Good afternoon, ladies and gentlemen, and welcome to the H&M six-month report conference call. At this time, all participants are in listen-only mode. Later on, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, you can press star 0 on your telephone keypad. Just to remind you, all this conference call is being recorded. I'll now like to hand over to the chairperson, Mr. Nils Vinge. Please begin your meeting, and I'll be standing by.
Thank you very much. Welcome to the telephone conference on the occasion of H&M six-month results. The presentation slides are found on our website, h&m.com. Our CFO, Jyrki Tervonen, is with me today, and we'll be happy to answer your questions after the presentation. It's been a strong second quarter and first half year for H&M. The year started well, and the positive development continued into the second quarter. Our spring collections have been well-received, and we've continued taking market share in a fashion retail market that remains challenging. We have increased our profitability. Please turn to the slide, second quarter 2012. Sales, including VAT, increased 12% in local currency in the quarter. In comparable units, sales were up 2%. Net sales grew 15% to SEK 31.7 billion.
The strong development is proof that H&M's attractive customer offering is being appreciated in all our 44 markets, in big as well as in small cities, and in countries with strong economic growth, as well as in countries with a tough macroeconomic climate. Please turn to the slide, sales per market per Germany is still by far our largest market, with 22% of group revenue. Our sales have developed well despite a slow clothing market. The strong development in the U.S. continues. Sales increased by around 30% in local currency in the first six months. We've had many successful openings, for example, our first store in Houston, Texas. Sales in the U.K. were also strong, with an increase of 16%. Our rapid growth in Asia, and especially in China, continues. We have more than 100 stores in China now.
Since Q2 last year, we've opened 42 stores, and our expansion continues. Sales in China were up by 47% in the first half of the year. In Japan, sales have developed well following a tough year last year, and we see continued great potential for H&M in Japan. All our new markets, with Bulgaria being the most recent addition, have performed well. Also in our franchise markets, sales have continued to increase, and both we and our franchisees are satisfied. Going back to the second quarter, please return to the slide, second quarter 2012. Gross profit for the quarter increased to SEK 19.5 billion, corresponding to a gross margin of 61.7%, unchanged from last year.
The gross margin is a result of many different factors, external as well as internal, together with the decisions we make in line with our strategy to always have the best customer offering in each market. In the quarter, the overall effects of the previously very negative external factors, such as the cotton price, were more or less neutral. The US dollar, our most important sourcing currency, was also relatively neutral year-on-year for the products we sold in the second quarter. For the second half of 2012, the US dollar will have a negative effect since it has strengthened materially against most of our sales currencies. We, however, have a long-term approach, and as always, we will strive to offer our customers the best combination of fashion and quality at the best price.
Looking at markdowns in relation to sales, they were at the same level as last year, and thus the effect on the gross margin was neutral. H&M's long-term investments that are aimed at broadening the total offering of the group, those investments continue. Like we said in connection with our first quarter results, one of them is an entirely new store chain that we will launch already next year. The name will be & Other Stories, and it will be a great complement to our existing brands. In the second quarter, in relation to sales, these investments were smaller than in the first quarter. Over to operational costs. Cost control in the group remained good. Costs in comparable stores decreased from second quarter last year as a proportion of sales. SG&A was SEK 12.7 billion in the quarter, up 10% in SEK and 8% in local currencies.
The increase is explained mainly by the expansion. As a share of sales, costs decreased to 40% from 41.5%. Just to remind you, in the second quarter last year, there was a provision of SEK 248 million related to H&M Incentive Program. The main part of that provision was booked as SG&A. The operating margin increased to 21.8% from 20.3%. It is a high level for H&M historically, but above all, it's a high level compared to the industry. Net profit for the period was up by 23% to SEK 5.2 billion, and corresponding earnings per share of SEK 3.15. Now looking at some key figures for the period. Please turn to the slide, key data. Stock in trade was SEK 11.3 billion, an increase of 8% in SEK and 6% in local currencies compared to the same time last year. The increase is due to the expansion.
The stock in trade is well composed and at a good level. Cash flow from current operations was SEK 10.7 billion. The main explanation for the increase is the increase in profit and the development of stock in trade. Investments were SEK 2.6 billion, above all in new stores, but also in IT and logistics. Despite a dividend of SEK 15.7 billion paid out in the quarter, our finances remain strong. Liquid funds and short-term investments amounted to SEK 13.5 billion. Now some words on our expansion. Please turn to the slide, expansion. We added a net of 84 stores in the second quarter, and the group had a total of 2,575 stores at the end of the period, of which 2,446 H&M, 51 COS, 55 Monki, 19 Weekday, and four Cheap Monday. Of the total, 75 are franchise stores.
Our expansion plan remains intact. In 2012, we plan to open around 275 stores net. We are growing in all our markets. China, the U.S., and the U.K. are the three countries where we plan to open the most stores. We're adding five new markets this year. During the spring, we opened our first three stores in Bulgaria. All of them have been well received by customers and will be followed by more openings this year. This autumn, we will open in Mexico, Latvia, and Malaysia, as well as in Thailand, which will become a new franchise market. All of them are very interesting markets, not least Mexico. The store in Mexico City will be the first H&M store in Latin America, and we see great demand for H&M also in this part of the world, where people are waiting for us to open.
COS continues to do very well and will open in six new markets only in this year. In May, COS opened in Italy and Finland with very successful openings in Milano and Helsinki. Last week, the first COS store opened in Poland. Next week, Hong Kong, followed by Austria in August, and later this year, Kuwait, via franchise. This autumn, we will also expand our online sales with the launch of H&M shop online in the U.S. We are looking forward very much to offer this opportunity to customers in the world's largest online retail market. Looking further ahead, our global expansion continues. Next year, we will again open stores in several new markets. Contracts are signed for the first three stores in Estonia that will open in Tallinn in the autumn of 2013. We're also opening Indonesia via franchise.
Before we start the Q&A session, a few comments to summarize. We've had a strong first half year. We have strengthened our position further. We have increased sales by 12% in local currencies and by 3% in comparable units. The fact that we continue taking market share under the challenging conditions that still prevail in many markets with economic austerity and restrained consumption shows not only that we have strong collections that are appreciated by our customers, but also that our business model works well, also in times of economic weakness. Conditions will always be changing in the world around us. For example, we've seen movements in currencies and the cotton prices. We will always be exposed to external changes. We will keep our long-term focus.
This means that we will always put the customers first and see to it that we have the best customer offering in each market. We're now happy to take your questions.
Ladies and gentlemen, if you do have a question at this time, please press star one on your telephone keypad. To cancel your question, press the hash or pound key. Once again, if you need to register for questions, please press star, followed by one on your telephone keypad. To cancel, press the hash or pound key. Okay, we do have a question coming from the line of Omar Saad. Please go ahead with your question and announce your company's name. Please.
Thank you. It's Omar Saad from ISI Group. Nice quarter, guys. Good job.
Hi there.
It looks like there's been an inflection in the markdown cadence. This quarter, we're stable year-over-year. What are the factors that you think are driving that?
The most important factor, of course, is the strong sales, our collections have done well-received, there are a lot of different things to explain that. Yeah, we are happy.
Okay, great. On the cotton comment you made in the prepared remarks, how do you think about balancing the benefit of lower cotton costs versus the rising wages as you think about your cost of goods? Thank you.
Yeah, there are several different factors, both external and internal, that affect our purchasing costs and exactly how we choose to balance them. That will, of course, always be from our view, looking into our customer offering in a competitive market. For competitive reasons, we choose not to exactly go into how we will use different external factors. The most decisive will be the decisions we will make when it comes to our customer offering. That will be decisive for the gross margin. I have to also remind you that there are a lot of other internal and external factors which are affecting the cost of goods. For H&M, as we are using an income statement by function. It's not only the pure sourcing costs. There are plenty of other factors as well.
Thank you. Nice job, guys. Good luck.
Thank you.
Thank you.
Our next question comes from the line of Richard Chamberlain. Please go ahead with your question announce your company's name.
Thank you. Afternoon, gentlemen.
Afternoon.
Afternoon.
It's Richard here from Merrill's. Could I just ask a question on the U.S. market, please? Another strong performance there. Did you see a significant difference in performance on the East versus the West Coast during the quarter?
The performance in the U.S. have been strong all over the continent, both in the East Coast, Midwest, and the West Coast as well. Today we are also in other parts of U.S. We see a strong performance all over the country.
Okay. Thanks for that. Then, just on the gross margin, these long-term investments that you've made, that you said were obviously less of a factor in Q2 compared to Q1. I just wondered if the new store chain is most of those investments, or is it only a small part?
It's one part. There are different other investments as well in broadening the total customer offering within the H&M as well. Another store is one of them, and the long-term investments, they will continue in the coming quarters as well, but they will, of course, vary between the quarters. In Q2, the share of sales was less than in Q1, and it's simply due to that Q2 is a bigger quarter when it comes to turnover.
Okay. Should we expect then a slightly lower proportion in the second half of those investments?
As I said, it's also if you're looking into the share of turnover, it will be dependent on how the turnover will develop during the third and fourth quarter. The impact as a share will be, of course, decisive on the top line.
Right. Okay. All right. Thanks very much.
Thank you.
Thank you.
Next question comes the line of Peter Faurholt. Please go ahead with your question, announce your company's name.
Good afternoon. Peter Faurholt from Bryan, Garnier.
Hi.
Hi. First question is on the gross margin because it was flat in Q2. You indicate that discounting the US dollar and cotton prices were all flat. There's a negative from your long-term investment in the buying office, et cetera. I was wondering what the positive was.
What we actually are saying in the report, we are looking into those four, five factors that we have been talking about the last year, which were significantly negative in the past quarters. That is mainly the cotton prices, it is the wage inflation in the sourcing countries, it is also transportation, it is the capacity of these suppliers, and then also this US dollar effect. When looking overall in those four to five factors, the effect is more or less neutral compared to the corresponding period last year. The long-term investment, as I just said, they will continue. It is a big change from quarter one when it comes to those four to five factors. Still, I have to remember there are plenty of other factors as well affecting our cost of goods sold and, of course, how we choose to work with our customer offering.
It is only those four, five external factors that we are commenting on in the report.
Yeah. What I am trying to understand, given all those external factors you say had broadly no impact in Q2, and that your long-term investments had a negative impact, even if it is more than Q1, that there is obviously a positive in there somewhere because you achieved a flat gross margin overall.
Yes. Exactly. As I said, there are maybe 20 to 30 different factors.
Okay
Year-on-year change as we are using this income statement by function. There are our costs when it comes to design, our logistics, our buying organization, our production offices, et cetera. There can be smaller changes in a quarter, but year-on-year, it can be the opposite change. +10 basis points last year, -15 basis points this year. There you already have a year-on-year effect of 25 basis points.
Yeah.
No significant ones.
Yeah. Okay, thank you. A quick second one if I may, on Bangladesh, if you could just give us an idea of how you're being impacted, if at all, and if you're managing to shift production out of the factories which are being impacted by riots.
We are, of course, following the situation very closely, it's correct that some of our suppliers are affected. We have all in all between more than 700 suppliers in the group, we think we can handle this.
Okay. Thank you.
Our next question comes from the line of Fraser Ramzan. Please go ahead with your question, announce your company's name.
Good afternoon, Fraser Ramzan at Nomura.
Good afternoon, Fraser.
Hi there. Just firstly, a question on markdown. When H&M says its stock or its inventory level is good and well composed, and it's up by less than sales in the quarter, should we think that that means you might have a pretty favorable markdown impact in the coming quarter?
It is far too early to say actually anything about the markdown effect in Q3. We've just started the summer sale in some countries, still it's over two months still to go. That's correct that we are satisfied with the level and the composition of the stock in trade as going out from Q2. Yeah, it's too early.
Okay. Thank you.
Thank you.
Thank you. Just, if I might just add to that, obviously, you've kindly given us an outlook for currency for the second half of the year, which as you say, quite visibly has swung to the negative. Given broadly your sourcing lead times and your level of commitment at this time, is it fair to say that at net average unit costs are likely to be down in the second half, taking into account all those different factors that you just cited?
No, I don't think you could put it that simple. There are, as Jyrki said several times, maybe 20, 30 different factors affecting. The most important thing regarding the gross margin is, of course, how we decide to work with the customer offering. Again, there are not things like how we succeed with the efficiency improvements and with the negotiations, et cetera. I refrain from giving you a guidance about the net price. Sorry.
Okay. Effectively, your commercial policy will determine whether or not you actually achieve what gross margin you actually achieve. Is that fair to say?
Absolutely, always.
Yeah. Okay. Thank you.
Our next question comes the line of James Merriman. Please go ahead with your question, announce your company's name.
Hi. Thanks very much. It is Jamie Merriman from Sanford Bernstein. My first question is just on the SG&A. It was very impressive cost control in the quarter, and I was wondering if there are any specific actions that you took in the quarter to control cost.
As we said earlier, we are always working with our cost structure and the efficiency. We have a strong cost focus within the H&M group. There are no special. It is fine-tuning, finding out, planning better, et cetera. Nothing dramatically. We have done a very good job in that part as well during the second quarter.
Okay, thanks. Then just one more question, if I could. Just in terms of the open-to-buy and the commitment, it seems like you've gotten the benefits of flat cotton prices sooner than I would have expected. I was wondering if there's been any efforts to increase the open-to-buy or the level of your commitment going into this season.
Yes and no. We have always an open-to-buy in order to react fast, and in some cases, we can be very fast. Then, of course, with strong sales, the chance of, or the opportunities for fast lead times increase, and we can act very quickly. In a way, you could say that is one effect. That, of course, affects the lead times. Again, I'd like to remind you that when we talk about the six months, et cetera, that's very theoretical. In reality, it's never that simple.
Okay, thank you.
Our next question comes from the line of Rebecca McClellan. Please go ahead with your question, announce your company's name.
Yeah. Hi there. This is Rebecca at Santander. Just on OpEx again, you said that in the second quarter, the like-for-like OpEx was negative. My question is that sustainable over the third and fourth quarter? Which costs on a like-for-like basis are being reviewed, please?
Yeah, the like-for-like OpEx was on a better level than the last year. We are looking into all different kinds of costs when it comes to OpEx, and we have a strong focus on that. A lot of times we get a question about the share of sales. For us, the most important is to have a really good control over the year-on-year development within our operations. Still, we will continue to make those investments that we feel is necessary because that will even give a strong H&M in the future, and we have the financial strength to do that.
Just to clarify, Rebecca, the costs were down in relation to sales, not in absolute terms in the comparable stores.
Yeah. You think that in the second half, we can continue to expect that trend?
As I said, we don't give any forward-looking statements when it comes to cost development, we are confident with the way we are working with the OpEx. We will still do those necessary investments that we need to do. If it's about share of sales, that will of course then be dependent on how the turnover develops during the second half year.
Okay. Just one more question, please. What is the like for like that the business needs in order to have operating breakeven? Is that possible to quantify?
No, we don't give such a number. It's not that simple the way we see it, but we always look for efficiency gains and improvements, and always try to have a good cost control.
Okay, thank you.
Our next question comes from the line of Nicklas Fhärm. Please go ahead with your question, announce your company's name.
Yes, SEB Enskilda. Good afternoon.
Good afternoon.
I just want to ask you on the financials, I mean the financial net. As a percentage of full-year net debt, it seems like you have a significantly higher interest rate achieved on your net debt position or net cash position, sorry, especially compared to in Q1 most recently. My question is really, have you found alternative ways to invest your cash at this stage?
No, nothing dramatically. We are having quite a conservative financial policy, and of course, what we can see in some markets, it's that sometimes we even get better interest rates just on a current account instead of deposits. The share of deposits have gone down in some countries, but nothing dramatically.
Okay. It's just such a big jump. It was like the annual interest generated in Q1 was 3.2% in net debt, and now it's at 4.7%. Thank you very much for your answer. If you find any other details, please come back.
Yes, we will come back.
Thank you very much.
Thank you.
Our next question comes the line of Christodoulos Chaviaras. Please go ahead with your question, announce your company's name.
Hi, guys. This is Chris calling from Barclays. Most of my questions have been answered to be fair, or maybe not really answered. One question on investments. Maybe help us understand a little bit how you do these investments in the product offering, because if the magnitude is reliant on top line, it looks like they are fixed amounts, in which case, the more sales you do, the less impact they have in the overall gross margin. Is this the right way to think about these investments?
Of course, if the investment would be a fixed amount, then of course it would be totally dependent on the development on the top line, the share of sales, of course. The reality is not such static. It's also the amounts are differing from quarter to quarter. For this quarter, the main reason for the long-term investment is that it's a less share than in Q1. It's mainly the top line is much bigger in Q2 than Q1.
If I may clarify, maybe there was a confusion. I thought you said investment in price.
No, not price. I said product, not price. That's what I'm looking at, it's not investments in price.
No.
Exactly.
Long-term investment in other stores, et cetera. Yeah.
Cool. Thank you very much. That's very clear.
Our next question comes from the line of Anne Critchlow. Please go ahead with your question, announce your company's name.
Hi there. It's Anne Critchlow from SG.
Hello.
Hi there. I've got a question about where the sales trends improved the most. Some of the countries where the sales trends improved the most were Greece, which was quite surprising, and Italy and Ireland. Just wondered whether it's an anomaly or whether you can explain it?
We are very happy with the development in, I would say, across all our countries and markets, including Greece and Ireland, Portugal, Spain, Italy, et cetera. Of course, I think it's a strong statement that you mention it because it means we continue to invest in Greece.
We continue to expand, and that is the biggest driver. We are very happy, and the Greek customers appreciate more and more H&M.
It's really about the maturity of the store base?
No, not just maturity of the store base. It's about, as Jyrki said before, a lot of different things and about continuous improvements and also expansion, of course.
Okay. Thank you.
Welcome.
Our next question comes the line of Simon Irwin. Please go ahead with your question, announce your company's name.
Hi, Simon Irwin from Liberum Capital. A couple of questions. Just on price. Prices generally in apparel in most major markets started creeping up in the last six months or so. Can you just say what you've actually done with your average prices over, particularly with your spring-summer collection?
We have not raised our prices.
Right. You mentioned that your 2Q EBIT margin was relatively high by your standard and by the industry standard. Yet, if I look back, you've actually only been noticeably below that once since 2005. I was wondering what your message is with that. Is it that we should be cautious about assuming higher EBIT margins going forward?
I don't know how you have been analyzing the EBIT margin. Of course, some quarters have, in nature, a bigger EBIT margin. If looking at the performance for a second quarter, the 21.8% as operating margin in this year's Q2, I think, I can't remember it exactly, but I think we had a stronger Q2 in 2010, when it was almost 26%. It was driven quite much from our internal hedges and those effects that we got there.
Yeah.
There we had a really high gross margin as well. Looking the past three years, this is, except for 2010, I think it's the highest operating margin.
Well, you were actually higher than that in 2006, 2007, and 2008. You've done a consistently higher EBIT margin in 2Q for quite a long time, which is.
Yeah. Still, we are happy with this. For our measures, it's a good operating margin, and also considering the environment we are operating in. We are very happy with this operating margin.
I'm sure you are. Could I also just ask about Admin? Your Admin expenses were up 6% in the first quarter, but only up 1% in the second quarter. That, again, Admin seems to have been going up much faster in 1Q than 2Q, going back for several years. I'm just wondering, is there anything behind this?
Comparing to last year's second quarter, there we had a quite big increase. Last year's second quarter, we had this long-term incentive program, Hennes & Mauritz Incentive Program.
Yeah, even if you strip that out, you were SEK 845 against SEK 835.
Yeah
That is kind of a 1% increase.
Additionally to that, we also had investments in IT and other long-term investments that was really high in second quarter last year. There you see a really high increase there from the previous year. That's the reason for this increase of around 1% this year to the second quarter last year.
Great. Okay. Thank you very much.
Welcome.
Ladies and gentlemen, if you do wish to register for a question, please press star one on your telephone keypad now. Our next question comes from the line of Adam Cochrane. Please go ahead with your question, announce your company's name.
Good afternoon. It's Adam Cochrane from UBS here.
Hello.
Two questions, please. First of all, you're the only retailer I can remember recently that doesn't really mention the internet at all in the statement. Can you give any details? I assume that you're reasonably happy with the progress of the internet, but can you give any further details as to how you're doing on the internet in your existing countries? Secondly, it's really just a question on, you mentioned the capacity with regard to suppliers, primarily in Asia. Can you just give us a little bit of a flavor as to whether you're seeing excess capacity or better deals to be had from the Asian suppliers because of capacity issues?
First of all, regarding internet, I did mention that we are looking forward to the online expansion of internet sales that is in the U.S. this autumn. Yes, of course, internet is a more and more important role for the whole retail industry, of course, for H&M as well. We are investing a lot in IT online, as you know. Looking forward very much to this expansion, first to U.S., but then of course after the U.S., the ambition, the plan is to roll it out in the rest of the group. Very excited and strong development. Next question regarding capacity. It's true that it's looking, compared to last year, it's more capacity, which is good. On the other hand, the salary costs are higher. It's not so simple to draw any conclusions from that.
Okay. With regard to the internet, are you happy with the performance of the current website, et cetera, in all of your existing regions? Clearly, I know that you're very excited about the U.S. launch, but within your existing nine or 10 countries where you've got the internet, is it performing well, and certainly well above the group average?
We are very happy, but we don't split out the different channels, as you know, for proprietary reasons. We see them as very important complement to each other.
Okay. Thank you.
Once again, ladies and gentlemen, if you do have a question at this point, please press star, followed by one on your telephone keypad. Our next question comes to the line of Richard Jaffe. Please go ahead with your question and announce your company's name.
Thank you very much. It's Richard Jaffe from Stifel Nicolaus.
Hi there.
Hi. Very strong quarter. A couple of questions. You seem so successful really any country you enter. Are there any countries where you have some reservations, where you don't see it as straightforward an opportunity to roll out, in the southern hemisphere, perhaps?
No.
Any country-
We haven't seen that yet. That's one thing that we talk about that shows the strength, we think, about the business model and the business proposition that so far, in all 44 markets, it works very well and we've never failed in any markets. Of course, that gives us self-confidence and the reason to believe that it will work also in other markets. You never know. Each market is unique.
Maybe I should also add that not only that it works in all the markets we have entered so far, it also works in big cities, medium-sized cities, and also small towns. We can really penetrate the market very deep and go into even smaller cities.
No doubt. Obviously, the success is there. One more question on & Other Stories and its opening up. Will that be an international rollout from day one, or will that be local for the first year or two? I am thinking about visiting. I am sorry?
We are looking at an international launch next year, primarily in Europe, in large cities in Europe.
Okay. When the time comes, you will share with us those locations?
Absolutely. When we have more to say, we will tell you.
Okay. Thank you very much.
We appear to have no further question at this point. I hand the conference back to you.
Okay. Thank you very much for participating in this conference call. Welcome back for the nine-month results on the 27th of September. I wish you a nice summer.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your line. Thank you.