next question comes from Fraser Bernstein. Please ask your question.
Hi, guys. Thanks for taking my question again. Sorry just to bore on about these SEK investments in the gross margin and costs. When you say you expect the total amount to increase this year, are we talking 10% or 100%? Because I mean if it's 10% then obviously it's not going to go up as a percent of sales unless you're like for like negative.
But if it's 100% then it's really important and we need to know about it.
Sorry, we prefer not to quantify the amounts, but yes, sorry for that.
How long is the stream?
Okay. And is it very different in quantum between the SG and A line and the gross margin investments in terms of the absolute amount of increase? [SPEAKER SEBASTIEN
DE MONTESSUS:] It's as we are working with a functional profit and loss, some of the long term investments will be on the cost of goods sold and the other parts will be distributed between sales and administration costs. So but exactly we wouldn't like to go into exactly how much is coming in and affecting the gross margin and how much and it differs from quarter to quarter itself.
Okay. Okay. So sorry, this 10% point, I mean, you were opening 10% or thereabouts more space. I mean, it's quite important that we understand that it's not 100 because obviously that would have a very serious impact on your margin. At the moment, you're just saying you're going to spend more money.
[SPEAKER JEAN FRANCOIS PRUNEAU:] Yes. I agree.
No. But as I said, it will be our normal expansion and that will continue during the year. And hopefully also the online investments will give some revenues when we launch U. S. Etcetera.
So but exactly how much that will affect the share of sales or the increase in but I think we are comfortable that we have a really good cost control. And these investments that we are doing, they are necessary and really wise to do. So I wouldn't put any dramatics in this. But the guidance is that they will continue during 2013, but no dramatic.
Right. I mean, if you thought it was going to significantly affect your margin in any way, you would of course flag that to us because it would be material, yes?
Yes. Of course, if we see something during the year, we will of course comment on it.
But not right now. Okay.
Well, no, we do give you the information that we will continue and the investments will increase.
Okay. Thank you.
Your next question comes from Niklas
fan. Just one final thing.
Would you for me, would you care to give us some idea of approximately how store expansion will look this year, the 3.25 net openings on a quarterly basis please?
It's pretty much the same pattern as 2012, I would guess. That's my best guess that there will always be differences between the product. If you look at the numbers right now, I think we already have
more stores this year and beginning of Q1. Yes. Maybe a little bit more considering that we will open up another stores another storage during the spring etcetera. So but nothing dramatically compared to last year.
Thank you very much.
We have no further questions registered at this time sir. Please continue.
Okay. Just one correction before I close. I think I mentioned the wrong figure for SG and A for the full year in SEK they increased by 10% and not 12%. I think I said that. Sorry for that.
And then closing remarks. Thank you all very much for participating in this conference call, very long one. And welcome back for the Q1 results on the 21st of March. Bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.