Afternoon, ladies and gentlemen, and welcome to the H&M 6 Months 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. And just to remind you all this conference call is being recorded. I'd now like to hand over to the chairperson, Mr.
Niels Wingate. Please begin your meeting and I'll be standing by.
Thank you very much. Welcome to the telephone conference on the occasion of H and M's 6 month results. The presentation slides are found on our website, hm.com. Our CFO, Jyrki Tarvanen 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 and M.
The year started well and the positive development continued in the Q2. Our spring collections have been well received and we have continued taking market share in a fashion retail market that remains challenging and we have increased our profitability. Please turn to the slide Q2 2012. Sales including VAT increased 12% in local currency in the quarter And in comparable units sales were up 2%. Net sales grew 15% to SEK 31,700,000,000 The strong development is proof that H and 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. Germany is still by far our largest market with 20 2% 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 1st 6 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 and M in Japan. All our new markets with Bulgaria being the most recent addition have performed well. And also in our franchise markets, sales have continued to increase and both we and our franchisees are satisfied. Going back to the Q2, please return to the slide Q2 2012. Gross profit for the quarter increased to €19,500,000,000 corresponding to a gross margin of 61.7 percent 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 U. S. Dollar, our most important sourcing currency, was also relatively neutral year on year for the products we sold in the Q2.
But for the second half of twenty twelve, the U. S. 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 and 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 Q1 results, one of them is an entirely new store chain that we will launch already next year. The name will be and other storage and it will be a great complement to our existing brands. In the Q2 in relation to sales, these investments were smaller than in the Q1. Over to operational costs.
Cost control in the group remains good. Costs in comparable stores decreased from Q2 last year as a proportion of sales. SG and A was €12,700,000,000 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%.
And just to remind you, in the Q2 last year, there was a provision of €248,000,000 related to H and M incentive program. The main part of that provision was booked as SG and A. The operating margin increased to 21.8% from 20.3%. It is a high level for H and M historically, but above all, it's a high level compared to the industry. Net profit for the period was up by 23% to 5,200,000,000 and corresponding to earnings per share of €3,150,000 And now looking at some key figures for the period.
Please turn to the slide key data. Stock in trade was €11,300,000,000 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 €10,700,000,000 The main explanation for the increase is the increase in profit and the development of stock in trade.
Investments were DKK 2,600,000,000 above all in new stores, but also in IT and logistics. Despite a dividend of EUR 15,700,000,000 pay down in the quarter, our finances remained strong. Liquid funds and short term investments amounted to €13,500,000,000 And now some words on our expansion. Please turn to the slide expansion. We added a net of 84 stores in the Q2 and the group had a total of 2,575 stores at the end of the period, of which 2,446 H and M, 51 Kos, 55 monkey, 19 weekday and 4 cheap Monday.
Of the total, 75 are franchised stores. Our expansion plan remains intact. And in 2012, we plan to open around 2 75 stores net. We are growing in all our markets. China, the U.
S. And the U. K. Are the 3 countries where we plan to open most stores. We're adding 5 new markets this year.
During the spring, we had opened our first three stores in Bulgaria, but all of them have been well received by customers and will be followed by more openings this year. And 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 1st H and M store in Latin America. And we see great demand for H and M also in this part of the world where people are waiting for us to open.
Kos continues to do very well and will open in 6 new markets only in this year. In May Kos opened in Italy and Finland with very successful openings in Milano and Helsinki. Last week, the first Costco store opened in Poland and next week Hong Kong followed by Austria in August and later this year Kuwait their franchise. This autumn, we will also expand our online sales with the launch of H and 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 and A session, a few comments to summarize. We've had a strong first half year. We've strengthened our position further and we've 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 and we will keep our long term focus. This means that we will put always put the customers first and see too that we have the best customer offering in each market. We're now happy to take your questions.
Okay. We do have a question coming from the line of Omar Saad. Please go ahead with your question and ask your company's name.
Thank you. It's Omar Saad from ISI Group. Nice quarter guys. Good job.
Hi, there.
Wanted to ask you about the 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?
Well, the most important factor of course is the strong sales. And there are collections that are well received. And well, there are a lot of different things to explain that. But yes, we are happy.
Okay. Great. And then on the cotton comment
you made
in the prepared remarks, how do you think about balancing the benefit of lower cotton costs and versus kind of the rising wages as you think about your cost of goods? Thank you.
Yes. There are several different factors both external and from our view, looking from our view, looking into our customer offering in a competitive market. But for competitive reasons, we choose not to exactly go into how we will use different external factors. But the most decisive will
be the decisions we will
make when it comes to customer offering that will be decisive for the gross margin. And I have to also remind you that there are a lot of other internal and external factors, which are affecting the cost of goods. So for HFM as we are using income statement by function. So 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.
Our next question comes from the line of Richard, Chalmers Lane. Please go ahead with your question and answer your company's name.
Thank you. Afternoon, gentlemen.
Good afternoon.
It's Richard here from Merrill's. Can 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. And today, we are also in other parts of U. S.
So we see a strong performance all over the country.
Okay. Thanks for that. And then the 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 HSTEM as well. So another story is one of them. And the long term investments, sales 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. So should we expect also should we expect then a slightly higher rate sorry a 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 3rd Q4. So the impact as a share will be of course the size of on the top line.
Right. Okay. All right. Thanks very much.
Thank you.
Next question comes from the line of Peter Farrin. Please go ahead with your question and ask your company's name.
Hello. Peter Farrin from Bryan Garnier. Hi. First question is on the gross margin because it was flat in Q2. You indicate that discounting in the dollar and cotton prices were all flat.
And there's a negative from your long term investment in the buying office, etcetera.
So I was
wondering what the positive was.
What we actually are saying in the report, we are looking into those 4, 5 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's the wage inflation in the sourcing countries. It's fossil transportation. It's the capacity of these suppliers and then also this U.
S. Dollar effect. When looking overall in those 4 to 5 factors, the effect is more or less neutral compared to the corresponding period last year. And the long term investment as I just said they will continue. So it's a big change from quarter 1 when it comes to those fortified factors.
But still I have to remember there are plenty of other factors as
well affecting our cost of
goods sold. And of our customer offering. So it's only those 4, 5 external factors that we are commenting on in the report.
Yes, yes. Ivan what I'm trying to understand that 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's more than Q1. There's obviously a positive in there somewhere because you achieved a flat gross margin overall.
Yes, exactly. And as I said, there are maybe 20 to 30 different factors. And year on year change as we are using this income statement by function then there are our costs when it comes to the design, our logistics, our buying organization, our production offices, etcetera. And there can be smaller changes in a quarter, but year on year it can be the opposite change, plus 10 basis points last year, minus 15 basis points this year where you already have a year on year effect of up 25 basis points, but no significant ones.
Yes. Okay. Okay. Thank you. And 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. And it's correct that some of our suppliers are affected. But we have all in all between more than 700 suppliers in the group. So we think we can handle this.
Okay. Okay. Thank you.
Our next question comes from the line of Fraser Ramzan. Please go ahead with your question and answer your company's name.
Good afternoon. Fraser Ramzan at Nomura. Good afternoon. Hi there. Just firstly a question on markdown.
When H and 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 means you might have a pretty favorable markdown impact in the coming quarter?
It's far too early to say actually anything about the markdown effect in Q3. We've just started the summer sale in some countries and still it's over 2 months still to go. But that's correct that we are satisfied with the level and the composition of the stock in trade as going out from Q2. But yes, it's too early. Okay.
Thank you. Thank you. Thank you. And 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 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, now several times maybe 20, 30 different factors affecting. And the most important thing regarding the gross margin is of course how we decide
to work with the
succeed with the efficiency improvements and with the negotiations etcetera. So I refrain from giving you a guidance about the net net price. Sorry.
Okay. So effectively your commercial policy will determine whether or not you actually achieve what gross margin you actually achieve.
As you're
saying always.
Yes. Okay. Thank you.
Our next question comes from the line of Jamie Merriman. Please go ahead with your question and answer your company's name.
Hi. Thanks very much. It's Jamie Merriman from Sanford Bernstein. My first question is just on the SG and A. It's 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. So we have a strong cost focus within the H and M group. So there are no special. It's fine tuning, finding out, planning better, etcetera, so nothing dramatically. But we have done a very good job in that part as well during the Q2.
Okay. Thanks. And 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. And I was wondering if there's been any efforts to increase the Open to Buy or the level of commitment going into this season?
Yes and no. I mean, we have always an open to buy in order to react fast. And I mean, in some cases, we can be very fast. And then of course, with strong sales the chance of or the opportunities for too fast lead times increase and we can act very quickly. So in a way you could say that has it's one effect that of course affects the lead times.
And again, I'd like to remind you that the when we talk about the 6 months etcetera that's very theoretical. And 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 and ask your company's name.
Yes. 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. And my question is, is that sustainable over the 3rd and fourth quarter?
And which costs on a like for like basis are being reviewed please?
Yes. The like for like OpEx was on a better level than the last year. And we are looking into all different kind of costs when it comes to OpEx and we have a strong focus on that. And a lot of times we get a question about the share of sales. And for us the most important is to have a really good control over the year on year development within our operations.
But still, we will continue to make those investments that we feel is necessary because that will even get give a strong HFM in 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 corporate stores.
Yes. And so 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, but we are confident with the way we are working with the OpEx. And but we will still do those necessary investments that we need to do. And 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. And just one question one more question, please. What is the sort of like for like that the business needs in order to have operating breakeven? If that's 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 cost always try to have a good cost control.
Okay. Thank you.
Our next question comes from the line of Nick Farr. Please go ahead with your question and ask your company's name.
Yes. SEB and SKILDA, good afternoon. I just want to ask you on the financials I mean the financial net. As a percentage of sort 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 Q1 most recently. So 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 the current account instead of deposits. So the share of deposits have gone down in some countries and but nothing dramatically.
Nothing. Okay. So it's just such a big jump. It was like the annual interest generated in Q1 was 3.2% of net debt and now it's at 4.7%. But thank you very much for your answer.
And if you find any other details, please come back. Yes, we will come back. Thank you very much. Thank you.
Our next question comes from the line of Chris Chaviaras. Please go ahead with your question.
Hi, guys. This is Chris calling from Barclays. Most of my questions have been answered to be fair or maybe not really answered. But one question on investments. Maybe help us understand a little bit how you do these investment in the product offering?
Because if they are 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?
Yes. Of course, if the investment would be a fixed amount, then of course it will be totally dependent on the development on the top line, the share of sales of course. But the reality is not such static. It's also the amounts are differing from 40% to quarter. But for this quarter, the main revision for the long term investments is that it's 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. Jyrki No, not price. I said product,
not price. That's what I'm looking. So it's not investments in price?
No. Exactly. Investment in other stores, etcetera.
Cool. Thank you very much. That's very clear.
Our next question comes from the line of Anne Critchlow. Please go ahead. Repeat your question and ask your company's name.
Hi, there. It's Anne Critlow from SG. Hi, Anne. Hi, there. I've got a question about where the sales trends improved the most because some of the countries where the sales trends improved the most were Greece, which was quite surprising in Italy and Ireland.
Just wondered whether it's an anomaly or whether you can explain it?
As we are very happy with the development in I would say across all our countries and markets including Greece and Ireland, Portugal, Spain, Italy, etcetera. And of course, I think it's a strong statement that you mentioned it because it means we continue to invest in Greece and we continue to expand and that is the biggest driver. So we are very happy and the Greek customers appreciate more and more H and M.
So it's really about the maturity of the store base?
No. Not just maturity of the store base. It's about as Jyrth, like you said before, a lot of things and about continuous improvements and also expansion of course.
Okay. Thank you. Our next question comes from the line of Simon Irwin. Please go ahead with your question and ask your company's name.
Hi. It's 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 6 months or so. Can you just say what you've actually done with your average prices over particularly in with your spring summer collection?
We have not raised our prices. Right.
And you mentioned that your 2Q EBIT margin was relatively high by your standard and by the industry standard. And yet if I look back, you've actually only been noticeably below that once since 2,005. And 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, there are some quarters have in nature a bigger EBIT margin. But if looking at the performance for 2nd quarter, the 21.8% as operating margin in this year's Q2, We I think I can't remember it exactly, but I think we had a stronger Q2 in 2010 when it was almost 26%. But then it was driven quite much from our internal hedges and those effects that we got there. So there we had a really, really gross margin as well.
But looking the past 3 years, this is except for 2010, I think it's the highest operating margin.
Well, you're actually higher than that in 2,006, 2,007, 2008. So you've done a consistently higher EBIT margin in 2Q for quite a long time which is
Yes. But still we think we are happy with this. It's for our measures, it's a good operating margin and also considering the environment we are operating in. So we are very happy with this operating margin.
I'm sure you are. The could I also just ask about admin, which your admin expenses were up 6% in the Q3, Bernie up 1% in the second quarter. And 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 Q2 there we had a quite a big increase last year's Q2. We had this long term incentive program, Hennessa Mallory's incentive program.
Yes. But even if you strip that out, you were 8.45% against 8.35%, which is kind of 1% increase.
Yes. And additionally to that, we also had investments in IT and other long term investments that was really high in Q2 last year. There you see a really high increase from the year the previous year. So that's the reason for this increase of around 1% this year to Q2 last year.
Great. Okay. Thank you very much.
Welcome.
Welcome.
Our next question comes from the line of Adam Cochrane. Please go ahead with your question and ask your company's name.
Good afternoon. It's Adam Cochrane from UBS here. And two questions please. First of all, you're the only retailer I can remember recently that doesn't like really mention the Internet at all in the statement. Have
you sort of can
you give any details? I assume that you're reasonably happy with the progress of the Internet. But can you sort of give any further details as to how you're doing on the Internet in your existing countries? And then secondly, it's really just a question on you mentioned the capacity with regards to suppliers primarily in Asia. Can you sort of 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're looking forward to the online expansion in Internet sales that is in the U. S. As autumn. So yes, of course, Internet is more and more important role for the whole retail industry of course for H and M as well. And we are investing a lot in IT online as you know and looking forward very much to this expansion first to U.
S, but then of course, back to the U. S. With the ambition. The plan is to roll it out in the rest of the group. So 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. But on the other hand the salary costs are higher. So 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 sort of current websites etcetera in all of your existing regions? Clearly, I know that you're very excited about the U. S. Launch.
But within your existing 9 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 comparative reasons. But we see them as very important complement to each other.
Okay. Thank you.
Our next question comes from the line of Richard Jaffe. Please go ahead with your question and ask your company's name.
Thank you very much. It's Richard Jaffe from Stifel Nicolaus. Just a couple of hi. Very strong quarter, but 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 in the country? No.
I mean, we haven't seen that yet. But I mean, 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. And of course that gives us self confidence and the reason to believe that it will work also in other markets. But you never know. I mean each market is unique.
And 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. So it's really we can really penetrate the market very deep and go into even smaller cities.
No, obviously, the success is there. One more question on and other stores and its opening. Will that be an international rollout from day 1? Or will that be local for the 1st year or 2? I'm thinking about visiting.
I'm sorry. We are looking at an international launch next year, primarily in Europe in large cities in Europe.
Okay. And when the time comes you'll share with 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. So I hand the conference back to you.
Okay. Thank you very much for participating in this conference call and welcome back for the 9 month results on the 27th 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 lines. Thank you.