Good morning and good afternoon, ladies and gentlemen, and welcome to the H& M N ine-Month Report. At this time, all participants are in a listen-only mode until we conduct the question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star and zero on your telephone. Just to remind you, this conference call is being recorded. I will now hand over to the Chairperson, Nils Vinge. Please begin your meeting, and I'll be standing by.
Thank you. Welcome to this telephone conference on the occasion of H& M's N ine-Month 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. Please turn to the slide Third Quarter, 2011. H& M delivered satisfactory sales in the third quarter in a very tough fashion retail market. Many countries faced economic difficulties, and competition was even more marked and driven than last year. In this environment, H& M managed to strengthen its position. We see that customers appreciate our long-term strategy to always offer the best combination of fashion, quality, and price. Sales, including VAT, increased by 5% in local currencies.
Net sales, converted into SEK, were largely unchanged from last year at SEK 26.9 billion. In comparable units, sales were 3% lower than in the third quarter last year, although against high comparables of + 11%. Like we state in the report, the weather was unfavorable this summer, with wet and cold weather in many important European markets, followed by a heatwave across large parts of Europe in the second half of August. Looking at sales in our markets thus far this year, please turn to the slide Sales Per Market. Sales have been strong, above all, in the U.S., the U.K., and China, markets where we expand rapidly. Meanwhile, Norway, Switzerland, and Austria were weaker, as well as Japan. Going back to the third quarter, please return to the slide Third Quarter, 2011.
Gross profit for the quarter was SEK 15.8 billion, corresponding to a gross margin of 58.6%, and down from 60.5% last year. Unfavorable external factors led to higher sourcing costs, which affected the gross margin negatively. Just to illustrate, if you turn to the chart Cotton Prices for a moment, you can see how prices rallied before they peaked early this spring. Cotton prices have come down since then but are still at high levels historically. In addition, there was a negative effect from a stronger U.S. dollar compared to last year. Markdowns, in relation to sales, were at the same level as last year, and therefore the effect on the gross margin was neutral year on year. This was a result of a successful assortment planning and a way of working with markdowns in the quarter. Looking at OpEx, we kept our strong control on costs across the group.
SG&A was SEK 11.1 billion in the quarter, up 4% in SEK and 9% in local currencies. The increase is explained mainly by the expansion and partly also by our continued long-term investments in marketing, IT, and online. The operating margin was 17.5%. Net financial items totaled SEK 143 million compared to SEK 79 million, and profit after financial items was almost SEK 4.9 billion compared to SEK 5.7 billion a year ago. The strong development of the Swedish krona, of course, had a negative effect on the reported numbers. Estimated tax rate for the quarter was 26%, and net profit was SEK 3.6 billion, corresponding to earnings per share of SEK 2.17. Moving over to expansion, we opened 119 stores net in the first nine months and had a total of 2,325 stores at the end of August, franchise and our other brands included.
For the full year, we plan to open around 265 stores net, which is 15 stores more than the 250 we planned originally. The reason why we're speeding up our expansion this year is that we are opening more stores than planned at the beginning of the year, primarily in China, Croatia, and Romania. Asia is an increasingly important region for our expansion. On the 3rd of September, the first H&M store opened in Singapore, and with that, H&M is now present in 41 markets. It was a fantastic opening on Orchard Road. The first customers arrived already the day before and spent the night outside the store to get first in line. Since then, the response from shoppers has been fantastic, and sales have exceeded our expectations. We see a great potential for H&M in Southeast Asia.
Next year, we plan to open in two new exciting markets, Indonesia and Thailand, both via franchise. We also expand in Europe. Bulgaria will become a new market in 2012. H&M will open at the best location in Sofia, in the shopping center, The Mall. This first store is planned for March, and we see good opportunities to open many more across the country. The potential is big also for our other brands, COS, Cheap Monday, Monki, Weekday, and H&M Home. COS's first store in Sweden is a great success, and in August, COS opened its third store in Paris, in Montmartre. It has performed very well. Monki and Cheap Monday recently opened their first stores in the UK, both at Selfridges, and both have had a very good start. We also keep growing our online and catalog sales.
Monki and COS have just launched online sales in 18 countries in Europe. We see this as an efficient way to make these newer brands available to many more customers in several new countries and around the clock. Online and catalog sales at H& M developed well also in the third quarter. Reception by customers in the UK has been great, and we look very much forward to the launch of H& M online in the U.S. next year. We've decided to move the U.S. launch from spring to autumn 2012. We see that we need some more time than we said originally in order to secure the best possible reception. A successful start in the world's largest online retail market will be very important for our future online growth.
Those were a few comments on our expansion, and now, looking at some key figures for Q3, please turn to the slide key data. Stock in trade was SEK 13.3 billion, an increase of 26% compared to the same time last year and 28% in local currencies. The increase is mainly due to the expansion, but also to higher purchasing costs and to the fact that third-quarter sales did not increase as much as we had planned. Stock in trade was well composed with a large portion of new arrivals. However, the weather has been unseasonably warm in many European markets in September, which has affected sales negatively. From the 1st to the 27th of September, sales increased 3% in local currencies compared to the same period last year.
Given a higher inventory level and a warm September, the sales development in October and November will be decisive with the markdown level in the fourth quarter. As you can see on the next slide, in relation to sales rolling 12 months, the stock in trade was 12.2% compared to a low 9.9% last year, but within the range we've seen over the past few years. Cash flow from current operations was SEK 11.2 billion, which is down from the third quarter last year. During the first nine months, we invested SEK 3.3 billion, mainly in new stores. Our finances remained strong. Liquid funds and short-term investments amounted to SEK 15.9 billion. Return on equity was 41.1% compared to 52.3% rolling 12 months. Looking at the rest of the year, we have strong collections for the autumn and winter season.
We're using more sustainable materials, and after yearly increases, H& M is today the world's largest user of organic cotton, which we're, of course, very proud of. This is one example of how we act long-term to constantly improve our customer offering. We also have a new designer collaboration this autumn, Versace for H& M. Like we could reveal already in June, the collection interprets the very best of Versace's iconic designs. It will be launched in around 300 stores worldwide and online mid-November. Early next year, we have a new and very exciting collaboration with sports and style icon David Beckham. Beckham has developed a new underwear collection for men, exclusively for H&M customers. David Beckham Bodywear will be available in around 1,800 H&M stores in all our markets and online.
The collection starts selling on the 2nd of February and will be followed by new product launches seasonally. We are very much looking forward to this collaboration, which is also a partnership between two strong brands. H&M is present in more than 40 countries today, and we have a strong position in all of them. Our business concept is fashion and quality at the best price. Our ranges are wide, and our business model is flexible, meaning that we can grow globally, both by expanding to new markets and by going deeply into existing markets. Our business model works well in large as well as in small markets and in economic upturns as well as in downturns. We don't divide markets into mature and emerging. Instead, we see opportunities for continued profitable growth in all our markets, as well as for all our brands and channels.
In other words, we remain very optimistic about the future prospects for H&M. At the same time, conditions in the retail markets remain challenging. Looking forward, it is with great respect for the economic uncertainty in many countries and the effects it has on our industry. We adjust to market conditions, and we strive to improve in all areas, from cost control to the shopping experience we offer our customers. Our financial position remains strong, and we see that H&M can grow with a target of 10%- 15% new stores net per year and do it with quality, sustainability, and continued high profitability. We're now happy to take your questions.
Ladies and gentlemen, if you do have a question at this time, please press star followed by one on your telephone keypad. It's the hash or pound key to cancel. Once again, that's star followed by one if you wish to ask a question. It's the hash or pound key to cancel. May we please ask you to ask one question at a time. The first question comes from the line of Erik Karlsson . Please go ahead and announce your company name.
Hello, it's Erik Karlsson from AKO Capital. I just had a question on China, which has grown from nothing to almost 3% of sales now in just a few years. I think you mentioned China was a reason for upgrading your rollout guidance. How is China faring compared to your expectations, and what do you see as the potential there in the medium term? Thanks.
As you have realized, we are very happy with the development in China, and it's doing better than expectations. We started in 2007, I think, in Hong Kong and in Shanghai. Then gradually, we have learned the market and adjusted, and now we expand very rapidly, as you point out. It's true that initially, when we entered this year, we had not as high expectations for the growth as now. Now we aim for around 35 new stores net this year, which is faster, I think, than we have expanded in any market before.
Great. How's the pipeline for next year preliminary in China?
We won't go into that in detail, but we will come back to that in connection with the full-year report.
Thank you.
The next question comes from the line of Richard Chamberlain. Please go ahead and announce your company name.
Thanks very much. Good morning, gents. It's Richard Chamberlain with B of A Merrill Lynch here. I just wanted to start with a question on the online launch in the U.S. I just wondered if you can explain why you've decided to delay that a little bit, that launch.
It's true that we have decided to move it to the autumn. The simple answer is that we need more time for such a big project, which is, of course, natural when you have a big project. It is very difficult to decide the exact timing. We always want to grow with quality, and we want to make sure that everything is in place before it's launched to really guarantee the best possible reception among the customers.
Okay. It sounds like a sort of logistics thing, then getting the logistics and the bureaucracy and so on sorted out. Is that right?
No, it's a combination of a lot of different things. We, as I said, really want to guarantee to have the best possible reception.
Okay. Fair enough. On the current trading comment, Nils, on the September trading, you obviously mentioned the warmer weather in a lot of European markets. I presume H &M has sold much better in its more established markets that have had more normal weather in September. Is that fair?
Absolutely. That's why we feel comfortable with the collections, because we see that, as you say, in markets where they've had more normal weather, we have seen good selling.
Okay. Great. Thanks. Just finally, on the dividend, I know we're only at Q3, but that has been at some courts for concern in the last couple of months. I just wondered if you wanted to make any comments on that in terms of like either maintaining it or intention to maintain it for this year.
When it comes to the dividend, it's a question for the Board of Directors and ultimately for the general annual meeting. That's up to them.
Okay. I mean, would it be affected by the ongoing space expansion and your decision to accelerate that?
No, as we said, the discussion when it comes to dividends, that's nothing that keeps our mind. It's a decision for the Board of Directors and the Annual General Meeting. We don't want to comment on the dividend policy.
Okay. All right. Thanks. I'll leave it there. Thank you.
Thank you. Bye.
The next question comes from the line of Rebecca McClellan. Please go ahead and announce your company name.
Yes. Hi. Good afternoon. I have a couple of questions for you. Firstly, can you tell us the percentage of inventory at the quarter end, which was still spring/summer inventory versus autumn/winter inventory, and how that compares to last year, please?
As the outgoing stock in Q3, what we can say about that is that we have a well-balanced outgoing stock in Q3 with a lot of autumn garments that we received in the end of August. It is a little bit higher than we initially planned. The increase of the stock in trade is mainly due to our normal expansion where we open up new stores and buy garments for those stores, and also a natural result of a higher sourcing cost. Of course, we didn't sell as much as we planned during the third quarter. The most important is that we feel that it's a well-balanced outgoing stock with a lot of autumn garments.
Okay. In terms of this autumn/winter, how committed are you now to the season? Are you pretty much fully committed to the inventory inflow over the remainder of the season, or do you still have some open to buy that you can use or not?
We do not go into detail, but we always keep parts we are open to buy. As we said in the report, October and November sales will be very decisive for the markdown level for the quarter.
Right. Thank you very much.
You're welcome.
The next question comes from the line of Andrew Hughes. Please go ahead and announce your company name.
Hi. It's Andy Hughes from UBS Investment Bank.
Hi.
Hi.
Just looking at Q3, when you started the quarter with 28% more stock and had a weak month for the first month of the quarter, you managed to avoid any markdown impact. Q4 seems to have started the same way, 28% more stock in a poor month. I mean, could we see the possibility of no additional markdown? Is it still possible if October and November are good, you could avoid any extra markdown?
As we mentioned, as you said in the report, October and November will be decisive for the markdown levels for Q3, but it's still too early. It's two big selling months ahead of us. Also, the difference between the Q2 situation where the stock increased almost the same amount was that the Q2 level 2010 was really low. What the markdown levels will be in Q4 is far too early to say. October and November, those will be decisive.
Okay. Just moving on to spring/summer next year, we've had at least one of your UK competitors saying that merchandise, the prices are coming down for spring/summer next year. From the orders that you're placing now, would you agree with that?
I agree that it looks certainly a lot better than it did compared to last fall.
We hope so.
For comparison reasons, we don't go into detail. For us, the ratio US dollar/euro looks better, for example. Of course, cotton prices have come down, at least from the peaks we saw in March, but still on a high level. Of course, when it comes to capacity, it looks much better in the sourcing side than last year.
Right. Okay. Just one last one on your relative position in terms of pricing and the other firm. Clearly, you've improved your position. Would your view for next year be that you'll do more, less, or about the same in terms of your competitive position?
Our strategy is always to have the best custom offering on each market. We have strengthened our position and increased the gap towards our peers. That is our long-term strategy, to always have the best custom offering on each market, and we have been working successfully with that.
Yeah, clearly improvement this year. Maybe needn't do quite as much next year.
We will see.
All right. Good, thanks very much.
Welcome.
The next question comes from the line of Chris Chaviaras. Please go ahead and announce your company name.
Hi, guys. This is Chris Chaviaras from Barclays Capital.
Hi.
Hi. The first question is on the gross margin. We've seen an improvement now, a sequential improvement from Q2 to Q3, which, I guess, is the annualization of your investment in the product offering that you had started at the end of Q2, beginning of Q3 of the previous year. It looks like this is now done. Is it fair to assume that, or do you feel now that your product is of the quality and the price architecture that fits the H&M proposition, or do you think there are still some more things to be done?
It is true that we have anniversaries now, the substantial investments we did in the product offering last year. This is a moving target, and it all depends on the competition. We always will strive to work on improvements in the customer offering.
Okay. Based on market share data, it looks like you have fared a lot better than your competition in major countries these years. I presume that this investment in the product offering has helped. Do you feel now that in 2012, any benefits that you're going to be seeing from the tailwinds that you have mentioned from lower cotton prices, better cotton inflation? Do you feel that you are going to get the benefit into your bottom line, or do you feel that you'll have to invest some of that depending on the concerns that are around the health of the European consumer for 2012? What are your concerns in 2012 in terms of the upper demand?
As Nils said, it's always a moving target. We are always working to have the best custom offering. We don't know. We are following both the sourcing markets and the sales markets. We always are reacting and trying to increase our gap to our peers. We don't know how the markets will react in the spring or next summer. For sure, we will always have a long-term view on this and always look that we will have the best custom offering. That's our strategy when it comes to pricing.
Right. Okay. The last one, if I may then, moving again to spring/summer 2012, I guess you're not fully bought for spring/summer 2012, but there is a big chunk of that should now be done, really. Orders must have been placed. Have you noticed any difference in the level of ordering for spring/summer 2012 for your competition and yourselves, or is it kind of the same level of business that you are planning for in spring/summer 2012? For example, I have heard suppliers saying that the U.S. retailers have been a lot more pessimistic about spring/summer 2012, and they have reduced orders. Is this something that you share or do you agree?
It's correct. I mean, we always plan for a positive like-like, and we have this continuous growth target of 10% to 15% new stores per annum. That's for sure. For the rest of the industry, I mean, I did say it before, and the official statistics say that demand has come down. That's correct.
You haven't changed your pattern of ordering?
As I said, we have a long-term growth target, and we always plan for a positive like-for-like.
Thank you.
The growth, sorry.
Thank you. Thank you very, very much for that.
You're welcome.
The next question comes from the line of [Richard Tescart]. Please go ahead and announce your company name.
Hi. It's [Richard Tescart from S&P Mellon & Ascendo]. Just a quick question on Germany, and I was wondering what your experience has been there as sales in the third quarter seem to have fallen slightly, whereas they were quite strong in the first and second quarters. I'm just wondering if you can give a bit more detail on that, please.
Yes. I mean, we are very happy with the developments in Germany in general. It's true that in the third quarter, the whole German market was very much slower than the previous first half. Of course, we have a bigger and bigger market share in Germany. The bigger we get, the more, of course, we're affected. You should keep in mind that last year, our development in Germany Q3 was very, very strong. We beat the market very much last year. Last but not least, the weather has not been so favorable in Germany and in the southern parts of Europe, as I said, with a rainy summer and then the heatwave that hit us in mid-August.
Okay. Great. Just one final question. Marketing. Do you think you'll be doing more marketing next year or a relatively similar amount?
When it comes to our marketing strategy, we will not go into detail. We are happy with our marketing that we are doing at the moment and what our activity plan and marketing plan for next year are, we will keep to ourselves. We are happy with the marketing that we are doing at the moment.
Okay. Great. Thanks very much.
Once again, if you do wish to ask a question at this time, please press star followed by one on your telephone keypad. It is the hash or pound key to cancel. May I please remind you to ask one question at a time? The next question comes from the line of Anne Chritchlow . Please go ahead and announce your company name.
Hi, there. It's Anne Critchlow from SG.
Hi, there.
Hi. I have a question about markdowns as well. You talked about the markdowns being similar year on year in Q3. I think one reason you mentioned for that is that you were marking down through the quarter. Have you changed the approach that you're taking to markdowns and marking more down as you go?
Yeah. The main reasons for keeping the same level in Q3 this year as compared to last year, the main reasons are our successful assortment planning and the way of working with the markdowns during the quarter. What we include in the assortment planning, that's more or less the incoming garments, the timing of those, the volumes, and also how we allocate the garments between different markets, regions, and store and channels. We feel that we have been working very good on those parts during the third quarter. As I already mentioned, we have a well-balanced outgoing stock in Q3 with a lot of autumn garments.
Okay. That's great. Thanks. If you did end up with excess stock through Q4, would you mark that down as you go through the quarter, or would it be more likely to fall into Q1 in, say, the January sale next year?
We always have to keep a tight control on inventory of markdowns. It's always a balance of taking it directly or waiting. We haven't made any, as Jyrki Tervonen said, we haven't made any big adjustments, but we always strive for improvements and fine-tuning.
In general, we can say that if we see that some garment types are not selling as expected, of course, we react quite quickly on them because we know that it will be more costly if we wait with them. We don't want to roll them forward.
Okay. Thank you. Just one more question. You said you saw great potential in Asia, and I'm just wondering why you intend to open up a franchise in Indonesia and Thailand. Why not through owned operated stores?
Yes, it's a good question. The reason is very simple. To start with, the region in general, this is the common way for many of our peers to work through a franchise. Of course, for us, the preferred way is always to do it on our own, ourselves. In Singapore, we do it ourselves. When it comes to Indonesia, for example, we're not allowed to do it ourselves. We have to do it through a JV or a franchisee. That's the reason. In Thailand, we are able to do it ourselves. In this case, we evaluated a lot of different options, and we met with a partner that we like. We feel very confident in working with this franchise partner.
Okay, thank you very much.
You're welcome.
The next question comes through the line of Simon Owen. Please go ahead and announce your company name.
Afternoon, gentlemen. [Simon Owen from Lieberman Capital].
Hi, there.
Just going back to the U.S. launch, is your planned structure in terms of the infrastructure there going to be the same? You're basically talking about a third-party fulfillment center somewhere in the Midwest, as well as your existing two warehouses.
Yes, it's true that the execution of the logistics would be outsourced. That's correct.
Right. Just generally with your supply chain, it's obviously the second quarter in a row where you appear to have a substantial amount of excess stock. Obviously, the sales have been a bit disappointing, but not dramatically so. Do you feel that there are improvements you need to make in terms of the way that you manage inventory going forwards to make your sales more responsive and to avoid these issues?
I think we have a very good way of working with the markdowns and the stock balances. We are happy with the outgoing stock in Q3. It's a little bit higher than planned, but it's within those targets that we usually have had the past four, five, six years. We think we have a good way of working with the stock balances.
Right. Just finally, in terms of the FX for your buying, as we go into 4Q, does that become a positive for the full quarter?
In theory, yes. It's something the U.S. dollar/euro becomes a tailwind for us. That's correct.
Why only in theory?
There are so many other parts in the equation, and that's hard to call it in theory.
Okay. From an FX perspective, at least, it does switch around.
Correct.
Brilliant. Thank you very much.
Welcome, too.
The next question comes from the line of Asad Malik. Please go ahead and announce your company name.
Afternoon, guys. Asad Malik here from Credit Suisse.
Hi.
I just had two questions really. In terms of the mixed or sort of sales performance that you're seeing in terms of product mix, I was just wondering if you could give us a bit more color in terms of how much of your product now is entry price to what you would classify as entry price point, given the repositioning you've done over time.
That is something we don't review for comparative reasons. Like I said, we haven't done any dramatic changes. There's always changes in the mix, but nothing worth mentioning.
You're not seeing anything from a consumer in terms of trading down within the ranges, or?
I think it's not about trading down. It's about, I mean, we have a deep respect for the situation and the economies in our markets. For us, it's always about striving to have the best combination of fashion, cotton, price. That's all. We feel quite comfortable in the sense that we have been strengthening our position during the third quarter as well. In that sense, facing really tough environments, I think we have a really good custom offering.
When you made the quote on the front page of your release about it is extra important to have a long-term perspective, and then you talk about best combination of fashion and quality, I mean, that sort of sounds like this kind of repositioning or investment in product could be ongoing for some time. Is that what we should be reading from that comment?
What I want to say is that, again, repeat our business idea to have a long-term view and strategy and always look at it in the wide perspective. It's tempting in the short term to perhaps raise your prices or markdown, which short term could be very efficient. Long term, we believe it's always about striving to have the best customer offering.
Okay. When you talk about maintaining sort of profitability longer term as well, can you give us any sort of expectation of what your sense is of a long-term operating margin for the business?
No, no. We don't want to give any forecast when it comes to operating margin. Our goal is always to have the increase in the number of new stores with high profitability also in the future.
Thank you. Just my last question. Were you planning for positive like-likes in Q3?
We always plan positive like-likes over season. Yes, we had, I mean, originally planned for it. As you know, there were many reasons why it came up + 3%. Given the circumstances, we think it's satisfactory.
Okay, thank you.
The next question comes from the line of Frank Baldi. Please go ahead and announce your company name.
Hi. It's Frank Baldi from Goldman Sachs here.
Hello.
I had a couple of questions on various themes. The first one was just your CapEx. You've upped your store opening guidance for the full year. Should we think about a similar magnitude of increase in terms of fixed CapEx? At the same time, can you maybe comment on what your expectations are for next year? Are we right in thinking that CapEx growth is in line with the space growth at this stage?
It comes to CapEx. We came out in January and estimated the CapEx for the full year that it will be an increase of approximately 20% in local currencies, but as it looks like now, it will be less than that.
Right. Okay. In local currency terms?
Yeah, in local currency terms, it will be less than 20% increase as we came out in the beginning of the year.
Why is it lower than your expectations?
Yeah. It's a lot of different reasons because going in in the beginning of the year, it's difficult to give an exact estimation of the CapEx level for the full year because there are so many moving components, uncertain components. For instance, the timing, the currency effects, the negotiations. When we go out in general, we don't have contracts for all our stores that we plan to open during the years. It can come up new opportunities, or we can revise decisions. There are a lot of different things that can affect the CapEx level during the year.
Okay. Do you have a view on what the biggest driver has been?
It's a combination of all these.
Okay. In terms of your view on franchising, just following on from the question earlier, do you intend to use more franchising or kind of department store-based concessions going forward? Is that something that you see as part of the strategy for growth?
For sure, growth path is always to grow organically. Of course, we are also open for franchise in some cases and possessions, as you mentioned. We have some recently in London, but still very marginal.
Okay. We shouldn't expect you to grow as a percentage of your overall store metrics.
No.
Okay. That's great. Finally, really interested to hear your views on what you think, you know, broadly the outlook is for the European consumer next year. Clearly, we're suffering from all sorts of turmoil in the markets. How do you think that's likely to translate to the consumer response for next year?
It is clearly, as I said many times, in a challenging environment. It's always up to us to continue to work with our offering, the customer offering. What we see is that, I mean, clearly, markets like the UK, the U.S., and even some European markets this year were already challenging. H&M has been doing very well.
Sure. Okay, thank you very much.
Next question comes from the line of Georgina Johanan. Please go ahead and announce your company name.
Hi. It's Georgina from JP Morgan.
Hi there.
Hi. You comment in the statement that cotton comparable stores have come down year on year. Just wondering if you can give us a bit of color on how you've managed to do that and whether that's something we should expect as we continue.
Yeah, that's correct. What we are mentioning is that the cotton comparable stores have come down in the third quarter, not year on year. We have a really good custom flow, and we are confident that we will still work with the OpEx operating expenses in a good way. We increased in the third quarter by 9%. The main reason is, of course, our expansion.
Okay. Thanks. Just to go back to the point on input cost pressures, is it possible if you could just clarify for us what we should expect to see input cost pressures peak in terms of Q3 or P&L?
When will they peak, the costs? Is that what you're saying? Could you clarify?
Yeah, because obviously we're still alive in terms of the kind of the easing in the cotton price and it coming through your P&L just because of obviously buying ahead.
Yeah, I see what you mean. It's very difficult to give an aggregated picture. I think you have to look into different parameters. To start with the cotton, it's true that it still hasn't peaked. I guess the effects of the peak that we saw in March, so it's very difficult to give an aggregated view. Sorry.
Okay, the peaking in the cotton still hasn't come through in Q3 then, is what you're saying?
I would guess it hasn't come yet, right?
Okay, thank you very much.
The next question comes from the line of Rebecca McClellan. Please go ahead and announce your company name.
Hi again, Rebecca from Santander. A couple of questions, just following on the OpEx. Does that mean we should expect the OpEx to sales ratio to start coming down? There was slightly pressure on that ratio for the last few quarters?
Could you repeat the question again, Rebecca? Sorry.
The OpEx to sales ratio, should we expect that to start coming down as a percentage of sales over the coming quarters versus a little bit of pressure that we've seen over the last quarters?
This comes to OpEx development. As I said just previously, we have good cost control, and we are not steering our business as an OpEx sales relation before. That is, of course, depending from quarter to quarter how we perform on the top line. We are confident that the work we are doing with the operating expenses and also those long-term investments when it comes to marketing, IT, and online, will benefit us in the long term.
Okay. If I remember correctly, the IT and the marketing expenses actually sort of accelerated in the latter part of last year. That will now have annualized rates going forward.
Correct.
Okay. My second question is just, you know, there's a sort of recent trading trend with July like-for-likes down 6% and then August flat. It looks like September is again down 6%. What do you think explains the actual volatility? I mean, I understand we've had some adverse weather, but you say that the adverse weather hit August or part of August as much as it hit September. What do you think should explain the sort of volatility in the recent trend?
If you look historically in monthly figures, they're always volatile, especially when you go from summer to fall or when you go from winter to spring, depending on when the cold weather comes or the warm weather. That's why we always say you shouldn't look reading too much in a monthly figure. There are also calendar effects, etc. You should look at it over a season and at more, let's say, looking back historically, not just year on year, but taking the average two, three years back in time.
Okay. Thanks.
I want to clarify whether the previous questions were about the OpEx development in comparable stores. Just to be clear, the comparable stores increased the OpEx in Q3 this year compared to last year's third quarter. Okay, next question.
The next question comes from the line of Hubert Mathis . Please go ahead and announce your company name.
Good afternoon. Hubert Mathis from Dowdy Investment. Just a question on the long-term view in sourcing. Because now things are a little bit more easy looking down the road, are you rethinking a long-term sourcing mix in terms of geography, or do you think that your ramp-up in Asia will be set in five years' time so that you will mitigate the risk of inflation and forex?
This is an ongoing process, as you're right to put it. We face orders every day. When we look at the sourcing strategies, it's not just about costs. Just like you indicate, there are a lot of other parameters to face as well, like risk and currency and lead times, etc. I'm sure that in five years' time, the sourcing looks different from today. Exactly how, I can't tell you.
Okay. Thanks.
If you have any further questions, please register them now by pressing star followed by one on your telephone keypad. It is the hash or pound key to cancel. The next question comes from the line of Nicholas Fehr. Please go ahead and announce your company name.
Yes. Good afternoon. S&P Global .
Hi there.
Hi there. Could I just follow up? Just for the record, you're okay on comparable store costs. It actually says in the report that comparable store cost growth were down year on year. Is that a misprint in the report, or did I just get you wrong during the conference call?
It's with the comparable period last year. That means the last year, third quarter.
Yeah. Okay. You write in the report that the cost in comparable stores were down compared to the same period last year.
By the same period, we mean the third quarter last year.
Yeah. If I'm not completely behind here, cost growth in comparable stores must be down year on year, no? Sorry for being tempted, but.
Yeah. When we are looking at Q3 development in our comparable stores this year, it's down compared to last year's third quarter.
Thank you very much.
Not on a yearly basis.
Okay. Thank you very much for clarifying that for me. I'm sorry for being a bit tense here in the afternoon.
Oh, no problem.
My real question was actually regarding CapEx. Obviously, you have been enjoying a weaker euro in particular this time around. I was just wondering, have you been using that situation to step up your CapEx efforts per store in the pertinent countries in the eurozone during this year? Could you also, just for the record, give us a feeling for actual return and CapEx requirements in, let's say, Asia compared to Europe? Thanks.
No, it has nothing to do with the euro development.
No, when we're looking at the CapEx, then we go in and look really much on the opportunities we see on different markets. We have a plan. As I said earlier, a lot of things can happen during the year when the situations change and the opportunities change. We are looking at the CapEx in the beginning of the year, try to estimate what the best outcome will be. That is what is steering to always find the best store location with the best terms for us. That's always steering our decisions when it comes to CapEx investments.
Is the average lifespan per store or whatever metric you want to use still the same, and it has not changed due to the weak currency?
No. Of course, we are always looking at different KPIs when it comes to the investments, but nothing changed due to the currency fluctuations.
How does expansion in Asia affect returns on capital? Is there any difference to this for why any expansion outside of Europe would be different in terms of returns, payback, and return on capital employed?
Of course, there are different circumstances on different markets, but we don't want to go in for competitive reasons to say what markets we feel is quicker payback. Of course, there are differences between the different markets. That's for sure.
Would you say if you take the Asian exposure combined, that by and large, return potential or payback times are actually net-net different compared to Europe?
Let me put it this way: they look interesting.
I'm sure they do. I was just wondering versus Europe where they would be.
No, we prefer not.
As I said, we prefer not to go into details how it looks on different markets. What we can say, of course, is there are differences in the investment levels, the payback times, etc. There are differences, but exactly how they look, that we don't want to go into in detail.
Thanks for this.
Thanks. You're welcome.
We appear to have no further questions at this time. I'll hand the conference back to you.
Okay. Thank you very much for participating in this conference call and all your questions. Welcome back for the full-year results on the 26th of January.
Ladies and gentlemen, thank you for your participation. This concludes today's conference, and you may now disconnect your lines. Thank you.