Thank you for standing by, and welcome to the H&M full year report 2012 conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star one on your telephone. I must advise you, this conference is being recorded today, Wednesday, January 30, 2013, at 2:00 P.M. CET. I would now like to hand the conference over to your speaker today, Mr. Nils Vinge, Head of Investor Relations. Please go ahead, sir.
Thank you very much. Welcome to this telephone conference on the occasion of H&M's fourth quarter and full year results for 2012. Presentation slides are found on our website, H&M.com. With me is our CFO, Jyrki Tervonen, and we'll be happy to answer your questions after the presentation. H&M continued to stand strong in the challenging market, which in many countries was even more demanding in 2012 than in 2011. Looking at the fourth quarter, the autumn was characterized by macroeconomic uncertainty, particularly in Europe, and most markets displayed weak statistics for fashion apparel. Still, H&M increased sales, including VAT, by 9% in local currencies in the fourth 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 fourth quarter grew by 5% to SEK 32.5 billion. 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 SEK 20 billion from SEK 19.2 billion, corresponding to a gross margin of 61.6%, approximately the same level as in the fourth quarter 2011. The overall effect from external factors, cotton prices, cost inflation, and the U.S. dollar, was neutral on purchases to the fourth quarter compared to the corresponding period the year before. Markdowns in relation to sales were at the same level as a year earlier. At H&M, we have a long-term approach, and we invest for the future in several areas.
In online and IT, in extending the total offering of the group with, for example, entirely new fashion brand & Other Stories, and in broadening H&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&A was SEK 13.5 billion 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 SEK 240 million, net profit for the quarter was more or less unchanged from the year before. Net profit amounted to SEK 5.3 billion, corresponding to earnings per share of SEK 3.19. Now please turn to the slide Full Year 2012. H&M is present in 48 countries with a varying consumer climate. In this environment, H&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 and appreciate our strong offering. Net sales increased 10% to SEK 121 million. 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 second-biggest market of the group. Last year, H&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&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. With the same growth rate, it will soon make 10% of the group revenue.
Sales were also very good in all of the five new markets that H&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&M's numbers in, for example, Greece, Spain, Portugal, and Italy. H&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&M franchise stores in the Middle East, and now also in Thailand. Going back to the result for the full year, please return to the slide, full year 2012. Gross profit increased to SEK 71.9 billion, corresponding to a gross margin of 59.5% compared to 60.1% the year before.
H&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 the 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&A increased by 11% in local currencies and 12% in Swedish krona to approximately SEK 50 billion. The main reasons are the strong expansion. We increased the number of stores by more than 12% last year and the long-term investment. 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 SEK 531 million, compared to SEK 563 million the year before. After a tax rate of 24.3%, net profit amounted to SEK 16.9 billion. That is an increase of 7% from the year, or more than SEK 1 billion, despite the long-term investment, despite negative currency translation effects of SEK 290 million. Earnings per share increased to SEK 10.19 from SEK 9.56. Now looking at some other key figures. Please turn to the slide, key data. Stock in trade was SEK 15.2 billion, 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 planned in the fourth quarter.
The inventory level as of the 30th of November 2012, was somewhat higher than planned, which means that markdowns in relation to sales for the first quarter 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 in 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 SEK 18.9 billion, an increase of SEK 1.5 billion. Investment in terms of CapEx rose to SEK 6.8 billion, mainly for new stores and partly also because of increased long-term investments to secure future expansion and further strengthen H&M's position long term. Our finances remain strong.
Liquid funds and short-term investments amounted to SEK 17.1 billion. The board of directors will propose to the annual general meeting a dividend of SEK 9.50 per share, corresponding to 93% of net profits for the year. Return on equity was 38.4% compared to 35.8% last year. H&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-time 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 fourth quarter. The group had a total of 2,776 stores at the end of the financial year. Of these, 2,628 were H&M, 64 COS, 59 Monki, 21 Weekday, and four Cheap Monday.
Of the total, 88 are franchise stores. H&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 at Lincoln Road in Miami Beach and in Aventura Mall. Expansion on Manhattan continues. H&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&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 five new markets, Bulgaria, Latvia, Malaysia, Thailand, and Mexico. Customer response has been amazing everywhere. The tremendous demand for H&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. COS, in particular, continues to do very well, exceeding our own high expectations. COS opened 19 stores and came to six new markets in 2012. At the end of the year, COS 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&M grows within the target of 10%-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.
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. Also for 2013, five new markets are planned: Chile, Estonia, Lithuania, Serbia, and via franchise, Indonesia. The store in Santiago de Chile will open in March. We're looking forward very much to offer H&M's fashion to customers in South America and the Southern Hemisphere. H&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. Two weeks ago, we launched a completely mobile-adapted shop online in our eight existing online markets to cater to this rapid development. We have also intensified work on the future rollout of H&M shop online to other markets in the group.
Now we are preparing for the launch of H&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, COS, Monki, Weekday, and Cheap Monday. We're also looking very much forward to offering our customers a completely new fashion brand & Other Stories. Please turn to the next slide. & Other Stories will launch 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.
& 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, eight stores in total, of which two in Berlin. The 10 countries where shop online will be available at stories.com are, except for the ones just mentioned, we also will open in Belgium and the Netherlands and Finland. Before we start the Q&A session, a few comments to summarize. Please turn to the next slide. Just to illustrate H&M's rapid international growth. Before the end of this year, we will have more than 3,000 stores worldwide. It means that H&M has opened 1,000 stores in less than four years.
To give you some perspective, it took 57 years to expand with the first 1,000 stores. H&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 demanding market proves once again that customers like our collection and appreciate our strong offering. We increased profit by SEK 1 billion 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.
Looking at current trading, sales in local currencies increased by 8% in December, and sales in January are expected to increase by 5% in local currencies compared to the same month last year. From mid-January onwards, sales were negatively affected by very cold weather in many of H&M's markets in Europe. We believe strongly in our offering and are convinced that H&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&M. We invest in online and IT. We launched an entirely new fashion brand & Other Stories, and we broadened our product range. In other words, we see significant opportunities for continued growth for the H&M group for many, many years. We are now happy to take your questions.
Thank you. 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. We would kindly ask you to limit your questions to one per person. If you wish to cancel a request, please press the hash or pound key. That was star one to ask a question. Your first question comes from Simon Bowler. Please ask your question.
Morning, guys. First of all, just hoping just to clarify some commentary I saw coming out of your earlier call around the gross margin. Just to check, 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?
If we isolated look at those mainly three things, cotton prices, US dollar effect, and cost inflation, altogether we see that they are more or less having a neutral effect on our purchase prices for the first quarter.
Okay, fantastic. That's very clear. Just a couple other quick things, with one, just of the increase that we saw in OpEx come through from the fourth quarter, 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?
As we already in connection with the third quarter report stated that we will intensify our efforts and investments in rolling out online in new markets, existing markets, and also the mobile adoption to have a fully adopted mobile site. That's the reason for the increase in the OpEx in Q4. 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. As you said, the long-term investments are affecting the SG&A.
They will continue going forward as well.
Yeah.
If that was the question, right?
Yes. Okay, fantastic. Are there kind of similar quantums that we saw across the fourth quarter should we think about, or is there kind of another step up in online costs that you are expecting to see come through?
Yeah, as we also said in previous conference calls, we will have a higher level on the long-term investments during 2013, exactly how they will be distributed in the different quarters. They will be on a higher level than 2012.
Of course, cost of sales will depend on the top line development.
The top line
which is impossible to say. It's not just the pure online investment. This is, as Jyrki has said, all the long-term related investments, including the new offering, the broadening, et cetera.
Yeah, sure. Okay. Then just one final one. Just on the balance sheet, there's a new category called capitalized expenditures, that's coming about 631 million SEK. Can you just give some color on what that is? Is that in any way linked to online?
Yes. One part of it is online. It's our long-term investment in online, IT, et cetera. The IAS accounting rules say that we have to capitalize those costs when we are in a development phase. It's IT systems, et cetera, that has to be capitalized.
Okay. In previous years, I presume there would've been similar costs coming through for IT expenditure. Was that previously being expensed through the P&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. Those costs has to be expensed in the income statement. When we are moving to development phase, the IAS rule states that you have to capitalize those costs.
Okay, fantastic. Very clear. Thanks very much, gents.
Please be reminded to limit your questions to one per person at one time. Your next question comes from Cédric Rossi-Laga. Please ask your question.
Yes. Good afternoon, gentlemen. Just a question on your Forex and the impact of the US dollar to euro currencies. Could you maybe help us understanding your hedging dynamics? If currencies were staying at current levels through the whole year, what kind of impact should we be looking at for 2013? Thank you very much.
Yes. If you start with a transaction impact, meaning when we buy, place orders today, most of that is done in US dollars because around 80% of the sourcing is done in Asia, where we still pay most of the garments in US dollar. Of course, if the dollar is more expensive compared to the euro, that is a negative in the short term, and vice versa. Right now, I think the currency is about the same level as last year, perhaps slightly less expensive. If they stay like this, that's pretty much neutral going forward. Since we hedge continuously, theoretically you can say that what we buy today, you will see in the figures, let's say three, four, five, six months from now in the P&L.
You have the translation effect, which is, of course, when we translate all the results from the subsidiaries into SEK. 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. Right now, the SEK is stronger compared to most currencies compared to euro.
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 the combined effect of currency transaction effects and cotton prices, et cetera, were negative for the year.
Okay. Thank you. Thank you very much.
Your next question come from Anne Critchlow. Please ask your question.
Thanks. It's Anne Critchlow from Societe Generale.
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. We are very cautious to give you a date, 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?
If we've learned something, we're very humble with dates. Of course, it's in our own interest to launch it as quick as possible. I promise you, we will come back to you as soon as we have something new to tell you.
Okay, thanks. Just very quickly, CapEx guidance for the current year. Sorry if I missed that.
It's somewhere between seven and seven and a half billion SEK for 2013. 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. We will come back to that later during the year if we see some significant changes.
Thank you.
Your next question come from Jörg Nowicki. Please ask your question.
Good afternoon.
Good afternoon.
Can you hear me?
Yes.
Okay, perfect.
Loud and clear.
My first question is actually a question I've been asking you for years, but I'm not giving up because you never gave me an answer. Can you give me a figure on how much turnover H&M is doing online with its mail order business?
Yes, you asked the question, and it's a good question, and my answer, unfortunately, will be the same. However, I can give you some more flavor, perhaps. It is, of course, that online is becoming more and more important for the industry and, of course, for H&M. That's why we invest even more in online. We just launched the mobile adaptive site two weeks ago, which has been very well received, and we are looking forward, again, to the U.S. launch this summer. As we said before, we are investing a lot to be able to roll out online sales in all our markets. Unfortunately for comparative reasons, we don't break out the different parts. Also, I think it's very important we talk about the multi-channel strategy, and it's all linked, the online and the retail numbers.
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 at the store. 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.
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 it. The growth rates in the industry for online.
H&M, by doing its 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 in general, of course, online sales are growing faster since they started from a lower, from almost nothing 10 years ago. Of course, I expect that online sales will become even more important for the industry and for H&M going forward.
Another question. International retailers like Mango and even Bestseller, they work on their prices and are offering now lower prices. Of course, there is the incredible success of Primark. Is H&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. Also we are focusing a lot on the sustainability part as well. We will keep to our business idea to have the best combination of these, and that we will stick to.
When exactly is & Other Stories opening? Can you say that? Then you were mentioning two stores in Germany. I only knew about one.
Yeah, there will be two in Berlin.
Okay.
One in [Foreign language]Kurfürstendamm[/Foreign language] 234 and one in [Foreign language]Neue Schönhauser Straße[/Foreign language] 15. Sorry for my German.
That's okay. They will open simultaneously, like all the stores will open?
No, 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 McClellan. Please ask your question.
Yeah. Hi, good afternoon. I've got a couple of questions, please. Firstly, can you confirm, in the fourth quarter you talk about the comparable store OpEx to sales ratios improving 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, of course there's always an OpEx inflation when it comes to indexations for rent and also salaries. They vary from country to country and of course, over time.
That's the reason why we are planning for increase in like-for-like sales every year because there is an underlying inflation. We have been managing to keep a good cost control and react on the sales figures. In the long run, of course, it's important that we have a positive like-for-like.
Sure. 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, et cetera, so that figure can vary.
Okay.
We've proven historically, when we had, I think it was three years ago, we had -5% like-to-like through the year, and we managed to balance that very well by being more efficient in the stores. I don't want to give such a fixed number.
Okay, great. 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. It can also be to broaden an existing concept or format that we have.
Finally, can you confirm if the group level is 100, what is the China sales density in comparison to that 100?
It's lower.
By a noticeable amount or just marginally?
It's up to you to estimate, it is lower because the retail market is still premature, it's developing quickly.
Okay. Thank you very much.
Your next question comes from Fraser Ramzan. Please ask your question.
Oh, thanks very much. Good afternoon.
Hello.
I 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 one-off startup costs in nature, but instead ongoing costs you have to bear in the business, such as people? Can you indicate whether or not in quantum, in SEK, 2013 is planned to be a bigger incremental number or the same number or less, please?
Yeah. Coming back, if it's startup costs or costs that will continue, it's of course a mix. Some of them are startup costs, some of them will continue during 2013. We don't want to give you any forecast how much it will be during 2013. As we said, it will be on a high level still. We have long-term investments that we will continue during 2013, and our assessment is that they will be on a higher level than in 2012. Of course, we will see future revenues as well. Up to date, we haven't seen much of the revenues because-
Right
as you see online. These are long-term investments which are necessary, and we will build up the strong H&M for the future.
Okay. 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 % of sales is a different question, it will be a larger absolute amount.
Yeah. Per definition, if we are expanding the SEK in Swedish crown, if you mean that will increase from year to year when we are continuing our expansion.
Okay. You're not necessarily saying it will rise as a % of sales.
No, it's depending on how the top line is developing.
Great. Thank you very much.
Thank you. Welcome.
Please be reminded to limit your questions to one per person at one time. 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? Simply because you're talking about relatively flat input costs. Obviously, 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 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 three or four 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. How the gross margin will develop, that's totally up to the decisions that we will take when it comes to our customer offering. This was not the guidance.
Okay.
This was these three, four isolated main input factors that we were commenting on.
All right. Point taken. 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 top line, obviously kind of selectively market by market, et cetera. Kind of two 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?
We're absolutely happy with the decision and we will continue. We're very long-term, as you know. We always strive to work with the improvements, starting with the customer offering. Whether how much we invest, meaning taking the mark down, that's another question. At the same time, we work with efficiency gains, et cetera. Yes, the consumer environment is very demanding and very difficult at the moment. I think last year, the 11% increase at top line is a proof, again, that we are on the right track and it's going the right direction. The customers appreciate what we do. For this year, 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. Just one final question in terms of stores. Given that your store expansion now includes four smaller formats going forwards, how should we think about your average store size? Is that going to start declining as these smaller formats make up a larger number % of the whole, or are they still going to be too small to influence the overall kind of average square impact from new space?
That could vary. If you talk about 2012, the average store size is actually somewhat larger. The smaller formats haven't had any greater impact yet. Who knows about the future? Another thing is that even though they might be smaller in square meters, they're not necessarily smaller in top line, if you have a strong sales density.
Fine. Just a final point in terms of depreciation. Presumably that capitalized depreciation number goes into the pot for the current year, you're also talking about an acceleration in CapEx in the year ahead. Should we be thinking about that depreciation line starting to move ahead fairly rapidly over the next couple of years?
Of course, the capitalized intangible assets that we have in the balance sheet, SEK 600 million. When we are starting to depreciate, of course it will. It will not be a dramatic thing. Of course, when we are starting to take and use those intangibles, of course the depreciation will be there.
Tremendous. Thank you very much.
Welcome.
Your next question comes from Richard Chamberlain. Please ask your question.
Yeah, thanks. Afternoon, everybody. Just to follow up on Simon's question then, on depreciation, why did depreciation go up so much in the second half, please? Was that to do with those large long-term investments you were talking about?
Yeah. Partly, 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, then when we are ending up the year in Q4, then we are calculating it more exactly. All the effects will land in the fourth quarter. That's the reason. Looking at the yearly level, it's increased by 13% something. That's the way we are doing it, and all the corrections when it comes to depreciations are done in Q4.
Understood. Okay, thanks. Then just another quick accounting one then. Why was the cash tax paid figure this year so much higher than the P&L charge for last year and this year, actually? The amount of cash tax is quite a bit higher. Is there a reason for that?
Yeah, if we look at the effective tax rate, for instance, we have some tax receivables in the balance sheet.
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% to 22%. In Sweden, you have the possibility every year to set one quarter of the Swedish profits to accrual fund to postpone. It's a kind of untaxed reserve. Therefore, this year, the paid tax has been higher.
I see. What's your effective tax rate outside Sweden at the moment?
It differs very much. From Ireland, I think they have 12.5% to-
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. Yeah. Okay, thanks. Just one, again, on the gross margin. Just reading the statement, it looks like you were expecting a lower level of markdown in the first quarter, and I wondered why that was. Is that just because of the base of comparison, 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 Q4 report, our best estimate for the first quarter is that we will, as a relation to sales, that the reductions will be on the same level as in Q1 last year. Of course, that's our best estimation. 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 2010. What we say now is that our best estimate at this point is that it will be a neutral effect on the gross margin compared to last year's first quarter.
As always, we still have one month to go, looking at the market, it's still a lot of reduced garments on the market, of course, if the market is starting to aggressively making campaigns and having killer prices, most probably we will also follow that. Also the turnover, it's really tough, and it's dependent also, if we don't get the good sales development during February, it will not most probably be flat compared to last year. It will increase. It's still too early to say.
Right. Okay. Just to be clear, you were planning a lower level of markdown in Q1, were you?
No. We are planning our best assessment. Our planning is 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. Yeah, thanks. Yeah.
no, it's a neutral effect on the gross margin.
I'm with you. Okay.
What I said, that can be a difference after February.
Yeah. No, sure. Okay. Thanks very much.
Thanks.
Your next question comes from Niklas Berg. Please ask your question.
Yes, good afternoon. I also have a question on accounting in the quarter. I was looking at the 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 2011. My question is then, 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 dramatical changes. Of course, always, it's a part of the negotiations with the suppliers, but nothing dramatical change compared to last year.
Okay. Perfect. Thanks. Just a final question, which I think have been touched on before, but anyway. Are you saying basically, just for the record, that 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. We don't see any dramatic changes in the space conversion.
Thank you very much.
Thank you.
Your next question come from Peter Farren. Please ask your question.
All answers for me, thanks. I just maybe follow up on the OpEx. I was wondering if you could tell us if assuming 11% currency neutral growth for 2013 is reasonable. I have heard everything you have had to say. It was basically a yes or no answer I am looking for.
As you probably know by now, we never give any forecasts regarding these kind of figures, more than saying that we always have a very tight cost control and very cost conscious in the group.
Okay, thanks. 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. Then we will make the final calculation in connection with the year-end closing. As for 2012, we used 26% during Q1, Q2, Q3, and ended up with 24.3%. We want to be cautious, and we will use 24% as a tax rate during Q1, Q2, Q3.
Okay.
Most probably, as it looks now, we will end up in a lower tax rate than for the whole financial year.
Yeah. Okay. Thank you.
Your next question come 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 SEK 17 billion left or a little bit more concerned on the basis that you might be looking at other metrics or the scale of that outflow?
Yeah, it's correct as you say. Still, we have a strong financial positions within H&M 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, et cetera. We are confident that we have the opportunities to continuously invest and expand in a really good, rapid pace.
Right. If conditions did remain difficult, you'd be happy to run with another cash outflow, at least in the current financial year?
I would just go, of course, looking into the future is really difficult to speculate about that. 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 and 2012.
Right. Okay. 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 it other markets where you've had to follow with more promotional activity?
Well, we are running the business on 48 different markets. It's very difficult for us to specify in each market, in some countries it's been worse, in some others, maybe not as tough. I don't want to go into detail for each market. Sorry.
Any comment on the top six markets then? We don't need a comment on all.
Andrew, what we give you is the consolidated or the aggregated view that we have for the group.
The picture is that the activity is on a high level when it comes to markdowns on more or less all the markets. I think the reason is that it's the same global players in most of the countries, and everybody faces tough macro environment. 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. Most retailers probably also have adapted the inventory levels to tougher conditions in those markets.
Good. Okay. Thanks very much.
Your next question come from Richard Jess. Please ask your question.
Thanks very much. Just to 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 story we have in eight countries have around 50ish, 50-plus% of the total assortment, and I don't think the U.S. will differ dramatically from that. 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. 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've 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. I'm 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. As I said, the development is going in that direction. 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 come from Chris Chaviaras. Please ask your question.
Good afternoon, guys. I had one question actually, again, regarding your longer-term thoughts on the investment. I was about to ask when the investments in the IT and the online capabilities will annualize. You said that you're going to continue with those. I was wondering, are there any big projects that we should be aware in the next year?
How should I put this? There are lots of different projects, and some of them will be launched. As I said, two weeks ago, we launched the mobile-adapted online site. Actually, today, we launched online sales in our 18 countries for Weekday. There will be deliveries throughout the year. When it comes to new projects, who knows? There is nothing that we have communicated as of today, but I hope there will be new projects going forward.
Agreed. It stands to reason that given that you had all this one-off investment, this 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?
As we said, for 2013, we see that these long-term investments, of course, some of them will be annualized, some of them will continue. Looking aggregated, the long-term investments in 2013 will be on an even higher level than 2012. Of course, in the long run, who knows? In 2014 or 2015. As Nils said, we most probably will have always long-term investments. Of course, now we have really much bigger, the online is one big. We have looking into IT systems, IT platform, et cetera. Still for 2013, the long-term investment level will be on a high level.
Okay. Thanks for that. My other one is on the profitability of the online model. I know you don't split it out, 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. As we said, it's in line with the retail operation.
Right. Okay. Thank you very much. Thanks for that.
Our next question comes from Chiara Battistini. Please ask your question.
Hi, good morning, everyone.
Good morning.
Good morning. Would like to follow up on, first, COS, Collection Style. What is driving their success, and how do their metrics differ from H&M? 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? Just lastly, on design collaborations, they've been an element of your success, what are the plans for 2013? Thank you.
Okay, let's see if I remember. First one was COS.
Yes.
As you see, we are happy with COS and the development, also made an exception to the rule, we commented that the profitability is also very high. It's in line with H&M already. The reason for the success, again, I don't think there is just one, but the customers, they love it, I think the combination of fashion, quality, and price in the higher price segments have been very successful, there is a great demand for COS, actually globally today, I would say. We're very happy about that. Your second question was, could you repeat again, please? Expansion, right?
Sure. What benefit 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? Are occupancy costs lower as you're more important to developers?
Of course, we get economies of scale. If you start with the brand H&M, we are today a global brand and very highly rated. 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 are an important tenant. Of course, that gives us a strong negotiation position. When it comes to other synergies, of course, we have processes for opening stores, for refurbishing, et cetera. Everybody, every company wants to expand, but it's easier said than done. We do it every day. We opened literally one store per day this year. On top of that, we refurbish even more. We get a lot of economies of scale by expanding the way we do.
Just design collaborations. What are you expecting for 2013?
We are very happy with the design collaborations we've done. The last one was Margiela, very appreciated again by customers. 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. It's made by our own designers, and we expect it to be a very big success again. Of course, the Conscious Collection is made by sustainable material, and you can read more about it on the website. When it comes to external design collaborations, we never talk about them really so much in advance because we want them to be a future. We will see.
Surprise
surprise, sorry. We will see in the future.
Thank you.
Your next question comes from Omar Hassan. 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. Seemed like it popped up a little bit in the fourth quarter relative to the sales growth, relative to the change you historically see, the seasonal change from third quarter to fourth quarter. Do you have any thoughts on that that you could share?
Yeah. You shouldn't see it sequentially, you should see it year-on-year, and it's the same level as last year compared to sales. Already, as Jyrki said, last year it was higher than expected due to the extremely warm autumn in 2011. Unfortunately, we didn't increase sales as much as planned this autumn 2012 again. The level is somewhat higher than planned, and thus the reduction we talk about, that they will probably remain at about the same level as last year, which were higher than the year before.
Understood. Thanks. 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 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? Could you see eventually, if online becomes ultimately very successful, as a slower physical store growth rate?
I know that there's a lot of talk about this in the industry, and I'm sure in long-term that could happen. 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 the channels really complement each other in a very good way.
Got it. Really quick, lastly, any thoughts on the dividend this year? Didn't see it bump up last year, but historically, you've been very 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. 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. 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 come 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.
You're welcome.
I already bought a shirt, and it works very well. Very nice app. Thanks very much.
I saw online sale increase today, thanks to that.
You bet. Just a quick question. How do you feel your price competitiveness is at the moment?
It's good. We see that in customer service that we do regularly. Of course it can always be better. That's why we always work with improvements. We are happier today than we were in the past because we are working with continuous improvement.
Very clear. Thank you very much.
That was star one to ask a question and the hash or pound key to cancel. Your next question come from Rebecca McClellan. Please ask your question.
Yeah, hi there again. Just to confirm that the SEK 7 billion-SEK 7.5 billion CapEx that you sort of guided towards for 2013 compares to SEK 6.8 billion in 2012?
Yes.
It's not the six, it's a 6.8, yeah?
Yes.
Okay, thank you.
Welcome.
Your next question come from Simon Bowler. Please ask your question.
Hi, chap. Just a quick follow-up from myself. Just being that you've mentioned the revenue uplift to come through from long-term investments, obviously we've got some visibility now on when we should get some revenue uplifts through from the new brands, when we should get some revenue uplifts coming through from online in the U.S. in particular. 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 timeframe is around seeing any uplift or your hopes around seeing any revenue uplifts come through from any 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. 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 Ramzan. Please ask your question.
Oh, 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%? 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. If it's 100%, then it's really important, and we need to know about it.
Sorry, we prefer not to quantify the amounts. Yeah, sorry for that.
How long is a string?
Okay. Is it very different in quantum between the SG&A line and the gross margin investments in terms of the absolute amount of increase?
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. 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.
Okay. Sorry, this 10% point, you were opening 10% or thereabouts more space. 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.
Yes.
I agree.
Yep.
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., et cetera. Exactly how much that will affect the share of sales or the increase in 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. I wouldn't put any dramatics in this. The guidance is that they will continue during 2013, but no dramatic.
Right. 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, yeah?
Yeah. Of course, if we see something during the year, we will of course comment on it.
Not right now. Okay.
Well, no, we do give you the information that we will continue, and the investments will increase.
Okay. Thank you.
Okay.
Thank you.
Your next question comes from Niklas Famm. Please ask your question.
Hi, guys. Again, just one final thing for me. Would you care to give us some idea of approximately how store expansion will look this year, the 325 net openings on a quarterly basis, please?
It's pretty much the same pattern as 2012, I would guess. That's my best guess. There will always be differences between the quarters. If you look at the numbers right now, I think we already have more stores this year in beginning of Q1.
Maybe a little bit more considering that we will open up another stores during the spring, et cetera. Nothing dramatically, compared to last year.
Thank you very much.
We have no further questions registered at this time, sir. Please continue.
Just one correction before I close. I think I mentioned the wrong figure for SG&A for the full year in SEK, they increased by 10% and not 12%. I think I said that. Sorry for that. Closing remarks. Thank you all very much for participating in this conference call, very long one, and welcome back for the first quarter results on the 21st of March. Bye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.