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H & M Hennes & Mauritz AB
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Good morning, ladies and gentlemen. Thank you for standing by, and welcome to today's 3 months' results for 2018. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, the 27th of March, 2018.And I'd now like to turn the conference over to your first speaker today, the CEO, Karl-Johan Persson. Please go ahead, sir.
Hi, everyone. Thank you all for joining us here today. You're very welcome for this telephone conference about the H&M group's first quarter 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 market and the first quarter of 2018. Nils will take us through the financial details. Then I will talk briefly about our key action areas for long-term profitable growth that we presented on our Capital Markets Day recently. After that, we'll be happy to answer your questions. And you will find the slides for this telephone conference on hm.com.As you all know, the fashion retail market is in rapid change. At the core of this change is the digitalization, which is changing customer behaviors and driving customer expectations constantly higher. This development is bringing both opportunities and challenges. For the H&M group, 2018 is a year of transformation, where we are accelerating our actions to adjust to the new dynamics in the markets and seize the growth opportunities that are arising. Our online sales continued to develop well in the quarter. We also see that many of our ongoing initiatives show good indications and results, even if they are not yet on the scale that is large enough to have decisive effect on our overall development. I will come back with more about our action areas shortly. But first, I will hand over to you, Nils.
Thank you, Karl-Johan. Starting with top line. Sales in local currencies were unchanged in the first quarter. Converted into SEK, with a negative currency translation effects, sales including VAT amounted to SEK 53.6 billion compared to SEK 54.4 billion a year earlier. Net sales amounted to SEK 46.2 billion compared to SEK 47 billion last year. For New Business, sales grew by 15% in stores and online combined. And looking at online sales for the whole H&M group, sales grew approximately 20%.Looking at some profit numbers. Gross profit was SEK 23 billion compared to SEK 24.5 billion in the first quarter last year. This corresponded to a gross margin of 49.9%. The weak sales in the fourth quarter partially caused by imbalances in the assortment for the H&M brand resulted, as previously communicated, in the need for higher markdowns in the first quarter. Markdown costs increased by just about 2 percentage points as a share of sales.Selling and administrative costs increased by 2% to SEK 21.8 billion. In local currencies, the increase was 4%. The cost control in the group remains good, but the higher markdown level in combination with a delayed start of the spring season led to weak results in the first quarter. And profit after financial items was SEK 1.3 billion.Net profit was SEK 1.4 billion, including a nonrecurring item of SEK 399 million in tax income, which was related to the U.S. Tax Cuts & Jobs Act.Net profit equaled earnings per share of SEK 0.83 compared to SEK 1.48 in the corresponding year earlier period.Looking at some key data. Stock-in-trade by the end of the quarter amounted to SEK 35 billion, an increase of 7% in kroner. In currency adjusted, the increase was around 8%. Due to the weak sales in the autumn, we had too many garments going into Q1, which we've been working to clear throughout the quarter. In parallel, we have had an inflow of new garments, however, the unusually cold winter weather in February had a negative impact on the sales of these new garments. The target of reducing inventory over time remains, but in order to get there, we need to get back to better full-price revenue growth. Since the inventory at the end of February is higher than planned, the marginal level will increase in the current quarter compared to the second quarter last year.Cash flow from current operations was SEK 1.3 billion in the first quarter compared to SEK 2.4 billion.Investments in terms of CapEx totaled SEK 2.1 billion compared to SEK 2.4 billion. And for the full year[Audio Gap]So how far did we come before it was -- the line was broken.
You've only missed about 20 seconds of what you were saying.
Okay. So I'll repeat the last part, I think, around from the cash flow. Cash flow from current operations was SEK 1.3 billion in the first quarter compared to SEK 2.4 billion. Investments in terms of CapEx totaled SEK 2.1 billion compared to SEK 2.4 billion. And for 2018, the full year, CapEx is expected to be around SEK 12 billion with a big shift from new physical stores to digital.Liquid funds amounted to SEK 10 billion, up from SEK 8.4 billion. And at the end of the quarter, short-term loans amounted to SEK 9.8 billion compared to SEK 1.3 billion last year. The return on equity was 24.1% rolling 12 months.And now back to you, Karl-Johan.
Thank you. We are well positioned in the market. Today, we have 8 strong brands. And just like H&M, our New Business portfolio is profitable, offline as well as online. The New Business portfolio today includes 7 brands, all with own unique identity. In addition to this, we have great strength in all our shared group assets such as our supply chain, all the data we have in the group, our tech foundation, our sourcing capabilities and all the skills and support from the multibrand functions and country organizations, just to name a few. We still see plenty of opportunities to improve and plenty of growth opportunities going forward. And our work now is mainly focused around the following areas: to develop the brands we have with a focus on H&M; to accelerate our key enablers, like we call them, I'll explain more in a second; and also to add new growth and, of course, also to continue to have good cost control and focus on efficiency gains.The first and most important area is to continuously develop our existing brands, and our highest priority is the H&M brand, which makes up the largest part of our business. And the most important thing when developing our brands is to improve and develop the products and the assortment. While the assortment is appreciated by our customers, we have not improved fast enough. In addition to this, we made some mistakes in the assortment mix in the second half of 2017 that affected the top line. And now, we're working hard to ensure improvements, including fashion improvements to improve value for money further as well as of cost and also to have the right balance and assortment mix with the right products in the right -- at the right time, in the right amount to the right channels. And then, of course, linked to this work is also to improve our physical stores to offer a more inspiring and convenient customer experience for the local customer. And we are in the process of testing new store concepts that's only in test or pilot phase, and they are small scale, but they are showing really positive results, both in terms of customer feedbacks and sales. So we will do more tests during the year and then the plan is to start scaling this up during the latter part of 2019.At the same time, we are continuing to optimize the store portfolio. This is to make sure we have a presence that fits customer demand in each market. In the first quarter, this included 34 store closures in addition to renegotiations, of course, where we see a big opportunity and rebuilds and the adjustment of store space.We also want -- our digital store is performing well, and we are developing this channel further. For example, we see that customers appreciate digit -- new digital features that we are adding such as image recognition and also personalized product feeds, just to mention a few things.By now, most of H&M's online markets have been transformed -- transferred to the new platform, which allows for further improvements for our customers. And this includes everything from higher speed to improved navigation and extended payment options. And we're also speeding up deliveries for online purchases.We also want to create a frictionless shopping experience by integrating the channels. This will enable convenient and more flexible services such as Click and Collect, Scan and Buy and online return in stores.Looking ahead, our omni-channel strategy will make our entire assortment even more accessible, which will benefit customers regardless of where, when and how they choose to shop. This brings us to our next action area, which is to accelerate our key enablers. And here, we continue to invest in new technology and ways of working to meet customers' fast-changing needs. One area is around our supply chain, and we have, together with internal and external experts, maxed up to optimize our sourcing, the logistic network to ensure even more speed, flexibility and efficiency. In addition to this, we are also investing a lot in automated warehouses for -- and this, we have done for our warehouse in Netherlands, Sweden and Poland. And by these initiatives, some already up and running, we are increasing capacity and efficiency and, most importantly, we also -- we shortened the time from order placement to delivery to customer. By optimizing our logistic network, we will also be able to increase product availability and further ahead reduce stock levels in relation to sales.We are also investing a lot in advanced analytics and artificial intelligence. Like we have said before, we see a very big potential here across the board, from assortment planning to supply chain and sales. And the areas we are investing in are trend detection, quantification and allocation, price management and personalization. And our ongoing projects in this field already show very good results and sales uplifts.One key enabler also for future growth is our whole tech foundation. And we have invested heavily in our backbone for a number of years. So now we have a robust and scalable foundation that will benefit the group for many years to come. And this will also enable faster development of consumer-facing apps and digital experiences.And our strategy for this is to use technical structures such as cloud, APIs and microservices. We're also expanding our use of technical solutions such as RFID and 3D. In 2018 and over the next few years, we will be rolling out RFID on a large scale.Our third focus area is that we aim to add new growth on top of the growth generated by our actions in the other 2 areas. We are expanding with -- across digital, meaning that we are broadening our online assortments, we're rolling out our online stores to more markets as well as linking to new platforms.In March, both H&M and H&M Home launched successfully on Tmall in mainland China. We had high expectations, but we exceeded the high expectations. So it was a fantastic launch. Also in March, H&M opened online in India where customer reception has been very good. This means that H&M now has e-commerce in 45 markets, a number that will grow further this year and beyond.In parallel, we still see room for expanding with physical stores in many regions and countries. For H&M, focus will be on emerging markets. And in total, we planned a net addition of 220 stores in 2018, including all brands of the H&M group.Developing and launching new brands is an important part of the growth strategy of the H&M group. Later this year, we will launch our ninth brand, Afound. Afound will be an off-price marketplace, offering carefully selected, broad and diverse assortment of discounted products from well-known quality brands, external as well as brands from the H&M group.We are also working on new ideas and innovations that will drive us forward, and this includes new business models that are based on external collaborations and that will build on the many strengths and assets we have within the H&M group. And we're looking forward to telling you more about these initiatives further ahead, but I would also like to point out that these investments are relatively limited in size. They're also managed by separate teams and do not take any of our focus from developing our core H&M brands -- our H&M brand, which is our highest priority also going forward.So this was the short recap of our main action areas for future growth. In parallel, with our growth initiatives, we continuously, of course, work to increase efficiency as well, maintaining a good cost control. We expect operating costs to continue to increase at a slow rate. Efficiency improvements are ongoing within -- with several promising initiatives within buying and production. In addition, the weaker U.S. dollar is currently having a favorable impact on purchasing costs.Looking ahead, we see great potential to reduce markdown costs from 2019 and onwards.Before we move over to the Q&A session, some words on the current year.Our assessment remains that sales from online and New Business will grow by more than 25% during the year and that the H&M group will reach a somewhat better results -- result for full year 2018 compared with last year. We take long-term view that together with our knowledge and experience enable us to navigate through times such as this. And I look forward to telling you more during the year about the H&M group's continued transformation work, which will get us back to healthy growth in both sales and profitability.Thank you, and now we're happy to take your questions.
[Operator Instructions] Your first question comes from the line of Charlie Muir-Sands from Deutsche Bank.
I've got 3 questions, please. The first one is that you, obviously, have talked about the errors you made in your assortment in the second half of 2017. I guess, it would have taken some time to realize that when the sales were then weak. So given the length of the supply chain, by what point do you think you implemented to fix this and we should see in your sales results the benefits of correcting those errors? The second question I have relates to all of the plans you have for 2019 that you've mentioned around store refits, particularly the roll -- ongoing rollout of RFID and developments of digital. Should we expect 2019 CapEx to be higher than the current year? And then the final brief question is, historically, you've made some comment about current trading. I wondered if you could confirm that March has been difficult as much as the industry data suggests.
Okay. Thank you very much. When it comes to the mistakes that we've made in the assortment for the H&M brand during the second half 2017, it is affecting -- it has affected the selling in quarter 1. It will, to some extent, also affect the selling in quarter 2, but it's not that anyone at a particular point where everything was fixed. It has been a gradual work, and it will be a gradual improvement, and we're also [ mending ] the mistakes that we did from last year -- from '17. So we will have easier comparable figures. But, of course, we're working very hard and focused to make sure that we improve all parts of the assortment and especially down that we have a better balance and cater well for our target customers. When it comes to the changes we're making to the store concept or to the stores, one part is, I mean, the tests that we are piloting with a good success and when it comes to the new interior, rebuild is just one part of it. But those we'll scale up if the tests continue to be successful during the latter part of '19. But the things that connect to the product presentation and other things that is not connected to rebuilds, we will implement quicker than that. RFID, which we -- which again we had piloted in many stores with good success will be rolled out to 1,800 stores approximately during the year and more stores during 2019. When it comes to the CapEx figure for 2019, it will not be -- we don't believe it will be higher than for 2018, but our best guess today is in line with '18. And current trading -- now we release -- don't release monthly figures, so we will comment on the full quarter in -- by mid-June. But as you have seen in the market figures and it's been tough month for retail, and I think the cold weather has been part of that, delaying the start of the spring season.
Your next question comes from the line of Richard Chamberlain from RBC.
[Technical Difficulty]Can you hear me?
No, we can't hear you. Maybe you have a mute button.
Richard, you're very far away from your phone. I'm sorry, Richard, we're going to need to go to the next -- you'll be timed out. Please continue.
Can you hear me?
Yes, we can now.
I just have a query, sorry about that. Right. 2 topics, please. Yes, the first -- my first question is on inventory. Just wondered if you can give more color on the inventory composition and also talk about inventory -- your current level of inventory commitments. And the second one is on the China Tmall launch. Obviously, you got off to a very strong start. I think you said it exceeded high expectations. Were there any sort of special incentives that you offered to drive initial demand? And do you expect that to be a sort of temporary period of very, very strong demand and then for demand to drop back or just some initial thoughts on the China Tmall launch?
Yes. Thank you. Yes, we went into quarter 1 with 2 [indiscernible] connected mistakes that we made in the assortments. Reductions, as you see, are -- has been very high during quarter 1. We still have 7% higher stock than last year, which is higher than what we wanted to be. But we -- still we have -- we still have a control of it, and it's -- and we have a good plan on how to handle it in the most cost-efficient way, taking into consideration sales, profits, customer experience in the stores. So we will do that as good as we can. Reductions will be higher during quarter 2, but we still believe with the stock management work and actions that we have, that reductions for the full year still can come in at flat or show a slight increase compared to 2017. When it comes to Tmall, we -- it's been very, very good. We heard some -- we got some estimates from other big international companies launched on Tmall. So we knew that we had high expectations, but it exceeded the expectations. We did some extra activities connected to the launch in Tmall, but so -- the first day was really high, but it has continued at the good level. So -- I mean, it looked very promising and the good part is that the stores in China have been not cannibalized by this nor our own web shop. So the total selling in China has been very good for us.
Okay. Great. So it sounds like you are attracting a very different customer with the Tmall launch. Is that correct?
I'm not sure about the customer mix or exactly where the customers are coming from. Yes, we will have to analyze that, of course. But it's been a very good start.
Next question comes from the line of Niklas Ekman from Carnegie.
Just a couple of questions. If -- I'll take them one at a time. Starting with inventory. I'm curious because the inventory has not been rising sharply for the past 2.5 years. And I'm -- you talk about efforts here to reduce the inventory, but I was wondering is that possible if like-for-like sales in physical stores continue to decline at a high single-digit pace, the way we've seen now. I assume that's the reason why inventory has continued to increase, that like-for-like sales have been much weaker than you have anticipated. So I was just curious, how quickly you can correct if like-for-like sales continue to decline?
Yes. Absolutely. It's connected to that, the selling has been lower than planned. But also one has to remember when we give the -- our view on the full year, we're making mistakes from second half last year. We, obviously, believe that we will improve from that. And on top of that, we believe that we have improved also when it comes to fashion trends, value for money and so on. So we hope that selling will be -- or we believe that the selling will be better for second half year 2018. And then, of course, we're learning, and we have invested a lot in the analytic tools that we believe will help us to quantify and allocate even better. And also RFID and some changes in the supply chain and how we work with different product flows will benefit. It's hard to give an exact figure, but our view that we gave during the Capital Markets Day is still the same, that we have a good chance of coming down to reductions that are flat or a slight increase compared to 2017. It still remains.
Yes. And on that topic, with -- you say reduced markdowns in 2019, but not in 2018. Is that because of the tough start? So the net figure you're still expecting to be slightly negative for the full year because same thing here, I mean, you are facing really easy comparisons throughout the year, but particularly towards the latter half of the year. So do you still expect to reduce markdowns in the latter half of this year?
Yes. Exactly.
Okay. Good. And I was curious, on your guidance for New Business and online sales, you talk about growth of 15% and 20%, respectively. How confident are you that these businesses will accelerate their growth? And particularly New Business, what kind of visibility do you have there that, that business will grow 25% for the full year?
We -- our view is that we will reach those goals of 25% plus for both online and New Business. H&M online was, we did what we planned in quarter 1, it was a little bit lower than for the rest of the year. New Business was actually a bit lower. But our view is that it was tough for the whole market. And partly, I mean, it's the market that we all know, a market in transformation, but it was quite a bit affected connected to the cold weather. And so, yes, I think that was specific for the quarter. And we -- so we still believe that we will reach the 25% plus for New Business as well.
Okay. But -- the cold weather, I can understand, but 10 percentage points below is quite significant and the structural challenges are probably not going to go away. So is there anything you're doing to accelerate the New Business in the remaining quarters?
It's not 25% below. I mean, it varies from quarter -- 10 percentage points below. It varies from quarter to quarter, but New Business was below the plan we had. But we -- but not by 10 percentage points.
Okay. And then final question here just on -- you've talked earlier about shifting to proximity sourcing. Can you give us an update here on where you are in this process? And if there could be any kind of guidance for what share of sourcing that can shift to shorter production times?
We don't give any figure on exact share and how much of it will be in production time, but it's an ongoing work. As I said, mapping up the whole, which we have done, optimal sourcing network, optimal logistic network, changing our internal processes connected to that and also segmenting the product flow. So we differentiate even more between how to buy basic garments, how to buy normal products or, to say, normal fashion products and also the things that we want to buy super quick. And things that we want to test in small quantities and then to scale up. So it's not the test period that will continue for a year and then we will roll it out, but we are gradually introducing new ways of working parallel to getting the whole organization ready for working in a new way.
Next question comes from the line of Adam Cochrane from Citi.
Firstly, on the weather impact. Is it possible with your geographic spread see that the clear differences where you've had the snow impact compared to other markets? If you just realistically look at isolating what is the range issue versus what's the weather? And then secondly, you're talking about the external factors becoming more positive as we look forward. Is there a chance for you to reinvest some of that cheaper sourcing into lower prices that may be start to kick-start some of the sales performance as, clearly, I think, one of the main concern is the underlying sales performance and maybe you just need to -- as well as better product, if you can come to the market with slightly more attractive prices? Is that something you think about doing for the remainder of the year?
Yes. Thank you. Yes. We see differences between markets connected to weather. We also see in the total sum of the assortment that more weather-sensitive products, so to say, more spring-ish garments has -- is performing less good than last year across the customer groups. So clearly connected to weather. So there is a weather component, yes, but I also want to be, I mean, honest in saying that we are still facing mistakes from second half last year that it's -- that has affected the quarter 1 selling and to some extent also will affect quarter 2 selling. So it's a combination. When it comes to favorable external conditions, yes, we have that, especially, with the dollar situation as it is now. And as I said during the Capital Markets Day and also today, one of the main priorities is to improve our assortment, especially, for the H&M brand. It's a combination, of course, of correcting the imbalances that we have to -- but also to improve fashion -- the fashion level and also to improve value for money. So we are looking to invest also, but the gross margin will be positive for second half 2018.
And have you sorted out sort of widening the tail of the brand to broadening the customer base for the core H&M product? Maybe over the last few years, it's become very narrowly focused on the younger customer.
I think you're right. I said it during the Capital Markets Day that we -- when we got more detailed questions about the imbalances in the assortment, one of the things that we did was that we lost a little bit of -- or we lost focus on our core customer groups, and we went a little bit too narrow in certain areas. So without going into super details, it's one of the things that we are, of course, correcting to make sure that we cater well for our customer groups and that we broaden the assortment well enough connected to our target customers. And so you're right.
Next question comes from the line of Simon Irwin.
Three questions for you. The first of which is, do you see anything in the spring/summer ranges, either yourself or across the industry, which suggests that there are any better fashion trends out there? I mean, obviously, one of the problems that the industry has faced in the last couple of years is simply a kind of lack of must-have newness? The second is, can you just talk a little bit more about flexibility in buying? What you're doing about it? And whether it is having any impact? And thirdly, can you just guide us to where you think inventory level should be? I mean, you typically run your business on 100, 105 days of inventory. You all currently seem to have around 130-plus days. So I'm just trying to work out how long it's going to take you to get rid of that excess.
Sorry, I didn't get your first question.
Just in terms of spring/summer ranges, are there any new fashion trends out there that you think are any better, given the whole industry has simply lacked must-have product for the last 2, 3 years?
You mean our spring...
No, in general term.
Either yours or the industry?
Those -- sorry. It's...
Okay. Well...
Are the competitors also doing better fashion or do -- I didn't get your question. Sorry, I'm...
Well. Are you any more confident that there are ranges out there in your ranges this year, which are better than last year and which are likely to [indiscernible] coming there?
Yes, yes, yes. We feel confident that we will see a gradual improvement in our assortment this year compared to last year, yes. But it's too early to say anything about spring/summer because it's -- as we said, it's been cold. But in the markets and online also, we see that the assortment of spring/summers or in markets where it's been more normal weather comparable to last year, we see that the spring/summer garments are appreciated. So we feel confident enough. When it comes to buying more in season and having better flexibility, our commitment today, commitment to buy, is lower than last year. We're looking to buy for the rest of the year to buy more in season, and we believe that we will have a big benefit from the investments that we have done in advanced analytics, in the supply chain work, in RFID and that we will have -- we will come down in stock in relation to sales, that we will see an improvement during the year in that and that during 2019 will come down to the range of 12% to 14% in relation to sales.
Okay. But you think it will take you into next year to get to what you need to be?
Improvements from end of '17 to the end of '18 and then for 2019 in the range of 12% to 14% in relation to sales.
Next question comes from the line of Chris Chaviaras from Bloomberg.
Two questions for me.
Yes.
Can you give us the essential -- can you quantify, if possible, the magnitude that the external factors will have on your gross margin in this year, in FY '18, just to get a sense because it's clearly quite important for the guidance? And the second question is on the 3 warehouses that you've mentioned, the ones where you do automation. Can you tell us what percent of the overall orders will they handle? And whether you have plans to automate the rest of the warehouses?
Yes. Sorry, but we can't give exact -- we don't want to give exact details on the gross margin for the rest of the year. But we said that it will be a positive gross margin for the second half. And then when it comes to automation, it's 3 big warehouses. So it has a big effect. We don't want to -- I don't have it actually either, but we -- even if I had it, we don't want to give the exact volume that goes through those warehouses. But the plan is, of course, in all the big warehouses that we have around the world to further roll out all the automation investments that we are doing because we see a big, big benefit in speed and efficiency coming from that. Sorry, I can't be more precise.
That's alright. Can you tell us how many big warehouses you have around the globe, the ones you consider big?
All right. I don't have the exact amount today, but if -- what was your name, again?
Chris Chaviaras.
Yes. We can have a look, and if you call Nils Vinge later on, we can see if we can give you more details on that.
But as Karl-Johan said, we have these 3 planned for 2018 and they are online warehouses. And then as we mentioned during the Capital Market Day, of course, one is planned in the U.K. for 2019. So we have several huge warehouses around -- in Europe and also in Asia and the U.S. But we also have this logistic network work that we are doing to look into all the warehouses we have in Europe to map them and see that they are optimized in geographical location, but also inside the automation levels, so that's the work we're doing with external consultants and our own experts, and the work is proceeding very good. So we will have some small changes probably in the warehouse setup the coming years, but no dramatical. We have a quite good roadmap already, and that's when we've got that confirmation from the external consultants.
It does sound though that you do have quite a few hints to my question because you do say that there's going to be quite a big impact in the lead times from automating these 3, but if these 3 are just 3 out of 50, let's say, or 40, it doesn't sound that big.
Yes. They will have an impact. For instance, when we are estimating, for instance, the amount of European customers that we can give them next day delivery in 2019, it could be up to 90% of European customers that will -- we will be able to cater next day delivery. So those will be, of course, important for the German online market with huge warehouse planned in Boleslawiec in Southern Poland, which is catering not only Germany but also Poland. So they will have an impact in the customer offering and our efficiency, as Karl-Johan said.
Your next question comes from the line of Nick Fhärm from SEB.
I'd like to start by asking you the like-for-like development in the quarter. I know it's a nondisclosure number, but irrespectively of what it actually is, could you give us an idea of how that breaks down into sort of store footfall and perhaps price and mix, please?
Price and mix, Nicklas, could you please explain what do you mean because, I mean, as we said, we don't disclose like-for-like, clearly it's been negative. And I mean, we had stopped disclosing the like-for-like number for various reasons and, of course, we don't break it down in price and mix.
But if -- one thing we have -- with the shift in the market, we have had negative footfall to many locations around the world for, I mean, a number of years and that, I think, happens to -- there have been some things we see in the markets. But during second half last year, we saw a bigger drop in like-for-like than that and also during quarter 1, but that's connected to our mistakes, and that's a combination of converting less than the average purchase, but we don't want to dig into too many details about that because then we have to talk about this quarter, but it's -- I mean, it's an indication again that, I mean, the second half last year was connected to the mistakes that we made.
Yes. But just for the record, it looks like or it's -- the way I interpret you, it seems like even though your markdowns probably had a negative mix effect on like-for-like sales, you are also confirming a still negative footfall trend across your retail network.
Yes.
Yes.
My second question would be, how did like-for-like costs develop in Q1, please?
Like-for-like costs?
Yes.
Like-for-like costs. Okay. Cost to SG&A. Yes. Okay. Yes, they were down compared to last year in comparable stores.
But by -- would you care to give us a number?
I have -- don't have the number but, of course, when we are looking into the comparable SG&A, but when we have the like-for-like decline in turnover, of course, we react, and I can't remember if it was down 3% or 4%, but it was quite good cost control during the Q1.
Excellent. And then if I interpret you right, I'm not sure, though, but let's just assume that the U.S. dollar will have a fairly large positive impact in gross margins in the second half, will it be a fair interpretation to say that you still expect markdowns to be sustained in the second half, but net-net you're expecting a positive development in gross margins in H2 this year?
As Karl-Johan just said in the previous question, yes, we expect, first of all, that the dollar is helping us as we stated in the report. And part of that, we could, of course, invest in the stronger offering, but also in terms of stronger [indiscernible] margin. And then with regards to markdowns, we felt that during the latter half or Q4, they should -- there is a potential to have lower markdowns than last year.
And then my final question then. Summing it all up, if you have continued pressure on store footfall, you hope to maintain a fairly unchanged, I believe, slightly increase in gross margin. And, yes, you had good cost control, but what is the implicit assumption you're making in terms of net sales like-for-likes in order to achieve "some profits growth in this year"? What are you basing in that guidance on?
Sorry. Can you say that again? I didn't get it.
Yes. So what is the actual like-for-like that you need to see that you base your forecast or your guidance for earnings growth in this year? What level is that?
We don't want to go into exact figures on what is our forecast, what we are aiming for. But if you combine our online targets, the New Business, our new stores, the like-for-like sales, the actions that we have connected to all parts of our focus areas, we believe we have a good chance of reaching the 25% plus for New Business plus online and that we will have a moderate increase in profits for the year.
Next question comes from the line of Michelle Wilson from Berenberg.
I've got 3 questions. First of all, just on the knock-on effect from the inventory overhang. I guess, we're now expecting higher levels of markdown in Q2. And I think you've previously said that when we have higher markdown in the quarter, it can negatively affect the following quarter because some of the sales are brought forward. So should we expect some weakness in Q3 now? My second question is on selling & distribution costs. So if we look at cost to store, it's actually been declining for the last 2 years now. Just wondering how much you can continue to cut costs without impacting service levels in stores? And then finally on online, you mentioned most of H&M's websites have now been transferred onto the new platform. Can you give any indication of the impact that's having on conversion rates?
Yes. If it comes to markdowns, we -- yes, the markdowns will be higher in Q2. And then we see -- for the second half year, we will -- we believe we will see an improvement so that the full year will be flat or show a slight increase compared to 2017. It's too early to say anything about the third quarter. When it comes to cost control, we have a good cost control. We believe, we will continue to have so and that we will show a small increase in operating costs for this year and for the coming years. And the third question was online, the new platform. We will soon, as you said, have transformed -- or transferred all markets to the new platform. It's showing good -- the KPIs are good, so I think that's one part, but the main part is that we will have a better, more robust and scalable platform that will enable more developing -- development and innovation that will benefit many years to come.
Maybe I could add there. When it comes to SG&A and cost control, of course, it's always a balance not to go and cut in areas that would keep the service levels or the top line. So that's always very important that we don't just work by cutting all the hours in stores, for instance. So we're pretty good on that and -- but, of course, when the top line is declining, it's getting tougher, of course. But so far -- and we are convinced that we will also manage it in the coming quarters.
Okay. Just on the Q3, is there anything particular about this Q3 that means we shouldn't see any knock-on effects from Q2?
Well, it's too early to say anything about Q3. So we will come back to that by the end of Q2.
It all depends how Q2 develops further.
Next question comes from the line of Anne Critchlow from Societe Generale.
I've got 2 questions. And I'll ask the first one. The first one is about Click and Collect in the U.K. and the trial that you've done. What percentage of the online orders that were made were picked up in store so far?
Yes. It's true, we have it in U.K. It's been very well received. And, okay, I don't think we want to disclose all the KPIs, but it's so promising, so we have scaled up the rollout now for a number of markets, mainly in Europe, during '18 already.
Okay. And then my second question...
Yes. And then, of course, we'll continue the global rollout after. Sorry.
Okay. And then my second question was simply about returns to store because I believe you have it in a number of markets. So please, could you update on the number of markets and also what percentage of online orders are returned to store, if you prefer to give that?
Yes. We have return to stores, which is, of course, an important feature in our omni, and we have it in around 15 markets by now and, of course, continue to rollout. And in parallel, we are improving the processes or make it even easier and less -- frictionless for the customers to do it. And actually the share of returns vary quite a lot between -- from market to market depending on different -- for different reasons, but it's a very appreciative feature.
Next question comes from the line of Andrew Hughes from UBS.
I've got 2 questions. Yes, firstly going back to the inventory level. So you've got SEK 35 billion of stock. Can you say how much of that is over 12 months old? That's the first question. And the second question is, when you're talking about and your belief that full year results will be up, are you including the tax credit within that or any additional one-off credits in your assessment for the full year?
Right. Starting with the inventory, well, of course, the vast majority of the products in weak inventory are new products for the spring that we have been -- that's [indiscernible] prepared for the season. And a very small part of the inventory is older than 12 months. I mean, it's marginal, I would say. When it comes to the tax, we estimate still 22% to 23% for the year and then perhaps preliminary, but this is the one-off on top of that.
Yes. This in Q1, it's based on the U.S. tax reform from 2017 December when we revalued and recalculated the deferred tax liabilities and deferred tax assets in our subsidiary in the U.S. So that's an one-off amounts of almost SEK 400 million. But we also used the 23% tax on the result in Q1 and that it was due also for Q2 and Q3 and then Q4, then it will be balanced from the actual taxes calculated after the full year. But we will use 23% in Q1, Q2 and Q3.
Right. So effectively when you say the full year may well be out, you're talking effectively about pretax profit being up?
Yes, yes. But then the tax rate is estimated to be somewhere between 22% and 23% on a yearly basis.
Okay. Yes. Okay now just go back to the tax credit within the balance sheet last year, the SEK 2.4 billion, your tax receivable. I think at the Q4 stage, you said that was a result of you sort of overestimating the profit you would make during the year. To -- and to actually get a tax credit that high on a 22.5% tax rate, is it fair to say you missed your profit estimate last year by about SEK 10 billion?
No, no, no. In many countries, it's worked like that the tax authorities are standing out tax payments based on the previous year's results plus an upgrade. And as you said, we had a tax receivable about -- around SEK 2.3 billion, SEK 2.4 billion. So we paid too much preliminary taxes during '17. And that we have received back. As you can see in the cash flow statement, we have a positive effect of SEK 250 million something in our cash flow statement. So that's the rationale behind in many markets. And, of course, one thing that we could have done maybe a little bit better in Q4 is that we could have corrected it already then instead of waiting for the year-end results because, of course, we saw quite well where the full year result was heading. So that's the rationale.
Okay. So we need to hope that the tax authorities are a bit more conservative in their expectations for sector earnings growth.
Yes. Or maybe we should be more -- maybe we should be more alert as well.
Next question comes from the line of [indiscernible] from Moody's Analytics.
My question has been answered. Thank you.
Your next question comes from the line of Daniel Schmidt from Danske Bank.
I just wanted to ask you about the incentive or the introduction that you did when it came to free deliveries and free returns for club members as of the start of February in many markets in Europe. What impact has that had on online sales and profitability so far? I know it's been a very brief period, but still if you have any comments on that?
Again, sorry, we don't want to disclose any exact figures, but as with most new things that we believe a lot in, we piloted first to see what effect it has and that showed really good effects. And now, we are just rolling it out to club members with good effect, but it's something that just started. So yes, it's -- we're happy with the start and it will help the company going forward.
Okay. But you can't see anything about sort of average order value versus order frequency, for instance.
Yes, yes. We can see a lot of things. And exactly what we were looking at when we did the pilot, and we see the same thing now that we have rolled it out, but we don't want to go into exact details. But, obviously, we're happy with it and the results that has been shown. So we will continue.
[Operator Instructions] Your next question comes from the line of Fredrik Ivarsson from Kepler.
Just another follow-up on the questions regarding your expectations of small earnings growth for the full year. Since you also guide for mid-single-digit growth in SG&A, do you actually assume that sales growth will outpace that? Or is it rather, yes, the increased gross margin that's driving?
We don't want to give an exact, I mean, sales estimate. We gave our view in the Capital Markets Day. We have the same view today, and it's what we comment on now. Sorry, we can't give more at this point.
Thank you. There are no further questions at this time.
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 now disconnect.