Morning and good afternoon, ladies and gentlemen. Welcome to the H& M three-month report conference call. At this time, all participants are in listen-only mode until we conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your telephone. Just to remind you, this conference call is being recorded. I would now like to hand over to the Chairperson, Head of Investor Relations, Nils Vinge. Please begin your meeting, sir, and I will be standing by.
Thank you. Welcome to this telephone conference on the occasion of H& M' s First Quarter Results. The presentation slides are found on our website, hm.com. Our CFO, Jyrki Tervonen, is with me today and will be happy to answer your questions after the presentation. We've had a good start to the new year with strong sales in the first quarter, as well as now in March. Between the 1st and the 27th of March, sales increased by 22% compared to the same period last year. The strong increase shows that our spring collections have been well-received, and we continue to take market share. Please turn to the slide First Quarter, 2012. In the first quarter, sales, including VAT, increased 13% in local currencies, and in comparable units, sales were up 3%. In SEK, net sales were SEK 27.8 billion.
We are present in 44 markets today, and we see the strong sales performance as proof that customers worldwide appreciate our strong offering. We continue to strengthen our position in a very challenging fashion retail market. Please turn to the slide Sales per Market. Germany remains by far our largest market, and sales continue developing well, with an increase of 9% in the first quarter in a slow clothing market, particularly in February. We have close to 400 stores in Germany, and our growth continues. The U.S. is now our second-largest market, and we are growing fast. Sales rose 29% in the quarter. Including Canada, we have nearly 300 stores in North America today. Sales were strong also in the U.K . With an increase of 21%, we grew considerably more than the market. In China, sales were up by 50%.
China was our single-largest expansion market last year and will be so also in 2012. In addition to our own strong collections, we have launched a long-term collaboration with David Beckham in the quarter. In March, we had Marni at H&M, which was also very well-received around the world. Turning to the slide of the gross margin development. Gross profit for the quarter was SEK 15.5 billion, corresponding to a gross margin of 55.8%, down from 57.8% last year. The decrease from last year may appear large, but if you look at the development, you get some perspective of this year's first quarter in comparison with the development over the years. Please turn to the next slide. We do have a genuine long-term perspective. We are investing for the future, and we always have the customer in focus.
We're committed to our strategy of strengthening our market position relative to competitors by strengthening our customer offering. Like we've said before, this includes even better prices, even higher quality, and more sustainable fashion. In the first quarter, we chose not to raise our prices to customers despite increased purchasing costs. The situation in the sourcing markets was still considerably tougher at the time of sourcing for the first quarter than in the corresponding period a year earlier, particularly due to higher cotton prices. The increase in purchasing costs is also related to a number of important and long-term investments aimed at broadening the total offering of the group. To do this, we are strengthening areas such as the buying organization and the production offices, with more new employees and new IT investments.
A number of long-term projects are underway, and in the first quarter, there is a larger proportion of investments than previously. One of our new initiatives is the launch of an entirely new store chain that will open already next year. We have a great team in place for this, and we are looking forward very much to launching this exciting new brand. It will be a very good complement to our existing offering, but for competitive reasons, we cannot say much more right now. We just want to clarify, though, as some media reports have speculated that the new store chain would be a luxury version of COS. This is not correct. It will be something else. We do, however, build on the positive experience we have from COS, as COS works very well and performs strongly both in terms of sales and profits.
We also want to broaden the ranges of our H&M stores by adding new concepts and new product categories. We're looking forward to share this with you in more details as we come closer to the launches. Looking at fashion retail in general in the first quarter, it was a period characterized by markdown activity in most of our markets. This was a consequence of the historically warm autumn that led to weaker demand for winter clothes. Increased markdowns in relation to sales affected the gross margin negatively by 90 basis points year- on- year. Together with our strong sales performance, the markdowns contributed to a good level of stock in trade as per the 29th of February. I will come back to that when we are looking at key data. The negative effects on the gross margin were partly offset by a weaker U.S.
dollar against most of our currencies at the time of sourcing for the first quarter compared to the corresponding sourcing period the previous year. Looking at operational costs, cost control in the group remains good. Costs in comparable stores decreased from the first quarter last year, both in absolute terms and as a proportion of sales. SG&A was SEK 12 billion in the quarter, up 12% in SEK and 11% in local currencies. The increase is explained mainly by the expansion and by continued long-term investments in IT, online, and marketing. The operating margin was 12.7%, and net profit for the period was SEK 2.7 billion, corresponding to earnings per share of SEK 1.65. Now, some words on our expansion. Please turn to the slide Expansion. We had a total of 2,491 stores at the end of the quarter, franchise and our other brands included.
For 2012, we plan to open around 275 stores net. We are growing in all markets. China, the U.S., and the U.K. are the countries where we plan to open most stores per market. We're also opening in five new markets this year. One of them is Bulgaria, where we opened the first store on the 10th of March. Customer reception has been fantastic, and we will open many more stores in Bulgaria. This autumn, H& M will open in Latvia, Malaysia, and Mexico, and we are franchised in Thailand. COS, too, is opening in five new markets this year: Italy, Poland, Hong Kong, and Finland. H&M is also expanding online.
This autumn, we will launch H&M Shop Online in the U.S., the world's largest retail market, where our sales growth is high and our brand is strong. Those were a few comments on our expansion, and now, looking at some key figures for the first quarter, please turn to the slide Key Data. Stock in trade was SEK 12.4 billion, an increase of 15% compared to the same time the previous year. The increase is mainly due to the expansion, but also to higher purchasing costs. Both the level and the balance of the stock in trade as of the 29th of February are viewed as good, thanks to strong sales in the quarter in combination with markdowns. As you can see on the next slide, in relation to sales, the stock in trade was 10.9%, which is still good looking back over the past number of years.
As always, one should keep in mind that the stock in trade is a snapshot at a certain moment in time and that the picture can change significantly over a week even. Cash from current operations, cash flow from current operations was just above SEK 2 billion. The main explanation for the increase is that stock in trade decreased more in the first quarter this year than a year ago. Investments were SEK 1.1 billion and are expected to be between SEK 5.5 billion and SEK 6 billion in 2012, like we've said before. Our finances remain strong. Liquid funds and short-term investments amounted to SEK 22 billion. Before we start the Q&A session, a few comments on the future. We have great collections in our stores for spring and summer. One example is our new Conscious Collection, where our designers combine environmentally smarter materials with high-fashion content.
Conscious Collection will be launched on the 12th of April. We continue strengthening our position, and we take market share. The customer service that we conduct in all our markets shows that never before did we have such a strong position as we do today. We've had a very good start to 2012 with a 13% sales increase in the first quarter and 22% in March until the 27th. We are in 44 markets today. Few retailers in the world have a business model that works as well globally as ours, not only when it comes to expanding to new markets and big cities, but also when it comes to working well in mid-sized and small towns. This allows us to go deeply into each market, and it leaves us with great potential for future growth. We can offer fashion for everyone.
This is a strength, but we do not take our success for granted in any way. Instead, we're looking harder, we're working harder than ever, both on delivering strong sales and profits here and now, and also on securing many years of continued successful expansion. Therefore, we are investing in our customer offering and broadening our total offering, like with a new and exciting store chain we're launching next year and in new employees, as well as in IT in order to support our multichannel growth. It would be easy for us to boost profits short term by, for example, raising prices and avoiding long-term investments. It would be easy, but for us, unwise. We will always put the customer first. We are convinced that this is the right strategy for us going forward so that we can continue our profitable growth for many years to come.
We are now happy to take your questions.
Thanks, Isa. Ladies and gentlemen, if you do have a question at this time, please press star one on your telephone keypad. To cancel your question, please press the hash or pound key. Once again, that's star one to register a question and the hash or pound key to cancel. There will be a short silence while participants register for questions. Our first question comes from the line of Richard Chamberlain from Bank of America. Your line is now open.
Thanks very much. Can you hear me okay?
Yes, I can hear you.
Morning, gents. Hi. Afternoon, sorry. Can I just ask you about these plans for this new brand? Just a general question, really. Why do you feel you need a new brand given the development of COS and obviously purchase of Weekday and Monki brands a few years ago? Why do you feel that you need another brand as from next year?
It's more that we have identified a gap in the market, and we are very excited about this.
Okay. I mean, does that suggest that you feel that you're better or you're better advised to create brands from scratch rather than buying them now given the relative performance of COS versus the brands that you bought, the fabric brands that you bought a few years ago?
No, nothing.
Do you expect now continued sort of organic brand development rather than acquisitions?
I think there are pros and cons with both strategies, so to speak. It's no secret that COS is organic, and we started from scratch, and it's come the furthest, and it's a very good example going forward.
Okay.
Yeah. I think also with COS, we have shown that we have the knowledge and experience of building up an organic brand. It's a great success, and we have a good turnover development, and it's a good profitability as well. It gives us strength to open a new chain when you see the opportunity.
Sure. Okay. Just one on the buying organization and production offices that you're doing. Can you just talk about how you're strengthening both of those? What improvements are you making?
This is related to the new initiatives and the new store chain, for example. We're strengthening with new designers, and also we're looking at H&M stores, as we said, new categories, et cetera.
Okay, the cost of that is presumably mainly people and some IT spend.
Yeah, that's correct. As Nils said, we have to build up the new designer team, also increasing the number of staff in the buying office and our production offices, and also IT investments. That's correct.
Right. Okay. All right. Thanks very much.
You're welcome.
You're welcome.
Our next question comes from the line of Anne Critchlow. Please announce your company name and go ahead with your question.
Good afternoon. It's Anne Critchlow from SG. I've got a question on pricing in the first quarter. You said you didn't pass on the higher cost of goods sold into prices, but did you actually lower prices in Q1?
Normally, we don't really comment on our pricing strategy, but we felt it was necessary at this time because some interpreted our figures that we had increased prices, and we want to be very clear that we have not increased our prices.
Did you actually lower them?
As Nils said, we normally don't comment on our pricing strategy. We just want to be clear that we haven't increased the prices to the customers during the first quarter. Otherwise, how we have been treating our prices to our customers, that we want to keep to ourselves.
Okay. Thank you. Just one more question about the March trading figures. Was there a positive calendar effect in that period, 1st to the 27th?
No, there isn't. If you look at the total month of March, we will end up with a Friday and Saturday, and compared to last year, it ended with a Wednesday and Thursday, I think, or something like that. It will be a positive for the complete month of March. That will reverse to negative in April.
Okay. The impact, the positive impact, would that be 3%- 5%?
It's difficult to say at this time, but it should be a few percentage points, at least.
Okay, thank you very much.
Our next question comes from the line of Adam Cochrane from UBS . Please go ahead with your question.
Hi. Good afternoon, guys.
Yeah, good afternoon.
You talked about the long-term investments in gross margin. I was just wondering if you could really clarify, you know, in terms of the Q1 being bigger, how long has it been going on for, and what would be your sort of expectations with regard to the long term, please?
Yes. We have had some effect in previous quarters as well, not as significant as in Q1. As these are long-term investments, they will continue during the quarters this coming year. Looking at the decrease in the gross margins from last year, the biggest single component affecting the decrease of the gross margin is the 90 basis points related to the increased markdowns. The rest of the decrease in the gross margin of 110 basis points is primarily related to the increased sourcing costs in combination with our decisions not to increase the prices to our customers. As we also state, it's also connected to our long-term investments, which are aiming to broaden our total offering. There are a lot of different components affecting our cost of goods sold and also our gross margin. The most important is how we choose to act when it comes to our custom offering.
That will be decisive for the gross margin.
Okay, in terms of the fact that you've made a comment about it at all, I presume it's got to be something 50 basis points or more. Otherwise, you probably wouldn't have commented at all, would you?
Yeah. As I said, the single biggest component is relating to the increased markdowns of 90 basis points. The rest of the 110 basis points is primarily related to increased sourcing in combination with our decision not to increase the prices to our customers. There are also these long-term investments and other components as well.
Okay, I'll take that as the answer. Thank you.
Thank you.
Our next question comes from the line of Simon Irwin from Liberum Capital. Please go ahead with your question.
Hello, gentlemen.
Hi there.
Could you just talk a little bit more about what you're seeing in terms of sourcing? You obviously mentioned cotton again in this quarter. That same period last year, you were saying that your margins were impacted by significantly higher cotton prices. I'm just trying to get a feel for how cotton impacts you over such a long period when the spike was relatively short from that perspective. Also, whether there have been any other shifts in the way that you source by shifting geography or anything else material.
Yeah. We start with the cotton prices. We talk about spot prices. It's true that they peaked sometime a year ago, but it wasn't until September, October that they were back on the same period or same level as the previous year. That's the spot prices we're talking about. As you know, we don't buy cotton. We design products, and we have them produced, and our suppliers buy the fabric, buy the yarn, et cetera. There is a considerable lag before the effects hit us, so to speak. Yes, there's definitely been an impact from increased cotton prices in Q1, and there will also be a slight one probably in Q2.
In terms of the FX, you obviously saw, I assume, a slightly bigger FX gain in Q1 than Q4. Am I right in thinking that that now becomes relatively immaterial for the next couple of quarters?
Going forward, the products we source today, there is a negative effect, so to speak. It's true that we go from it has been a positive effect in Q4 and Q1, and in Q2, it's more neutral and then becomes negative, yes.
Okay. In terms of what you're doing in terms of buying and production and things, are there any changes to the physical infrastructure of your business, which you haven't talked about for a while? Am I right in thinking you've opened the Belgium RDC, and is that now up and running, and are there any others planned?
That's up and running. That's correct. There are always things going on in our infrastructure and our sourcing, but it's about small steps in evolution rather than revolution. There is no huge project, mega project going on at the moment, no.
Anything that would allow you to accelerate the development of e-commerce?
We are definitely investing in the infrastructure and IT, et cetera, to allow us to continue the expansion of online that we are doing at the moment. Right now, we are preparing, as you understand, for the launch in the U.S. this autumn. That will be followed by more to come after. We don't intend to stop after the U.S.
Right. Thank you very much.
Our next question comes from the line of Richard Jesse. Please announce your company name and go ahead with your question.
Thanks very much. I'm calling from Stifel Nicholas. If you could just remind us at how quickly COS grew, that is to say, once you had the conviction and started to roll it out, do you think that could be a good proxy for this new business, the unnamed business, in terms of rate of growth, how fast we should see it accelerate? Where would we best see these new stores? I would assume in Stockholm. Are you going to enter other countries immediately? If so, where might that be?
Okay. Good morning to New York. When it comes to COS, yes, it gives us, of course, a lot of experience that we can use on the new brand, but it's far too early to say anything about the rollout pace or anything. We plan to roll out, we start next year, and it will be more than one store, definitely. When it comes to geography, it hasn't been decided yet, more than that we will initially start somewhere in Europe.
Just to follow up with online, you're very visible now in the U.S. online, but it doesn't appear that the full assortment, that is all that's found in stores, is not yet available online. I'm wondering what your thoughts are. Do you think the online business should match the stores? Will it ever get to that level of capacity?
This is something we are, of course, looking at, and it's changing. Right now, it's around 50% of the store, something of that, that you can find online. Some collections are only for online, like, for example, the Versace second collection we released in January. This is something that we are flexible about. It's likely that the proportion will grow.
Both more product and more exclusive product in both directions?
More products. I mean, today, as I said, around 50% maybe from the stores, and that will probably grow.
Very good. Thank you very much.
Welcome.
Our next question comes from the line of Chris Javieres from Barclays. Please go ahead with your question.
Hi, guys. This is Chris Javieres from Barclays Capital. A question on, hiya. A question on the breakdown of the gross margin, if possible, because can I clarify? You were talking about investments. It looks like you were talking mostly about investments in the operating costs line. In terms of the gross margin, trying to understand what kind of investments you're doing there, you did mention the markdowns were 90 basis points. Now, the biggest was cost inflation. How much of an impact relative to Q4 was Q1 cost inflation at one the first quarter? Also, how positive the FX was, if you can give a gut feel?
Chris, could you please take one question at a time? It gets confusing. Start with the first question, please.
In the gross margin, if you can talk about the impact that you show in the first quarter coming from cost inflation relative to the fourth quarter of the previous year, if that was similar or it was lower or higher. As a second kind of, it's in the same question, how much did the FX offset your gross margin decline?
Looking at the FX year-on-year, Q4 to Q4 last year and Q1 to Q1 last year, it's more or less the same effects year-on-year.
Right.
The second question, how much the FX was, you mean the dollar effect, mainly the euro/dollar effect?
Yeah. My first one was on cost inflation. How much was the impact in the first quarter versus the fourth quarter? Was it a higher or a similar impact that you saw from cost inflation this quarter versus the previous quarter?
Yeah, as I said, more or less the same impact. Yeah.
And FX?
As Nils already said, in the buying for Q1, it was a positive dollar effect, more positive than for Q4.
Right. Okay. A very last one, if I may. The markdowns. Did we have any markdowns in the second quarter? I remember last time you reported, you had reported that you have seen increased markdowns in the first quarter, but you haven't mentioned anything about the second quarter. Do you have any visibility? I mean, did you have any kind of markdowns during March, year-on-year?
Last year in Q2, the markdown levels were flat to the previous year. That was your first question, right?
What about these years, second quarter? You started the second quarter with a plus 22% in March, roughly. Does this come in any association with markdowns?
It's far too early to say anything about the markdown levels for the second quarter. We have still two months to go. As we say in the report, we have a well-balanced and a good level in stock in trade when we go out the first quarter. We have had a good start in the second quarter. When it comes to the markdown levels for the whole Q2, we still have two months to go, and it will be dependent on the turnover development during April and May.
Correct.
To clarify, the first 22 days are not markdown-driven, no.
Thank you very much. That's very clear. Thanks a lot.
Our next question comes from the line of Nick Farm from SAB. Please go ahead with your question.
Actually, my questions were just asked. Thank you very much for the opportunity.
You're welcome. You're welcome.
Thank you for calling.
Our next question comes from the line of Asad Malik from Credit Suisse. Please go ahead with your question.
Afternoon, gentlemen. My first question is really with regards to the additional OpEx investment that you're making with regards to IT and marketing. You said it was a larger proportion of Q1. Do we expect, are we in a ramp-up phase where, as we get into Q2 and Q3, that proportion is going to increase? Should we expect higher investment costs as the year progresses as a percentage of the quarter OpEx?
When looking at the long-term investment, some of them go into the OpEx, and some part of them goes to the cost of goods, as we are having an income statement by function. Previously, most of the long-term investments that we have talked about last year were more affecting the sales organization and the administration, thus ending up in an increased investment in the OpEx. Now, we are in a phase where we are building up a new designer team, building up new employees within the buying office and production office. That will affect the cost of goods sold. When it comes to level, as it is a long-term investment, these will continue during the coming quarters during this year. Exactly how the effect will be between the different quarters will, of course, vary. They will be on a higher level this year compared to last year.
Will Q2 be on a higher level versus Q1?
If we're talking as a share, that will, of course, be dependent on the turnover development as well. If you're looking at the absolute.
Sure, yes.
Investment in money, it will most probably be on the same level.
Okay. Thank you. Just my second question. You talked a lot about, obviously, the success with COS and the profitability. Can you give us any color on how profitable the existing COS H&M brand, please, in terms of operating margin?
It's about on the same level.
Similar to the H&M brand?
Yes.
Okay, thank you.
We have a follow-up question from Adam Cochrane from UBS Investment Bank. Please go ahead with your question.
Yes. Hi. It's actually Andy Hughes here from UBS Investment Bank.
Hi there. Hi.
Hi there. Just before I ask my first question, just to clarify that the last answer, did you say that the less than H&M or equivalent?
we do not comment. Yes, same equivalent to H&M. Normally, we do not comment on the different concept of profitability, et cetera. We do this to show, especially since we launched a new chain, that we have a lot of good experience from COS.
Just to be clear, we are talking about the profitability, not going into the gross margin levels between different concepts. What we commented on was the profitability on a whole.
Right. Okay. Good. Thank you for breaking your own rules there.
You're welcome.
The question I was going to ask was, in the first quarter, whether you could give us a same-store sales growth at full price. Is that a 3% increase? Was it influenced by the level of markdowns?
For the first quarter, of course, the markdowns were part of it, but it was also full-price sales, of course, that the new collections sold well.
Right. Okay.
It was a combination.
Right. Okay. The second question was just on price structure in that a lot of your stores I've been in have this top 10 pricing strategy. It seems that more, perhaps, of your pricing has gone into key lines, into your most popular lines. Is that correct in terms of where you have been more competitive?
We have been very successful with our strategy in Q1 and so far in March, but we prefer not to go into detail exactly how we do it. Sorry.
Right. Okay. All right. Thanks very much, though.
Come.
We have a follow-up question from the line of Simon Ervin from Librem Cap. Please go ahead with your question.
Hi. Could we just talk a little bit about the collections that you've launched recently, particularly in terms of you've obviously had Versace Phase 2 and David Beckham, as to whether those would have had a material impact in the quarter in terms of either your costs or your margins? How big is Beckham bodywear in terms of the number of products or range or anything like that, just to get a handle on it?
First of all, I must say we are very happy with these, first of all, the Versace that sold out very quickly. Then we launched the David Beckham, which is different because it's going to last for at least two years, and we're looking forward to new product drops that we will see. All in all, in the big assortment that we have and the broad collections, it's not material, of course, not when it comes to profitability or volumes or anything. When it comes to quantify the collection, we will not do that, of course.
Right. There's no material impact on cost, given that obviously there's a lot of noise around those two, and presumably, some of the money costs would have fed into the quarter as well, I assume.
Let me put it this way. We talk about increased investments also in the OpEx in IT, online, and marketing. I mean, already last year, we saw an increase in marketing. I mean, this year, this quarter has been very intense with the Beckham and the Super Bowl, of course, which has been very appreciated and talked about, not just in the U.S. but worldwide. I mean, it's part of that, but not the only reason.
Okay, thank you very much.
We have a follow-up question from the line of Chris Javieres from Barclays. Please go ahead with your question.
Oh, hi, guys. Sorry about the follow-up. In terms of the CapEx, since now you have announced the creation of a new brand, how does this impact your CapEx for this year, for fiscal year 2012?
Yeah. These investments will fit in the CapEx estimation that we have given in the beginning of the year, that it's somewhere between SEK 5.5 billion up to SEK 6 billion. That's still our best estimate for the total CapEx for this financial year.
Perfect. Thank you.
Our next question comes from the line of Jeff Ruddle from MS. Please go ahead with your question.
Hi, guys.
Hi, guys.
Hi. Just two questions. Firstly, I realize you don't want to say too much about the new business you're starting, but can you at least confirm that it is clothing rather than something like housewares, for example?
No, sorry. When we know more, we will come back to you. When we have more to say, we'll come back to you. Sorry.
You're not prepared to confirm it's clothing? Okay. Secondly, are you now happy with your customer proposition? Obviously, your new ranges are being taken well, and your sales are very strong at the moment. Does that mean you have invested enough, you think? I appreciate you've got investments for the future in terms of more staff in buying functions and so on. Are you happy with the quality and the price positioning you're offering your customers now in your stores, given the investments you've made over the last 18 months or so?
We're happy in the sense that our customers are happy, but we will never be satisfied because we will always strive to improve things, and that we have a very long-term view, as I said before.
That suggests that the gross margin. Okay, fine. I'll leave it there. Thank you.
Thanks.
Our next question comes from the line of Peter Farren. Please announce your company name and go ahead with your question.
Hi. It's Peter farren from Bryan Garnier. You may have answered my question already. I had a technical glitch. Anyway, it's regarding the sourcing environment. I just wanted to confirm that given the evolution of cotton prices, Q1 is likely to be the worst of it in terms of the sourcing environment that you're actually seeing in the gross margin and that it should improve from Q2 onwards.
That's correct, yes.
Okay, thank you.
Once again, the star one to register a question and the hash or pound key to cancel. Our next question comes from the line of Anna-Karin Envall from ABG. Please go ahead with your question.
Hi, good afternoon.
Hi.
Did I hear the answer right that you said that the largest single effect affecting the gross margin in Q1 was the discounts of 90 basis points?
Yes, that's correct.
Cost inflation did not exceed that or positive effects either.
Yeah. When we're talking about the increased sourcing costs, we are netting the negative factors from increased cotton prices, but there is also a positive US dollar effect.
Okay. The net effect is smaller than the 90 basis points, but most likely, excluding the effect, cost inflation should be larger.
That's correct.
Okay, thank you.
We appear to have no further questions at this time. I'll hand the conference back to you, sir.
Thank you. Thank you very much for participating in this conference call and welcome back for the first half-year results on the 20th of June.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your line.