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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's nine-month report for 2019. At this time, all participants are in a listen-only mode. [Operator Instructions] I would like to advise you that the conference is being recorded today on Thursday, the 3rd of October 2019. I would now like to turn the conference over to your speaker today, Karl-Johan Persson, CEO. Please go ahead, sir.
Hi, everyone. Thank you for joining us today. I'm very pleased to welcome you all to this conference call about H&M Group's second quarter and nine-month results for 2019.
With me today is our CFO, Jyrki Tervonen; and our Head of Investor Relations, Nils Vinge. You will find the nine-months report on hmgroup.com Investor Relations. And before we start the Q&A session, I will give a short summary about the quarter and current developments.
We continue transforming our business to meet customers ever increasing expectations. Well-received summer collections and increased market share clearly shows that customers are appreciating our efforts. The positive development of more full-price sales and reduced markdowns continued in the third quarter contributing to an increase of 26% in operating profit.
Looking at sales numbers in the quarter, total sales increased by 12% in Swedish Kronor and 8% in local currencies. Growth was driven by both physical stores and online and we had a very strong increase in online sales of 30% as Swedish Kronor and 25% in local currencies.
Customer focus is our highest priority and activity levels related to our transformation work remain high throughout
the H&M Group. We continue driving change through our strategic focus areas. And we have gone through these before but these are the -- these are to create the best customer offering for all our brands, which includes investments in the assortment, in physical stores, or online stores and the integration of stores and online.
It is to make sure that we have a fast, efficient and flexible product flow to make sure to secure a stable and scalable infrastructure, our tech foundation and to add growth by expanding through physical stores, online stores and digital marketplaces. So to summarize, we see that our ongoing transformation work is clearly having effect. The new season has also got off to a promising start with a positive reception for our early autumn collections. Sales in local currencies increased by 8% in September. Looking ahead, we remain humble considering the rapid shift in the fashion retail world and the challenges it brings.
Our transformation work will therefore continue at a fast pace in all parts of the company included continued upgrades in the supply chain. We’re convinced that this will contribute to positive development for the H&M Group for many years to come. Thank you. And now we're happy to take your questions.
Thank you. [Operator Instructions] And your first question comes from Charlie Muir-Sands from Exane BNP Paribas. Please go ahead.
Good morning guys. Thank you very much for taking my questions. I've got two please to focus on, the first is related to markdown, you clearly overachieved against your ambition for Q3. You haven't given any indication in the statement on Q4. I wondered if you can elaborate on what do you think there's still much or substantial markdown opportunity to come in the fourth quarter or indeed into the next financial year? And then secondly, just on the operating costs side, it's great to see you delivering some operating cost leverage but you clearly made reference to the ongoing transformation work. I just wondered whether you time when we might start to see some of those costs related transformation perhaps coming back out or getting leverage more substantially? Thank you.
Yes, thank you. If we talk about the markdowns, we’ve seen an improvement through the year, which is good and in line with our expectations and it’s showing, I mean results from the work that we do. Over time, we believe there's good potential to continue to improve with all the initiatives we have related to the supply chain work, improved collections, and a lot of other things. The big potential lies in the bigger reduction quarters, quarter one, and quarter three.
And then for quarter four, I think it's too early to say. Good start in September, but we still have October, November to go. So over time, we believe in this other improvements take us potential in quarter one, and quarter three. When it comes to the OpEx, we have a good cost control, but at the same time we have in-high activity level necessary to secure a long-term development for the company. And we will believe, we will have or we will have continued high activity level going forward. So roughly at the same level for quarter four and at the high level for next year as well. But we don't know what exactly what level.
Great, thanks very much.
Thank you.
Thank you. Your next question comes from Daniel Schmidt from Danske Bank. Please go ahead.
Yes. Good morning. Another question on the gross margin. When you reported Q4 last year, you incurred extra costs related to the implementation on new logistic systems, and also a negative year-end effect and the upcoming transitional logistics systems in Germany of SEK 560 million of which most of that related to COGS and are you seeing any extra costs, sort of repeating itself also going into this Q4? Or how should we view those extra costs?
Yes, yes, thank you. There are many, many factors, as you know affecting the gross margin. Normally, we comment on these big external factors. Currency being a big one, especially now. And these external factors currency, raw material prices, transport prices, capacity and salaries are roughly at the same level as they were for purchases made for Q3 at the same level then for purchases made for Q4. And then as you said, we had some extraordinary costs last year that we communicated. So year-on-year compared to 2017, they stood out. But this year, we have a higher activity level or planned activity level. So roughly at the same level as the year before.
All right. Could you say anything when you talk about sort of transformation and extra cost and then sort of a high level going forward as well? Could you say anything about sort of where we are in terms of maturity in many of these projects depending AI or logistics, or tech, which have been driving costs a lot? Are we sort of halfway through? Or is there any way to quantify for us where we are in those stages?
I think it's very hard for us, of course, we have a plan for the coming years. But the activity level will remain high. And I think these are planned activities, really good activities, necessary activities that will help the company for many years to come. And I don't think that will stop. Some of the extra activities for last year were non-planned, we have to put in extra resources to tackle some of the issues that we had with the implementation of the new systems.
But there we have made improvements, we're seeing efficiency gains. And then at the same time, we're investing in new things. So I know long answer, but it's hard to say to give an exact level.
You did comment in connection with the Q2 call, you said that sort of SG&A costs are elevated, but looking sort of into the future, they will come down in terms of sort of year-on-year growth. Now it sounds like it's a little bit more sort of postponed into the future.
I think there is potential that they will come down, but the activity level will remain high. And what I'm saying I think it's hard to give an exact timing. We have tried to do that before. But there's so much uncertainty and I think to give an exact date on when things will happen it is hard. I think there is potential that they will come down in relation to sales, yes.
All right. Thank you. Thank you.
Thank you. Your next question comes from Fredrik Ivarsson from ABG. Please go ahead.
Good morning. Thank you, operator. Two questions from me as well. Firstly, you're replacing the logistics systems in China during the end of this quarter. Just curious whether we should expect any significant extraordinary cost year-to-date like we did last year in Europe and the U.S. And second question is on Germany, you're now live with the new online platform in that country as well, that was the last country that you did. I'm curious to hear what you have seen in terms of improving the services there i.e. have you or where you want to be in terms of deliveries, also the return policies and everything that comes with a new platform? Thanks.
Yes, when it comes to the first question, China, I mean, we did Spain successfully, which helps in our confidence that we will transition China in a good way. So hopefully, that will go well. And we are putting in extra resources to secure a good transition. So some extra costs are related to that preparation work, but we’re confident that that we will do it in a good way. And when it comes to the new platform in Germany, we're happy with the transition, obviously, that will give the customers a lot of benefits now and also over time.
So that's a good, stable and good, stable platform that we can build from and then we will add new good things for customers over time. So we're seeing some improvements already.
A quick follow-up on that one, are you really where you want to be in Germany yet?
No, not in any market, I mean because we have a lot of activities that will give improvements for the customers over time. So we see a lot of potential to improve. And also when we launch a new platform, new logistic systems, things are not perfect from day one is often so-called J-curve. And that we can see in Germany as well. In the beginning, we had some problems with deliveries, delivery times, delivery accuracy, but that's improving and getting up to a much better level. But we can improve from this level as well.
That's very clear, thank you.
Thank you.
Thank you. Your next question comes from Rebecca McClellan from Santander. Please go ahead.
Yes, good morning. Could you please tell us of the sort of constant currency sales growth you've had in 3Q and in September? What the boost to that is of the improved full-priced sales?
Sorry, can you -- we didn't hear that well, can you repeat the question?
Of your constant currency sales growth in 3Q and in September? What contribution comes from the full-priced sales improvements?
Well, as you know, we don't quantify it. But then we clearly there has been, as we stated again, continuously improved full-priced sales and less markdowns. But we don't comment on mix.
And that's a similar dynamic in September than in 3Q?
No, not really because we don't want to comment on markdowns in Q4 yet. It's too early.
Okay.
And J-curve production quarter as well.
Okay, thank you.
Thank you.
Thank you. Your next question comes from Simon Irwin from Credit Suisse. Please go ahead.
Good morning, everyone.
Good morning.
So congratulations on a great quarter. Couple of questions for you. Firstly, can you just talk a bit about price investments? It was this time last year, with autumn/winter, that you signaled an increase in price investment. Has that annualized and should we kind of think about that not continuing? Or will that -- will that continue through autumn/winter?
It may be a big answer, but it's something that we will continue to invest in the customer offering, I mean improved quality, improved prices, some of those investments will come from our efficiency gains that we pass on to customers, sometimes it will be acting the margin. So yes, it can be a combination. So we will continue to invest and the most important thing for us is to look at our business idea to have the best combination of fashion, quality, price and sustainability. And then we have to benchmark us against the customers expectations and us against our competitors in every market and follow that. So over time, we will continue to invest.
Okay, and just in terms of overall stores, as you're -- now you're adding still adding reasonable number of stores, but reducing a lot and the net number is a pretty small number. It's quite hard to ascertain the change in space fuel business, can you give us a sense about the relative size of stores being closed relative to the size of stores being opened?
It's -- I mean our whole work with the portfolio, the store optimization of the portfolio includes, I mean rightsizing stores. So some stores we are making smaller, some we are making bigger, stores we close can actually be a mix of bigger stores and average size stores, smaller store. So it's hard to -- it's hard to say a difference between those and the ones that we have and the ones that we opened. But directly so far that closing in new stores in average that they are more or less the same size. But as he said it could differ on expanding markets with we open the flagship store still, and closing down smaller, but roughly in space, it’s the fact.
I think it’s not so much size that matters Simon. It’s more about the profitability and how it fits in the total picture.
And also the square meter selling, we're expanding more in emerging markets and closing those stores in more established markets as Jyrki said.
Right, thank you very much.
Thank you. Your next question comes from Anne Critchlow from SG. Please go ahead.
Good morning. Thanks for taking my question. We've been reading quite a bit in the press about H&M’s lease negotiations in the U.K. I'm just wondering if that could lower, if there's lower rents could next year have a noticeable impact on the cost line from our perspective in the modeling?
We have quite, we have a big possibility, a lot of stores that comes up for renegotiation next year, and then many markets we believe the rent levels are too high, given what's happening in the retail market. So I mean, that's one of the reasons why we are a bit more cautious when it comes to opening new stores, why we have revised goals? And yes, so we believe rents should come down in many markets.
And should we see that in the operating cost line? Will it have a noticeable impact from our perspective in modeling?
Yes, it's a bit hard to give an exact figure but we believe there's potential and the rent should come down and
yes, rents will parse out, yes.
Great.
Thank you. Your next question comes from Nicklas Fharm from SEB. Please go ahead.
Thanks, operator. And good morning to all. I was just wondering, if you could give us some idea of the magnitude of the price investments in gross margins in this quarter given that the share of markdown impact was actually higher than you initially thought? Thanks.
Hi, sorry. We don't go into details on our exact investments, what we normally comment are these five big external factors. They had a big negative effect on purchases made for the third quarter.
Would you care to give us some hinge of the number of new store openings that you plan for 2020 at this stage?
Sorry, we’re in the preparation of setting goals for 2020. So that's not finalized yet. So we will get back to that later.
Yes, sure. And final question, if I may. About a year and a half ago, you set an inventory target at the Capital Markets Day I'm referring to, and obviously a lot of things have happened since then. And I'm sure you have been contemplating, how the sector has really been changing. And I was just wondering, do you think you could give us some updates on sort of a new ballpark number for where you think inventory should be on a more normalized level, where you’re now one year ahead?
We haven't changed that, we believe it's possible to go down to that level that we set during the Capital Markets Day in the range of 12% to 14% in relation to sales. We believe in further improvements in stock levels but the hard time is it's hard to put the timeline on it. And so all the work that we have a lot of the activities will help us achieve that. So we still have a belief in that.
Okay, that is okay. One final small question, there's quite strong cash flow in the period and one of the points sticking out perhaps is, of course, the change in tariff receivables in working cap and I was just wondering if you could touch on that briefly please?
Yes, I think we're looking at the group cash flow statement, I really think as you mentioned, we have a quite strong improvement in free cash flow, I think it's up SEK 3.5 billion compared to last year but trying to look into each row in the cash flow statement, it’s very hard because there are so much currency, currency effects affecting the gross.
But in general, we are working hard with the working capital and stocking traders we have mentioned earlier is the big potential to release working capital. So we are comfortable that we are in the right direction. And the most important thing is that we started to deliver on top line and profitability, but also to start to generate the cash flow. So we think it's the first time that we are in the right direction.
Thank you for taking all these questions.
Thank you.
Thank you.
Thank you. Your next question comes from James Grzinic from Jefferies. Please go ahead.
Yes, good morning, everybody. I had two quick questions really. The first one perhaps to try and put into better context, the reception of this autumn/winter range. Can you perhaps clarify what the comps look like in September, October, November last year? And my second one was around club membership? And can you perhaps update us on what the membership total is at now? And whether you have changed some of the conditions, inducements, offers in some markets that come with a membership sign up. Thank you.
Yes, good reception of the collection then for September, it's only a month, it's very hard to draw conclusions from a month. We're meeting, if I remember correctly, plus, I think in plastics in local currencies for the quarter last year, September was a bit weaker. So we will see but I think it's a sign again, that the work that we do, customers are appreciating that and the collections that we have in stores and online so far. When it comes to, what's your second question around number of members in the loyalty?
Yes, in the club, was it now and whether you’re changing some of the mechanics for some of the services offered with the membership?
Yes, we're introducing new features all the time for members and we have had a good growth. We went into the year with SEK 30 million. I think we stand up just about SEK 50 million today. So good growth and customers are appreciating the club. So we hope to see for the growth in that over the year.
Thank you.
Thank you.
Thank you. Your next question comes from Niklas Ekman from Carnegie. Please go ahead.
Thank you, yes just a quick follow-up on September. Is there any tangible weather effect that's worth mentioning? I know in June, you had a very significant weather effect. Was there anything similar you've seen here in September?
Yes, I think looking at, it varies from market to market, but many big markets for us the positive weather effect, especially in the first half of September, a bit weaker in the final week of September. So that's, that's what I mean, it's only a month. And it can change quickly. So we'll see. But when we look at all the markets, we still see that we take market shares that we do well, the customers are appreciating our collections.
Okay, great, thanks. And also on inventory. Can you just comment a little bit on the difference here between inventory being down 1% in local currency and up 9% in SEK, I think when you look at the currency translation effects, they are significantly smaller than 10%. So how come you have such a big discrepancy between SEK and local currency?
Yes, as you mentioned, it's a combination of translation effects. The Swedish Kronor is depreciating against our portfolio of currencies. But there are also some accounting transactional effects which is causing quite big currency effect and it’s connected to that we hold 50%, 60% in GBC, the Swedish company in Swedish Crown. So that will give a quite big effect as to the Swedish Kronor has really depreciated against the U.S. dollar.
Okay, thanks for clarifying. And then coming back to OpEx growth, I'm trying to understand here the acceleration in OpEx growth obviously if you look at store expansion has slowed quite considerably from over 6% one year-ago to under 3% comparison, it is continuing to accelerate when you’re slowing stores and facing easy comps?
Yes, it’s different things, but mostly it's connected to the high activity level that we have had for several quarters and that will continue for quarters to come. So that’s correct that of course, these stores side is not expanding as earlier, but we are expanding with online quite heavily, both when it comes to our newer brands but also with the H&M brand. So it's not only about the physical stores, it's also online growth that’s increasing, increasing from year-to-year.
And in the past couple of quarters, you had a lot of cost related to this transition of your logistic systems. Is that something still weighing a lot on cost? And is there a lot of these because that are kind of temporary in nature? Or should we expect OpEx growth to remain at quite elevated levels for the next year or two?
Yes. Two questions in one there. As Karl-Johan already said yes there is still, we still have a very high activity level throughout the company that affects both costs and OpEx. But it's good things we're doing as we see that they give results. We will continue of course, when it comes to COGS, yes, we have some one-off last year but this year again, very high activity level. We're preparing for the transition in China as we talked about and we also have the big move in U.K. where we’re moving into big new automated logistics center.
Excellent. Thanks for taking my questions.
Thank you.
Thank you. Your next question comes from Miguel Medina from JB Capital. Please go ahead.
Yes, good morning. Just one question, it's regarding the face evolution in the Spanish market. If I look at the data for the first half, it’s fairly constant that 8% growth in local currency, and then in Q3, it’s just 1%, I was wondering is this a level that was less sales activity, this comes in Q3 or the macro has slowed in Spain or a combination of both? Just wondering was there any specific reason for the performance in Q3?
Yes, sales activity there were less sales. So the performance in Spain is according to the plan that we have. And then if I’m not mistaken, we’re meeting a bit higher comps also in quarter three compared to earlier quarters in the year. So yes, according to our plan.
Thank you very much.
Thank you.
Thank you. Your next question comes from Richard Chamberlain, RBC Capital Markets. Please go ahead.
Thank you. Good morning everybody. A couple of things please. I'm interested in. On inventory, I wondered if you could comment on the inventory reduction in Q3, to what extent it was driven by any particular areas? For instance in the U.S. you had an inventory backlog last year in the D.C., and New Jersey. I'm just trying to get a sense of how much that inventory improvement is one-off or more than underlying trends? Thanks.
This is certainly not one-off. This is part of the transformation improvement that we are doing and we expect the inventory to continue.
Okay, thanks. And then my other one was just on the activity level that you mentioned in the state, you say that you're doing more work on this plant. I wonder if you can just give us a bit more color on where you are with that. Talk about the upgrades that you're making and potential impaired gross margin in the fourth quarter if you can, thanks.
Yes, those we have listed of activities in the report faster strongly, few of the main stuff we have and the supply chain activities is just one area about report unboxed preparing transition. So lot of preparation work going into that and that goes as big in the U.K. activities. So it’s big activity, thanks for confidence but obviously a lot of investment in costs into that. So those were two examples that supply chain works we have in that. We have to remember also seen the U.K. opening up new facilities, the same time we have to run these old warehouse at the same time. So we have double cost in bringing this long one, so that is of course a time to one-off during that.
And in your warehouse business be the first mover integrated warehouse that you mentioned conserve online and stores?
Yes, we are on this journey and we have gradually we are growing more in this chain, yes.
Sure, okay. Thanks very much.
Thank you.
Thank you. Your next question comes from Anne Critchlow from SG. Please go ahead.
Thanks. Just a follow-up from me, please, on store refurbishment. I know that you had in your store, I’m just wondering if that accelerate and what we need to consider any disruption to trading in those?
We have a program, the look of the store, formats of the store, rebuilding the stores in different versions. So we have program for that, plan for it, we will see more refurbishments in the next year. So we’re confident with the planning there and that it will generate good results.
Okay, thanks. And do you think there will be disruption due to areas that the store being closed while that work goes on?
Obviously, when rebuilding a store, there are some disruptions to that. But that’s in the plan. The refurbishment time, how much that will cost but we also see a big upside of course from the stores selling wise, cost wise, so everything is in the calculation.
All right. Thank you.
Thank you.
Thank you. Your next question comes from Simon Irwin from Credit Suisse. Please go ahead.
Hi, just a follow-up on tax, I know that generally 4Q the tax rate tends to bring the full-year level down. How should we think about overall tax rates this year?
Yes, as normally we are using 23% in Q1, Q2 and Q3 and the final calculations is done in connection with Q4. We still believe that the tax rate will be between 22% and 23% when we end the year.
Okay, thank you very much.
Thank you. [Operator Instructions] And the next question comes from Rebecca McClellan from Santander. Please go ahead.
Yes, hi. Just a quick one on inventory. Can you give us an idea as to how inventory is across the two channels and against your goal of 14% as of the medium term, how much of that is related to improved inventory integration?
As we’ve been speaking about many times before, virtually of course it’s integrated but it could be split for reasons. In this phase, we are right now where we are still expanding online new markets or expanding online, the shares as the online is like higher for the stores. But that should normalize.
Okay, thank you.
Thank you. There are no further questions at this time. [Operator Instructions] We have no further question, so I would like to hand you back to your host for closing remarks. Please go ahead.
Thank you all very much for participating in this conference call. And we wish you all a good day. Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.