© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today’s Six Months Results for 2018. At this time, all participants are in a listen-only mode. [Operator Instructions] I must advise you that this conference is being recorded today, on Thursday, the 28th of June 2018.
And I would now like to hand the conference over to your first speaker today, CEO, Karl-Johan Persson. Please go ahead, sir.
Hi, everyone. Thank you all for joining us here today. You’re very welcome to this telephone conference in connection with H&M group’s six months results for 2018. With me is our CFO, Jyrki Tervonen; and our Head of Investor Relations, Nils Vinge.
I will start with a short introduction about the second quarter. Nils will take us through the financial details. Then, I will give an update on developments within our priority action areas, before it’s time for the Q&A session. You will find the slides to this telephone conference on hm.com.
Our industry is going through a period of rapid change and we are in the middle of a transformation that is both challenging and exciting. Challenging, because it is complex, extensive, and the pace of change is fast; exciting, because we see big potential ahead and positive trends from the improvements in investments that we are making.
But, let’s start by looking at the second quarter. Like we had already signaled, the first half of 2018 would be tough. We entered the second quarter with too much inventory as well as with some imbalances still in the H&M brand assortment, something that we are gradually correcting. One important part of our transformation work is to make our supply chain faster, more flexible, and more efficient. Therefore, we’re making necessary transitions to new logistic systems and we are automating our warehouses and changing the way of working. These are very important actions. However, in connection with changes of this magnitude and complexity, temporary interruptions and loss of efficiency are not entirely uncommon. Unfortunately, this occurred during the second quarter in some of our large markets and this had negative impact for sales and profits in the U.S., France, Italy and Belgium, and it also affected online sales in the Nordic region. This is of course not good, but like I said, these are important transitions that will benefit us greatly going forward and they are an essential part of our transformation work.
We are of course solving the temporary interruptions and we are making the adjustments needed to the new systems. Due to the interruptions in inventory, backlog was still tough in these affected markets, and this is something that we are gradually correcting.
Looking at revenue in the quarter, group sales including VAT increased by 2% to approximately SEK 60 billion. In local currencies, sales were unchanged. Profit after financial items amounted to SEK 6 billion. And all-in-all, we’re not happy with the performance in the second quarter. With that said, we are happy with the ongoing transformation work that we are doing.
And I will come back with more details about this shortly, but first, I hand over to you Nils.
Thank you, Karl-Johan.
Starting with top-line. Sales including VAT amounted to SEK 60 billion in the second quarter and net sales reached SEK 52 billion, compared to SEK 51.4 billion last year. Like Karl-Johan explained, conditions for the quarter weren’t the best. In several markets however, sales developed positively including Sweden, Norway, Denmark and Finland and Eastern Europe where we grew a lot faster than the market. This shows that we are on the right track and that our improvement work and digital investments are starting to give results. Sales also developed well in growth market such as Russia, Mexico and India. Online sales grew approximately 17% in the second quarter and for new business, which combines the new brands of the group, store and online sales together grew approximately 14%.
Looking at some profit numbers. Gross profit was SEK 29.2 billion, which corresponds to a gross margin of 56.1%. Markdown costs increased by slightly less than 1 percentage point as a share of sales. Cost control in the group remains good. Selling and admin costs increased by 7% to SEK 23.2 billion. In local currencies, the increase was 5%. The increase is related to the expansion in stores and online. In comparable stores, costs decreased.
Profit after financial items was SEK 6 billion and profit was affected by weak sales as a result of the still challenging markets, but also by the internal factors that Karl-Johan mentioned. And net profit was SEK 4.6 billion including earnings per share of SEK 2.80 compared to SEK 3.56 in the corresponding year earlier period.
Looking at some key data. Stock-in-trade on the 31st of May amounted to SEK 36.3 billion, an increase of 13% in SEK. In local currencies, the increase was 11%. The main explanations for the increase are high inventory level going into the quarter in combination with the sales development in the second quarter. The inventory level is still too high and will lead to increased markdowns in relation to sales in the third quarter, compared with the same period last year. Gradual improvements to the balance and precision of the H&M assortment combined with shorter lead times which will allow us for more buying in season, will result in more full-price sales, and with that improved inventory levels in the future.
Cash flow from current operations was SEK 9.1 billion in the second quarter. And investments in terms of CapEx totaled SEK 5.7 billion compared to SEK 5.5 billion. For the full year 2018, CapEx is expected to be approximately SEK 12 million, with continued shift from new physical stores to digital. And liquid funds amounted to SEK 11.1 billion. And at the end of the quarter, loans amounted to SEK 15.6 billion compared to SEK 6.2 billion last year. Return on equity was 26.5%, rolling 12 months.
And now, back to you Karl-Johan.
Thank you. Our transformation work continues at full speed in order to take the H&M group to a new level. We are driving change through a number of priority action areas that we see as strategically important to get there.
Our first focus area is developing the core of our existing brands and our highest priority is H&M. This area includes the products, the assortments, the customer experience in-store and online as well as the integration of the two channels. And the most important part of this work obviously is to improve the assortment.
In addition to correcting the imbalances of the assortment, this work also includes all the time getting better in terms of design, quality and price. And here, we are already seeing positive signals from our summer collections which have sold better than the equivalent collections last year.
In parallel, we are testing new store concepts for the H&M stores with the aim on making the shopping experience more inspiring and convenient for our customers. We continue this work by developing the tests, further verifying the findings and in parallel we’re making plans to gradually roll out the best ideas.
Looking at the online store. We are focusing mainly on enhancing the product presentation to make the experience and also to make the experience -- and also by personalizing our apps and our sites. And we are improving various functionalities such as payment options and deliveries. And when it comes to the integration of the physical and digital channels, this work includes improvements and rollout of features such as Click & Collect, online returns, in-store and online shopping in-store.
And this brings us to our next section area, which we call our key enablers. And these are investments that we make in our supply chain, the tech foundation, and also advanced analytics and AI. We have good indications from a number of tests in this area within personalization, quantification and allocation, price management, and also trend detection.
It is worth pointing out though that as these are still pilot projects, effects are yet too small to be seen in our overall performance. But, with these investments, we’re building something very valuable for the future. And therefore, as our test results are very promising, we will scale this up for more markets and more concepts.
Our next focus area is to add new growth. And we continue developing and optimizing our store portfolio. At the same time, we’re growing across digital with our existing brands, and we’re also launching new brands to meet new needs.
In 2018, we plan to open 240 new stores net. The number of planned closures has been somewhat lowered because we have obtained substantially improved lease terms for some of the stores that we have planned to close.
For the H&M brand, focus on new openings will be in emerging markets. In more established markets, focus for H&M will be on optimizing the portfolio including closures, changes of store area, rebuilds and relocations. For our newer brands however, stores will open mainly in our more established markets. We continue to see great potential for new stores in the coming years, and our newer brands gradually will come to make up an increasing share of the store portfolio.
Looking at our digital expansion. We are broadening the assortment online for all our brands. And at the same time, we continue our global online expansions in these markets. H&M will open its online store in Mexico in 2019. And we are also looking at more markets. We’re also expanding through external partners. H&M launched on Tmall in mainland China in March and the start has been very successful.
Today, we have nine bands in the H&M group. Two weeks ago, we launched our most recent brand, Afound with hundreds of especially selected fashion and lifestyle brands offering products at bargain prices. Afound opened its first store in Stockholm and Malmö along with its digital marketplace. And reception has been very good so far, and we’re looking forward to open Afound in more locations in Sweden already this year.
I would also like to mention that we’re looking forward to broadening the assortment of H&M Home. H&M Home is developing very well. And within shortly we will add new product categories such as furniture to the H&M Home selection, which has until included mainly textiles, decorative items and products for the kitchen.
So, this was a short update on some of the areas through which we’re driving our transformation work and that we view as strategically important for the future of the H&M group.
Before we move over to the Q&A session, a few words on the current year. We can see the things are moving in the right direction, even though many challenges remain, and there is a lot of hard work still ahead of us. The first half of the year was somewhat more challenging than we initially expected but we believe there will be a gradual improvement and that we will see a stronger second half.
We have a long-term approach and are optimistic about the future for the whole H&M group with many years of good growth in both sales and profitability ahead of us. Thank you. And now, we’re happy to take your questions.
Thank you. [Operator Instructions] And the first question comes from the line of Chiara Battistini. Please ask your question.
Hello. Good morning. Thank you for taking my questions. The first one would be on the temporary interruptions. You’ve mentioned impacting your quarter two sales. I was just wondering whether these interruptions have now been resolved and you are not seeing any impacts anymore, and would you be able actually to quantify the impact of these issues in Q2? And the second question on inventories that are still higher than previous quarters. Can you talk more about the actions you are taking to reduce the levels of the inventories and are you planning to reinvest part of all of the ForEx benefit that is about to come through in pricing and promotional activity to also help on the inventory side, please? Thank you.
Okay. If we take interruptions caused from the change of the logistic systems, the cause of it, the technical issues that we have had, we have more or less all corrected, which is good. But during this time, we have built up a backlog of products that we could not allocate. So that will gradually -- we will gradually improve this backlog, so to say, during the third quarter. So, the effect on the second quarter of sales is hard to quantify exactly, but roughly 2 percentages units on the group. And the effect on the third quarter, although we have solved the technical issues, it will be affected by the backlog, but not as much as in the second quarter. And I didn’t get your -- the last question, was it connected to the FX?
So, the second question would be on the level of inventories in general. If you could talk more about the initiatives you are taking to work through these excess inventories levels, and if those initiatives also include investing the FX benefits into higher promotional activity for the rest of the year?
Okay. Sorry. Yes. The inventory level is too high and that is because we haven’t sold according to plan. And obviously with the work we have connected to improving the assortment, correcting the imbalances, improving in terms of design, quality, price, we believe we will have a better assortment and sell better. And connected to that as well, we are making a lot of investment in the logistic in the whole supply chain to become even faster, more flexible and efficient, and that should help as well. And also, in the AI tools that we have invested in today, to be able to quantify better, to be -- allocate the better, and also when it comes to price management, just to mention a few things.
So, going forward, we believe that we will buy better, plan the assortment better, and we believe the assortment will be better as well. So that should lead to a healthier inventory level in relation to sales.
When it comes to the gross margin and the FX, we prefer not to quantify exactly what we do. But we will stick to our business idea to have the best customer offering in terms of fashion, quality, and price, and sustainability. And we know as the competition is getting tougher all the time, we want to be the best. We know that being on the same level as the last year is not good enough. We constantly have to improve, and part of that is improving value for money as well.
And if I just may squeeze in another question on your omni-channel and Click & Collect. Can you just remind us where Click & Collect is available now? And provide an update on the timeline for the rollout of Click & Collect, please.
We will -- today, it’s UK, but we will roll out many more markets during autumn and after -- during the autumn 2018 and rollout for ‘19.
And your next question comes from the line of Magnus Raman. Please ask your question.
You mentioned that net financials was negatively affected due to IFRS rules for leasing. Can you give us any more flavor here on potential effects going forward when it comes to net financials?
Yes. That’s correct. It’s the IFRS rules connected to how to treat the financial lease in our books and the effect in Q2 is around SEK 30 million in negative currency effect. Last year, in Q2, we have a positive effect of around SEK 15 million. And going ahead, it’s impossible to say how the currencies will fluctuate. But without this negative currency translation effect of SEK 30 million, the net financial items should have been on a level of positive SEK 35 million in Q2.
And then, in terms -- I mean, you mentioned that you -- in terms of buying, you will be somewhat more cautious in your budget going forward. But at the same time, you guide for increased markdowns here in Q3, whilst in Q3 2017 markdowns grew a full 280 basis points. Can you help us understand the reasoning here? You expect increased markdowns on this very easy comp, while you see somewhat more cautious buying at the same time.
Yes. But, I mean, going into the third quarter, we have -- the inventory level is too high. The majority of the inventory level is current season and garments that we would like to have. But we still have too much of older garments still with value. So, we would like to of course take care of that in as cost efficient way as possible. So, we believe that markdowns in quarter three will be higher than quarter three last year. What I said was, we haven’t lowered our ambitions for second half 2018. But, we will be -- with the possibility to buy more in season, we will be -- with the initial purchasing, we will be a little bit more cautious and to buy more in season. So, the improved flexibility and the ability to buy quicker will help us in that sense.
Just finally, you mentioned that press conference also that June sales was somewhat better than the flat local currency sales growth reported for Q2. Can you just give us any sense of the magnitude here, if it’s just slight improvement or otherwise?
Yes. What we have said that we believe in a gradual improvement. We’re not happy with the first half obviously, and we believe in the gradual improvement for the second half year. And I mean, the second half has just started with June. And what we said is that, if it is somewhat better than what we have seen in quarter two. So, I mean it’s not high growth figures, but somewhat better.
Thank you. And your next question comes from the line of Charlie Muir-Sands. Please ask you question.
Hi, guys. Yes. I’ve got three questions, please. The first one is to follow up. You made the comment about positive results of your summer collections, suggesting that they are ahead of the prior year. It’s not just the seasonal collections or is that your entire H&M Group on a like-for-like basis you’re currently experiencing as being ahead? Perhaps you can elaborate a bit more to give us some comfort that the collections are starting to work better.
And then, the second question relates to the supply chain, IT, changes that you’ve made that caused you some problems in the second quarter. Can you tell us what proportion of your global revenue base has been replatform now and if there are some -- any major countries still ahead? And indeed, what mitigation you can put in place to avoid this disruption going forward?
And then, the final question relates to your comment about expectations to close fewer stores because you are getting very good rent renewals. Can you talk about what level of rent reduction you’re getting, and what proportion of your stores you are able to renew each year? Thank you.
Okay. When it comes to the summer collections, what I said earlier was that recent collections, recent summer collections that are built on the learnings that we had from last year and the imbalances that we have and other improvements as well has been received very well from customers. It stands for -- I mean, that’s not the entire H&M store collection or the online collection, but it’s a good start. And if it continues on the same track, I mean, week-by-week it will take up a bigger share of the stores and of the online store. So, it’s a good first sign. And I hope and believe that we will continue on that track as well.
When it comes to the supply chain and IT and logistic transitions, there are several parts. One is the online transitions that we’re doing to the new platforms, eight countries. We have done the transition for seven years, so one country remains. Initially, we had some, I mean some technical issues with the transitions, but those have been solved. Then, the latest countries that we have done, we have done in a very good way without any disturbances.
So, what I’m talking about, what will happen now in the U.S. and some of the southern European countries are connecting to the warehouse management systems. And there have been some technical issues connected to the integration between the warehouse management system and automation in the warehouses. And these are things that we have solved, I mean, the clear majority of it. And in solving that, there will be -- I mean, we have solved for future countries to come as well. And of course, we’re learning along the way as well when it comes to working with teams and so on.
During the autumn, we will not transition more countries. With warehouse management systems, we will make sure that we stabilize what we have and that we’re prepared well for other countries that will follow during 2019. So, with us having solved, with us during the autumn making sure that all countries are well prepared, we feel confident that we can do the countries for 2019 with less or no disturbance.
Great.
And when it comes to the rent, I mean, we constantly look at when we open new stores, we have a clear roadmap. We know what the business cases are for the new stores. And same goes for stores that we will close. And some stores that we look at to close are in good locations, but the rents are too high. And they are performing well but the rent is at wrong level, or it’s in a location that we don’t really have a strong belief in that we would like to exit. It depends on what the rent reduction is really. So, when we get the rent reduction, we take a new view at that location and see if it’s something that we would like to stay in long-term or if it’s something that we can stay in for the short term. So, it’s -- we have a good view of new stores and the store optimization work that we’re doing.
And your last question was on how much flexibility we have in the contract, right? As we stated in connection on the Capital Markets Day, around two thirds of the store portfolio, we have contracts -- we have the right to cancel or renegotiate two thirds of these contracts within three years.
Thank you. And your next question comes from the line of Mariana Lopez. Please as your question.
Yes. Good afternoon. It’s Rebecca McClellan at Santander. And just a couple of questions. Would you agree that the stock-in-trade as a sort of percentage of sales from the sort of 2016 levels are the sort of levels which are probably the optimal levels for you? And that’s the -- the growth in the percentage of sales seems -- is basically what you could quantify as excess inventory?
I think we stated in connect -- again on the Capital Markets Day that there is long-term target as -- be at around 12 to 14% of sales, rolling 12 months. But of course, now, when sales have been quite slow the last year, this KPI looks pretty distorted in a way, but I mean, we feel comfortable. We feel that we are in a good journey that going forward we will come back to leaner inventory levels, but of course it takes time and it’s a difficult balance between being aggressive on markdowns but at the same time have renewal and the new products in the stores every day. I think these incidents that we have seen in connection with the transition of the warehouse systems in the U.S. and France, and Italy et cetera, show how crucial it is to have new products in the stores every day.
Okay. Thank you. And in terms of sort of the average age of the inventory, I understand it’s sort of same as quite recent inventory in what has built. But, is there an average age of the inventory that you can give us or what percentage of inventory is not current season?
As we said earlier, the clear majority of the inventory is current season or season-less products, and then we have a part that is I mean not the current season. But, we feel confident that we will handle that during the summer sale. And the aim is to handle it our own channels and to build that as cost efficiently as possible. And if needed, we will look at external parties to take care of that. Because the aim is to go into the new system or after the summer sale with the better situation compared to the same time last year.
Thank you. And your next question comes from the line of Adam Cochrane. Please ask your question.
Good afternoon. Couple of questions. Firstly on the 14% growth you had in new businesses, it seems quite disappointing and a slowdown from what you were talking about at the Capital Markets Day. Is there anything you can just highlight as to whether this a temporary issue? I understand the range issues with the core H&M brand but I wasn’t aware of any within the smaller brands, just some commentary around that? And then, secondly, in terms of the -- sorry to go on about inventory, but the -- given it’s getting bigger as a proportion of sales and it must -- I think theoretically, it must be getting slightly older. Do you think -- in terms of the percentage discount you need to take off each of those items, do you think that that’s going to be a bigger discount in Q3 as a proportion of the sort of retail sales value than it has been before as the stock is getting slightly older and you get more team to clear it? Thanks.
Yes. Thank you very much. If we start with the new business portfolio, we’re still aiming for the 25% plus for the full year. We planned a little bit lower than that for the second quarter but came in at 14, which is lower than our plan. And one of the reasons for it is also connected to the logistic systems and changes that we have made. A big part of the new business portfolio is connected to warehouses that have been affected, so problems with allocations and replenishment affecting the new business performance. So that’s one of the reasons. We still feel confident and that we’ll get to the levels that we’re aiming for, for the full year. And when it comes to -- your second question was on inventory, the inventory level and if we need to do big discounts. We prefer not to comment on the exact discount levels now, still some way to go during the quarter. But what we have said is that we will probably or we will have higher reductions during quarter three and we’ll see at what levels.
Okay. This is in terms of that. You’re saying now you expect the markdown to be higher or to de more marked down this time last year. Are you originally expecting -- because you had such a big markdown this time last year, will you originally expect in Q3 of this year to have less markdown than last year?
Yes. To be honest, yes. I mean, we haven’t sold according to plan. And then we had the logistic challenges affecting the sales by approximately 2 percentage units for the group. And so, I mean, that was not according to the plan and then we have a higher inventory level compared to the plan, leading to higher markdown. So, yes.
And your next question comes from the line of Cedric Lecasble. Please ask your question.
Two remaining ones for me. So, first one on your UK Click & Collect experiment. It’s been there for some time now. What were the main learnings you have from that? And are you happy with the experience and is this a benchmark for the rollout or do you expect progress on your new regions? That’s the first question. And the second one is on the impact of your logistics adaptation transformation on the percentage of fresh inventory you can send to the stores on a daily basis. You say you must have more fresh products in the store. To what extent can it change the kind of dynamic on a daily basis? Thank you.
Yes. If we start with the first question, the Click & Collect, it’s just one of many important omni initiatives. During the test phase and the rollout phase in the UK, it has been well-received, appreciated by customers and also good for H&M. So, therefore, it’s something that we are rolling out, as we said earlier, to many more markets during second half of 2018 and then global rollout during 2019. In addition to that, we’re obviously also improving the service that, so that not we not only expand with it, but we also improve it.
What impact would it have on your economics? What do you see at this stage?
I don’t want to go -- from all the tests we’re doing, I don’t want to go into exact details on the financials. But as -- I mean, as we are expanding with it, clearly, it’s good for us, not only from, I mean from more satisfied customers which of course helps as well, but pure financials also. And sorry, but I didn’t really get your second question.
Yes. In your automation and also progress you tried to make on logistics to be faster, to be more automated, I was wondering what impact it had on introducing new products on a daily basis into the stores and dynamizing a little more the product offer on a daily basis.
Yes. But, it’s -- the automation of the warehouses and the whole logistic systems will make us faster. So, we will have quicker deliveries to customers online, we will have quicker throughput to the stores. It will increase transparency. So, it’s foundation and enabler for things like RFID. It will help a lot of -- help us to be more flexible between tenants and between markets. And in this work, we’re also further segmenting our products close, so differentiating between super quick orders and replenishment orders, so helping in that sense as well, so, many improvements coming from the automation of the warehouses, warehouse management systems. Unfortunately, disturbance now in the quarter but still something that is great for the company.
Thank you. And your next question comes from the line of Michelle Wilson. Please ask your question.
Hi. Good afternoon. You talked about a more cautious buy on inventory. Could you give us an indication of how much more products you’re buying this year compared to last year? And then, secondly, just follow-up on your comment about broadening the assortment online across all brands. Has that contributed to the inventory problem at all? And presumably that means that you’re buying shallower on each SKU. Will that have any impact on underlying gross margin going forward?
Yes. Sorry, I have to a bit -- we don’t want to go into the exact details of our purchase spend going forward. As I said earlier, we have not lowered the aim. We still have a good belief in the assortment for all the brands for the second half of the year. But with the possibility to buy more in season, we are -- and with other improvements as well, we are -- our commitment -- the initial commitment is lower compared to last year. So, we can buy more in season.
And when it comes to broadening the assortment for our brands, it’s been -- I mean, we have broadened it. It’s a gradual broadening of the assortment for all the brands. And it’s not the reason behind the excess inventory. I mean, the clear majority of it is this -- the inventory so to say and something that we want to do. And it has not had a negative effect on the margins.
Okay, great. Could I just ask on the first question then, are you buying on the basis that you deliver positive like-for-likes?
Sorry. I don’t want to go into detail, so give forecast or prognosis on the like-for-like development, nor how we buy. Sorry.
Thank you. And your next question comes from the line of Chris Chaviaras. Please ask your question.
Hi, guys. Thank you for taking my questions. Two remaining questions for me as well, please. The first one, is there -- talking about the gradual improvement in the second half. Is there any feasible workable scenario, where if sales go as you planned in 3Q and 4Q that the full year gross margin could ever be not negative overall? And that’s the first question.
And the second question on the OpEx growth. So, the run-rate in the second quarter was quite a bit worse than the first quarter. Is that the run-rate that we should expect for the rest of the year, or is there any dual branding costs from the disruption from automating your warehouses there other than the sales disruption, whether you had any sort of additional cost that can be considered let’s say one-offs? Thank you.
Okay. So, when it comes give gross margin prognosis for the rest of the year and for the full year, we will not go into giving that. But of course, it will be tougher, if we expect for instance, higher markdowns in Q3 compared to last year. So that will of course make it very challenging.
Going back to OpEx growth, we have a very good cost control in the Company that’s one of our core values and fitting deep in our DNA. I don’t think that local currency development, it was plus 5, the SG&A in Q2. And that’s also for the 6 months period, plus 5. And that’s what we said during the Capital Markets Day. We expect the SG&A in local currencies to grow somewhere between 4% to 5% this year, in local currencies. So, there we are, and we believe that we will remain there for the rest of the year. But as always said, this can differ between different quarters. But on a yearly level, we feel confident that we will be more or less in that range.
Okay. Can I ask a very quick third one then, please? In terms of the markdowns in the third quarter that you expect, would you expect at the similar level to the second quarter or higher, lower, any color there?
We will not give any prognosis for the reductions. What we say, they will be higher than the corresponding quarter last year.
Thank you. And your next question comes from the line of Dana Telsey. Please ask your question.
Good morning, everyone. As you think of the progress that you’re making in supply chain, what are the key stepping stones that we should be watching for to show that it’s having the effect that you’re looking for? Whether it’s in inventory, whether it’s in merchandise margin rates, how should we think about that path? Thank you.
You mean what we want to see from the supply chain work that we’re doing?
Correct.
Well, it’s going to lead -- the that we’re doing with us mapping up the whole logistic network, the automation of the warehouses, the new warehouse management systems, the new product flows, the sourcing network and so on, so the whole -- and also the work we do connected to artificial intelligence and advanced analytics, when it comes to quantifying and allocation, all-in-all it will lead to a lot of good things for the customers. It will lead to increased sales by allocating better, by forecasting trends better for example, by speed to market and so on. So, there are lot of -- but obviously improved sales, improved profits, lower markdowns, less -- lower inventory levels in relation to sales. That’s what we’re aiming for.
And will this be beginning in second half of the year, first half of ‘19, how do you think of any timing?
I mean, there are several activities connected to this area, and they will be rolled out in different phases and will have different impacts. So, it’s not a certain date for everything. It will be a gradual introduction and thus also a gradual benefit realization of the different things that we are doing. But, it will have over time a very positive effect on sales and results and inventory levels.
Thank you. And your next question comes from Simon Irwin. Please ask your question.
Hi. I’m very sorry to be going back on this whole inventory thing, but I’m not quite sure I understand some of your comments. So, you lost actually 2% of sales in the quarter. So, you’re saying that inventory was up 11% in local currency terms. So, excluding that it still would have been up 9 at a time of year when you’re normally are at a seasonally low level of inventory. And you seem to be inferring you think that you can clear most of this excess inventory, and relative to say, we go back to last time, you were trading well, inventory seems to be say 30% higher than it might normally be. Do you actually think you can clear all of that through during this summer selling season and be relatively clean going into autumn winter? Is that what you’re saying? And can you just explain how those numbers actually work practically when you’ve got inventory of SEK 36 billion and your 3Q COGS were only 25?
Yes. I’ll try to give you an answer on that. I mean, the logistic issue is not the whole explanation, obviously exactly like you say; it affected sales roughly 2% for the total group. But, the main reason is that we have not sold according to plan. And we will clear this during summer sale as good as we can in our own channels and we will look at external parties as well. And the aim is to go into the season after the summer sale in a better situation in relation to last year. That is the aim. And then, it’s important when we look at the inventory levels that not everything is of the older seasons or older products without value. A lot of the products are season-less products as well, but we have to take into account when buying new season-less products. So, it’s a balancing act of doing it cost efficiently and setting the stores and online stores up well for the new season.
Okay. But if we look at the absolute volume, does this imply that then there’s going to be a material amount going out through third parties, because it’s very hard to see how you could get that much inventory through your business in one quarter?
We don’t want to comment exactly on how -- we have a good plan for how to sell it during the quarter. We’ll see how it goes and where we end the third quarter. But, the aim is to be in a better position compared to last year.
Okay. And can I just ask you about the H&M Club, which is now a year old? What impact has that had, particularly in terms of average basket size?
Yes. When it comes to the H&M Club, sorry again, but we don’t want to go into the exact details on the financials or the different KPIs connected to that. But, it’s something that we have worked with in the number of markets for many years and built up a big group of loyal customers. We are improving the club and we’re rolling it out to new markets. We’re introducing free shipping and free returns, much appreciated by customers, something that we have tested before rolling it out. And the reason we’re rolling it out is we -- of course, it’s the customers -- and again it’s something that is financially good for H&M. So, all-in-all, we’re happy with the club. More and more customers are joining the club, and it’s something that we see as a long-term important thing for our company.
Okay. And can I just follow up on the imbalances? You talked about it for three quarters, four quarters now. And you obviously seem to be more optimistic that you are past the worst. Can you just explain in layman’s terms exactly what you mean by these imbalances, and what -- exactly what you’ve done to improve the collections or the balances or the balances or imbalances, as you describe them?
Yes. Same as last quarter, we don’t want to go into too much details on that, but we have a broad customer base for -- now it’s mainly for the H&M brand. And we went -- when it comes to -- for certain customers, certain collections and concepts, we went too narrow and they didn’t cater quite enough and have the same article within the same commerciality in the assortment mix as we normally do for our core customers. And we went a little bit too broad in other areas that we don’t normally do. So that’s what we mean and that’s what we are correcting. And on top of that, we are of course looking to improve the fashion, the quality levels and the prices. So, sorry, I can’t go into exact detail as where we have gone too narrow and where we have gone.
And your next question comes from the line of Mariana Lopez. Please ask your question.
This is Rebecca again, and I’ve got three follow-up questions, please, hopefully short. Firstly, what do you mean precisely by a third-party solution to inventory? And my second question is you mentioned having an initial season commitment lower than last year. Is that for the autumn-winter? And my third question is what would constant currency OpEx growth have been, excluding sort of additional inventory handling costs related to the unsold inventory, the inventory overhang?
The first question was about how to treat stock-in-trade with the third-party. We’re looking to different markets for resellers for instance to solve part of the high stock-in-trade level to sell it to retailers. And then, what was the second?
Second was your question about lower commitment, where we are. This is -- talking about now for since 3Q last year and it’s work in progress and of course it will continue. So, that’s why we feel now going forward, we’re going to have even better opportunities to buy more in-season.
So, what is the open to buy, for example for autumn-winter ‘18 versus autumn-winter ‘17?
We don’t want to specify a number but it’s lower.
Thank you. And your next question comes from the line of Nicklas Fhärm. Please ask your question.
Yes. Good afternoon. So, could I just put these various questions on the inventory in a slightly different perspective? I was just merely wondering why would you choose at this stage knowing that starting trade has been increasing out for quite some time to protect gross margins and see inventories increase by this fairly big amount as of the end of the day rather than well, -- cut to the chase, cut the inventory and then therefore take the cost in your margin. What’s the rationale behind this decision to report this gross margin versus this end of period, the stock-in-trade decision, please?
Sorry, Nicklas. But you asked this question this morning and we -- it’s not a trade between protecting margin and versus the higher inventory. If anything, I think we are sacrificing the margin by having high markdowns. So, of course, the target is always have to optimize, have the best offerings to the customers and still have a decent markup, so to speak. And the FX, current factional gains suggest that we should have higher markup than achieved. So obviously we’ve invested some of the gains into even stronger customer offerings.
That was actually my follow-up question. If you would be kind enough to sort of give us any idea of what your product investments will look like, maybe -- or at least what they were in Q2, please?
Sorry, Nicklas. But again, we prefer not to comment on the exact investments that we are making. Normally, we comment on the five big external factors affecting the gross margin, the currency effect, the material prices, transport, the salaries, but not our exact investments in the customer offerings.
Okay. But, you do reiterate that you will continue to invest in your products over the coming year, as you said I think in Q3, most recently last year?
What we’re saying is that we need to improve this assortment. We have to correct the imbalances that we have had and we also have to improve when it comes to design, quality and price. The same level is not good enough and we constantly want to improve. That’s what we’re going to do.
Final quick question. I’m probably just dense, but there is some confusion in the market with regards to your statement on the summer collection performance. And I would just for the record like to ask you, are you saying that this part of your total offering in the stores and online is up in like-for-like terms or is it a less negative like for like development to the same performance last year?
We’re comparing the recent collections, the recent summer collections to the equivalent collections last year. So, it’s not the whole store, but it’s the recent ones, and they are performing better than the equivalent collections last year.
Okay. Thank you very much for taking these questions.
Yes. Thank you.
A correction from my side. I think I misunderstood Rebecca’s question about open to buy for the autumn. So, we have more open to buy, and the commitment is lower than last year. Okay?
And your next question comes from the line of Charlie Muir-Sands. Please ask your questions.
Hi. Sorry. One final follow-up question for me. You said you’ve had a good experience with Tmall, made a broader comment about third-party platforms. I wondered if that meant you were considering putting your main brand onto platforms in other parts of the world such as Europe or North America. Thank you.
No plans as of now, but we are constantly looking, I mean at platforms as well. And it could be part of the collection -- part of the main brands collection also that we could test on some other platforms. But nothing decided for H&M.
Thank you. And your next question comes from the line of Jörg Nowicki. Please pose your question.
Hello. I’m sorry. My question was asked and answered. I just didn’t know how to sign-off. Sorry. Thank you.
Thank you. Bye, bye.
Thank you. And your final question comes from the line of Michelle Wilson. Please ask you question.
Hi. Just a follow-up question on some comments you made on the Q1 call that you expect PBT to increase year-on-year. Is that still the case at this stage of the year?
Obviously, we still believe in the stronger second half and gradual improvements. But of course, since the first half turned out to be even more challenging than we anticipated in connection with services we have with transitions on the warehouse systems, of course it will be even more challenging to reach.
[Operator Instructions] There are no further questions at this time. Please continue.
Thank you all very much for participating in this conference call. And we wish you all a good day.
That does conclude our conference for today. Thank you for participating. You may all disconnect.