H & M Hennes & Mauritz AB

STO:HM B

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the first quarterly report for 2020 conference call. [Operator Instructions]I must advise you that this conference is being recorded today, Friday, the 3rd of April 2020.I'd now like to hand the conference over to your speaker today, Helena Helmersson, CEO. Please go ahead, madam.

[Helena Helmersson, Chief Executive Officer]

Thank you so much. Hi, everyone. We hope that you are well in these challenging times. Thank you for joining us today, and welcome to this telephone conference about the H&M group's 3-month results 2020 and our update on the impact of the coronavirus situation.With me today is our CFO, Adam Karlsson; and Head of Investor Relations, Nils Vinge. And we will do our best to answer your questions. You will find the 3-month report on hmgroup.com, Investor Relations.We have never been through times as demanding as this. Things are happening extremely fast, and extraordinary public measures have been taken to contain the coronavirus. This has put people, communities and companies in an exceptional situation. We are working very hard in the H&M group to manage the challenges in the best possible way.Our first priority is the safety of our employees and customers, and we are cooperating fully with the authorities. Because of the dramatically weaker market and its negative effect on our sales, we are forced to make difficult decisions and also take radical actions. I am convinced that as a company, having taken the right measures to get through this tough period, we will continue to stand strong. With customers all over the world, amazing employees and sound finances, we are well positioned to do so.Looking at the first quarter, our profits more than doubled. The strong increase is the result of a much-appreciated assortment with the best combination of fashion, quality, price and sustainability. Our initiatives to improve the customer offering and the customer experience continue to drive full-price sales, leading to lower markdowns and also an improved inventory level. This positive trend, which was there already in 2019, shows that our improvements are effective and that our long-term investments are paying off.Sales increased with 8% in Swedish kronor and 5% in local currencies. Online sales were up 48% in SEK and 44% in local currencies. In the second half of the quarter, growth was held back by the rapid outbreak of coronavirus, particularly in China, where sales declined by 84% in February. Excluding China, Hong Kong, Singapore, Macau, Japan and Taiwan, sales increased by 7% in local currency.Now turning to the current quarter. Naturally, the corona situation is having a huge negative effect on our second quarter. As of 31st of March, 3,778 of our 5,065 stores were temporarily closed in a total of 54 markets. Since mid-March, all our stores have been closed in several of our largest markets, including Germany, the U.S., the U.K., France, Italy and Spain. Because of the pandemic, demand has weakened in many other markets, too. Net sales in the month of March decreased by 46% in local currencies. In China, however, we are seeing a gradual recovery. Our digital channels remain open in 47 of 51 markets. And in March, our online sales grew by 17% in local currencies.With each day that we must keep stores closed, the situation is getting tougher. To lessen the negative impact, we are taking a range of forceful measures in areas such as purchasing, investments, rents and staffing. All parts of the business are included and all costs are being reviewed. We are adjusting our purchases and our buying plans. Inventory is expected to increase temporarily, but we expect levels to start normalizing again once demand is coming back.Investments are being scaled back. Planned CapEx for the year has been revised down from SEK 8.5 billion to SEK 5 billion. In 2019, CapEx was SEK 10 billion. In the second quarter, we estimate that a reduction of approximately 20% to 25% will be possible in operating costs, excluding depreciation, based on the information we have now. This estimate is subject to some uncertainty, though.Regrettably, this will also require a reduced working hours in our affected markets, and tens of thousands of our employees will be affected. This will be carried out in accordance with the laws applicable in each country. Meanwhile, senior executive salaries will be cut by 20% for 3 months. We are also reviewing the need for any redundancies.Rental costs are being reduced through turnover-based rents and rent relief from certain governments. We are awaiting possible additional rent relief based on dialogue with landlords and authority decisions in connection with the store closures in many markets. In addition, all other operating costs are reduced to absolute minimum levels. The second quarter will, however, be loss-making as the sudden drop in sales is too significant to be balanced by the cost savings.In the light of all this, I welcome the Board's decision to propose to the 2020 Annual General Meeting that the dividend is canceled. I share the Board's view that this is the best thing to do for our company. We are fortunate to have a strong balance sheet. And to further strengthen our liquidity buffer, we are also evaluating and preparing a number of sources of financing.The extraordinary situation we are in will have severe consequences for many companies, both in our sector and others. Dialogue between companies and governments is more important than ever, and the H&M group appreciates the various support measures that governments have introduced to ease the cost burden on companies in the markets concerned. In our view, though, further measures will be needed.The H&M group wants to help in the fight against corona, and we have temporarily switched parts of our suppliers' production to making personal protective equipment for hospital staff. The H&M Foundation is also supporting the COVID-19 Solidarity Response Fund, which -- started by WHO and partners in order to contribute to understanding the spread of the virus, making protective equipment available and speeding up development of a vaccine. People and communities are under great strain and, of course, so are we as a company. For the moment, we are acting on the rapid changes around us while ensuring that we have the best customer offering at all our brands.To ensure our long-term development, it is important that we also continue to look forward. Our strong momentum until the coronavirus' global outbreak shows that we have a firm foundation to build on. We believe that the big change in consumer behavior that we are seeing now will further speed up the rapid digitalization of our industry. We also believe that focus on sustainability will grow even stronger since the need for business resilience has become very clear. Both these areas will play important parts in our transformation work going forward.With our committed employees, strong culture and unique brands, the H&M group will continue to stand strong. We have what it takes to weather this storm. And once we have, we will continue to renew ourselves, build customer relationships and drive sustainable change.Thank you very much. And now we're happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Chiara Battistini from JPMorgan.

[Chiara Battistini, Co]

I have a couple, please. The first one would be on how to think about inventories versus promotional activity coming in the next few quarters. How are you thinking about the orders for the autumn/winter with the suppliers and also about the excess stock in terms of promotional activity in Q2 versus the second half of the year? That would be my first question.And then on the second question, about your liquidity versus the working capital requirements and also the number of weeks your stores can actually stay close, how should we be thinking about this, please?

[Helena Helmersson, Chief Executive Officer]

Thank you so much. When it comes to the inventory, as soon as we saw and started to understand how the virus could affect us, we started to take measures, meaning that we adjusted our purchasing and our plans going forward.When looking at the first quarter, we see that we had a result of minus 12% on inventory levels. And of course, during the second quarter, that will go up. That also means that we probably will have to work with more reductions, but we see this as something temporarily. And we'll, of course, try to get inventory levels down as soon as possible after that quarter. But it's all depending, of course, on the situation and what happens going forward.When it comes to the second question and the number of weeks, I think no one can really tell about the development going forward. I think the best thing we can do is to do what we have done so far, meaning taking measures and acting fast. We have done so when it comes to costs of different sorts, and we will continue to do so if the situation continues but also have a plan for opening up if that would be the scenario going forward.

[Chiara Battistini, Co]

If I may, a couple of follow-ups, maybe on both questions, actually. On the first question, in terms of promotional activity, is it fair to assume that there's going to be a step-up on promotional activity already in Q2? Or is this something for the second half of the year?And on the second question, in terms of savings and initiatives you can put in place to further mitigate the pressure if the situation continues for much longer, how much room do you have to take further actions versus what you have already implemented?

[Adam Karlsson, Chief Financial Officer]

This is Adam here. Looking into the markdowns and reductions, we don't foresee a big change during second quarter, but of course, we are reviewing the plans for third quarter here depending on how the situation evolves. So as Helena said, we have both buying and planning measures in place but also a plan for how do we activate the stock when trading becomes more normalized in the time to come.When it comes to the OpEx, of course, we've taken measures, but we also have a toolbox of measures to take as the situation evolves, both if the lockdown period will be prolonged or, as Helena also said, what do we start to do if the situation turns to the better. So we're following it closely and have a toolbox of actions plan going forward, if so needed.

[Operator]

[Operator Instructions] Your next question comes from the line of Fredrik Ivarsson.

[Fredrik Ivarsson, Research Analyst]

My question would be on the sourcing costs. As you start sort of buying for the winter collection and even looking into the next year, obviously the situation has forced you to become much more flexible. So in that sense, is it fair to assume that your sourcing costs will come up quite significantly as we look into 2021, potentially putting some pressure on your gross margin?

[Adam Karlsson, Chief Financial Officer]

Our current assessment of the sourcing costs are also, of course, very, very difficult to assess, both as the demand in the sourcing markets has dramatically dropped and some of the external factors such as input factors to our products is also coming down. So we are not right now seeing a likely increase but rather potential neutral or slightly sort of, from a cost perspective, positive development. But it's too early to say how -- to what extent this will affect the sourcing costs.

[Operator]

Your next question comes from the line of Magnus RÃ¥man.

[Magnus Råman, Equity Research Analyst]

Could you help out a little bit on the reductions in Q2 OpEx that you foresee? How is that spread roughly over staff costs, rents and marketing or other fees?

[Adam Karlsson, Chief Financial Officer]

Looking at the guidance for OpEx, as previously mentioned then, we do have always a flexibility in our cost structures that, of course, now when a lot of stores are closed, the need for marketing or rent levels is predicted to go down and also the need for staffing in our stores. But we're also reviewing sort of the situation on local level when it comes to government relief packages. So it is a combination of all, I must say, but with some, as we write also, uncertainty regarding the timing as we as well as the countries are facing a new situation here with quite big uncertainty regarding when and how much will be attributed to cost savings.

[Operator]

Your next question comes from the line of Aneesha Sherman from Bernstein.

[Aneesha Sherman, Research Analyst]

My question is about store openings. Your estimates have come down for both openings and closures versus what you expected last quarter. On closures, in particular, you -- can you shed some light on why you expect to see 45 fewer closures than what you expected a quarter ago? Are you seeing some significant rent relief on those stores that makes you change your mind on keeping them open? And does that impact your broader strategy looking ahead of dramatically reducing your store opening rates going forward?

[Nils Vinge, Head of Investor Relations/Franchise]

Yes. As, of course, the situation is very, very complex right now and things move very fast and this is an ongoing process, as you know, we have been revising these numbers pretty often. And we have a lot of stores coming up for renegs and so on.And when it comes to new stores, it's obvious that we are now slowing down the opening pace. And when it comes to closures, I can understand that you're surprised, but when we look at and assess every negotiation, we've seen that we get, in some cases, even better terms than we expected. So it makes sense to keep the stores open. And also, in some cases, a closure of a store is connected to a write-down. So it's wiser to keep them open. And on top of that, we also have inventory now to sell, so it makes sense to have more stores open for that reason as well.

[Aneesha Sherman, Research Analyst]

And sorry, to follow up, does that impact your longer-term strategy? Or is that just a short-term decision based on rent relief and write-down implications?

[Nils Vinge, Head of Investor Relations/Franchise]

No, it doesn't change our long-term strategy.

[Operator]

Your next question comes from the line of Charlie Muir-Sands from Exane BNP Paribas.

[Charlie Muir-Sands]

I wanted to focus back on the operating costs and your target for Q2. Is the -- is that pace of cost saving reflective of what you think you can achieve as a run rate going forward? Or is that due to the fact that you're implementing activities now, but perhaps some of those only achieves full cost reduction towards the end of the quarter? I guess what I'm trying to drive at is, are there more cost levers that will bear fruit on a run rate basis as we enter Q3 notwithstanding perhaps the fact that revenues will begin to improve?

[Adam Karlsson, Chief Financial Officer]

It's so difficult to assess how the situation will evolve. So we have focused on actions and the consequences of those actions affecting second quarter. So it's not to be taken as an assessment of the long-term flexibility in cost, but it's our best current estimate of the second quarter and how that will be impacted.

[Charlie Muir-Sands]

Great. And secondly, on inventories, you said that, obviously, you've been reducing your purchases quite significantly. Can you give us any kind of quantification as to how much you've managed to reduce your order book by?

[Helena Helmersson, Chief Executive Officer]

Not a real quantification, but of course, as soon as we saw the magnitude of the closure of stores, we acted immediately to kind of reassess our plans and the quantifications and the whole purchasing plans going forward. So the whole success when it comes to that will be the flexibility of going down in orders or taking away or canceling some parts and kind of also steer it to the right channel, meaning then as of now, the online channel where we still have customers who want to shop.

[Operator]

Your next question comes from the line of Richard Chamberlain from RBC Capital Markets.

[Richard B. Chamberlain, Managing Director of Consumer Retail]

Just back on the OpEx as a subject, I'm slightly surprised OpEx control was so good in Q1 given the Black Friday shift and so on. Were there any extra actions taken at the end of the quarter in relation to COVID-19 in particular on marketing? And then does the OpEx guidance for Q2 include any IFRS 16 impacts, that 20% to 25% reduction that you're talking about?

[Adam Karlsson, Chief Financial Officer]

For quarter 1, as Helena mentioned, we saw a continuous improvement of top line and also, of course, continuous positive effects of lowered stock levels that also indirectly affects operating cost. So there were no extraordinary measures in general during quarter 1. Some, of course, with the effects in primarily China were taken, but they were less significant during first quarter. Second quarter, there is no IFRS 16 effects in this estimate.

[Operator]

Your next question comes from the line of Geoff Ruddell from Morgan Stanley.

[Geoffrey Frith Ruddell, Managing Director]

Can I just ask a question about payments to suppliers? Are you changing your payment terms to suppliers for the inventory that's already in your system? And if not, is it reasonable to assume you've got to pay something around SEK 30 billion over the next quarter to your suppliers?

[Helena Helmersson, Chief Executive Officer]

We pay the suppliers, of course, for the orders that has been produced as per our contracts. And then when it comes to coming orders and the orders that we now cautiously start placing, we do sign new agreements and we have new negotiations with our suppliers.

[Operator]

Your next question comes from the line of Adam Cochrane from Citi.

[Adam Gareth Cochrane, Director]

First of all, I'd like to say a very thorough report you managed to produce in these circumstances, and the charts on China is probably one of the most useful things I've seen in the last couple of weeks. And on China, is there any lessons you've learned from China that you can apply to some of the other countries as we're going into this? And as we look at China, do you think it's a relevant template for how sales may recover in other markets?

[Helena Helmersson, Chief Executive Officer]

When it comes to learnings from China, yes, definitely, that is spread to other markets in different ways. And first of all, I would mention it's more our approach when it comes to our amazing colleagues and the people in how to do that in the right way when having more closed stores. But of course, also, we can learn from them reopening and what kind of actions to take when welcoming all the customers back again in the different channels.I believe there was a second question. Did I get that right? If there was a second question?

[Nils Vinge, Head of Investor Relations/Franchise]

Adam?

[Adam Gareth Cochrane, Director]

Hello, can you hear me?

[Nils Vinge, Head of Investor Relations/Franchise]

Yes, clearly.

[Helena Helmersson, Chief Executive Officer]

Yes.

[Adam Gareth Cochrane, Director]

Yes. When you look at those reopenings, do you have to -- the inventory that you had going into the closures, when you reopen it, are the customers interested in the same products that you have in-store because it's only, let's say, 2 months rather than 6 months? It's still the same season products. Or do you just have to give them a slight incentive to come back and shop?

[Helena Helmersson, Chief Executive Officer]

Well, I would say that we have really carefully looked into our commercial plans in what to offer the customers. Of course, we have activated what we feel is appropriate deals for our customers to attract them. So slight changes in our commercial plan, I would say. But yes, we're really happy to see that the opening in China, welcoming the customers back with those commercial activities is slowly but surely showing good recovery.

[Operator]

Your next question comes from the line of Daniel Schmidt from Danske Bank.

[Daniel Schmidt, Research Analyst]

A question from me then. When you're guiding for an operating loss in Q2 and, of course, also giving us some guidance on gross margin and operating expenses and so on, what are you implicitly assuming when it comes to the top line development for Q2?

[Adam Karlsson, Chief Financial Officer]

For second quarter then, it is virtually impossible to make any definite forecast or how this will evolve. But of course, we follow the respective markets and the authorities' suggested or proposed dates for reopenings of some of the parts of the society. So that is one of the data points we use for assessing the potential recovery. But as we're all in, in this situation, it's hugely difficult to make any distinct predictions.

[Operator]

Your next question comes from the line of Anne Critchlow from Societe Generale.

[Anne Critchlow, Equity Analyst]

My question is on the online delivery because I believe you're offering free delivery on all orders at the moment. Is there any minimum order value? And are you doing that in all markets?

[Nils Vinge, Head of Investor Relations/Franchise]

I think this is something we are very generous here, of course, to incentivize our customers. And we are very happy that we have the online channel so we can still keep in touch with our customers. And so that's very appreciated. I don't have the details for all markets, sorry.

[Operator]

Your next question comes from the line of Rebecca McClellan from Santander.

[Rebecca Anne McClellan, Equity Analyst]

I also have a question on digital. Is the March growth, the 17% local currency sales growth in digital, was it fairly even across the month? Or did that growth basically decline as the month progressed sort of alongside lockdowns and such? And also, is there any sort of major pockets of geographical demand for online? Or is it just you've seen a typical sort of shift from bricks and mortar to online in most of your markets?

[Helena Helmersson, Chief Executive Officer]

I would say that the turnover in our digital channel was fairly even during March, of course, with some variations when it comes to the different markets.

[Operator]

Your next question comes from the line of Rosie Shepard from Retail Week.

[Rosie Shepard]

So you talked about rent dialogue with landlords. Can you go into a bit more detail? So what kind of arrangement has been made and what's likely to happen in the future? And has there been a difference across Europe with the negotiations with landlords? And are there other lessons for the U.K. market to learn from?

[Helena Helmersson, Chief Executive Officer]

So seeing that almost 4,000 out of our 5,000 stores are closed and with, of course, a significant decrease then in turnover, of course for the coming weeks and months of rent, we will have to have discussions with our partners, in this case with our landlords, and come to new type of agreements since we will all have to kind of help each other in a crisis that affects everyone. I cannot be specific per market because this is an ongoing process with landlords in each of the markets affected.

[Operator]

Your next question comes from the line of Aimee Donnellan from Breakingviews.

[Aimee Donnellan]

Again, it was helpful to see the data coming from China. And just wondered what the situation was with online sales in China. Have they kind of -- did they carry on throughout the kind of peak that you saw there? Or is there kind of any guidance that you could give us on what we should expect from the other markets?

[Adam Karlsson, Chief Financial Officer]

Online in China has had a fairly stable but strong month of March. So we don't see the same fluctuations in the online demand in China as we see in the stores.

[Operator]

Your next question comes from the line of Simon Irwin from Crédit Suisse.

[Simon William George Irwin, Director]

Two questions for you. The first is on marketing within 1Q. I mean as you saw things coming, did you ramp back on the cost of marketing in the quarter? Any expectation that things were going to slow down? And can you just talk a little bit through the cash flow and the balance sheet in the quarter? Obviously, it was a strong quarter from a profit perspective. And yet, your interest-bearing liabilities seem to have gone up quite materially in the quarter. Can you just talk us through that disparity?

[Nils Vinge, Head of Investor Relations/Franchise]

Let's start with the marketing...

[Adam Karlsson, Chief Financial Officer]

I'd just start with the marketing then. Marketing is one of our more flexible costs. So as we saw the situation develop, we adjusted plans for communications. So that is part of the cost savings. Then we have already, from last years, gained a lot of learnings in how to work with marketing and particularly in the digital channels that we continuously apply then. So it was not a dramatic shift, but parts of the OpEx improvements in quarter 1 were due to marketing.

[Nils Vinge, Head of Investor Relations/Franchise]

And when it comes to the interest-bearing liabilities, this is a pure IFRS 16 effect, where we have the long-term leasing liabilities amounting to SEK 57 billion, which, of course, inflates this KPI.

[Operator]

Your next question comes from the line of James Grzinic from Jefferies.

[James Robert Grzinic, Equity Analyst]

Just a very quick one really. How much are you looking to expand your credit facilities by given what you told us on the press release?

[Adam Karlsson, Chief Financial Officer]

Our aim is to have an appropriate liquidity buffer and preparing for, yes, any development of this situation. So it's not only the credit facilities but also, of course, how is the investment, how we manage costs and how we steer the buying. So we don't have a single figure for that part. It's a combination of all actions we do with the overarching goal to secure an appropriate liquidity buffer.

[Operator]

Your next question comes from the line of Geoff Lowery from Redburn.

[Geoff Lowery, Partner of Non]

A question about digital and e-com, please. Are you managing to operate your warehouses and your deliveries without disruption? And what measures are you taking to try and ensure that those channels remain open over coming months?

[Helena Helmersson, Chief Executive Officer]

Thank you for the question. When it comes to digital operations, of course, first of all, we follow the recommendations from the authorities in each market to understand and to keep on having the safety for our staff as the first priority. In those countries, 47 out of 51, where we can, we do see that we drive successfully some activities when it comes to increased flexibilities to be able to give the service and the products to the online customers going forward. We also, of course, revisit to optimize the commercial activities in our digital channels to meet the customers where they are and keep on delivering the best customer offer to them.

[Operator]

Your next question comes from the line of Bilquis Ahmed from JPMAM.

[Bilquis Ahmed;JPMAM;Analyst]

I have 2 questions, please. The first is, could you just clarify whether the 20% to 25% decrease in OpEx that you mentioned in Q2 also includes the benefit from any government schemes that have already been announced in terms of [ clipping ] for full-load employees, things like that? So does that guidance include or exclude government assistance during this time?And the second is, just as you've been going through your transformation program, could you just give us an update on how flexible the supply chain or the purchasing side of things currently are? If you could just give at least some sort of bullet point of lead times and what percentage of your purchasing is now on quite short lead time so you can be very, very flexible to ramp up a new product purchase if the demand suddenly comes back, if we get this V-shaped recovery that all of us are hoping for?

[Adam Karlsson, Chief Financial Officer]

If I then start with the first question regarding the OpEx guidance. It is including the currently verified government relief packages. And this is, as you all understand, an ongoing work to see how this evolves, but it is including the currently confirmed government relief packages, yes.

[Helena Helmersson, Chief Executive Officer]

When it comes to the supply chain flexibility, again the most important thing for us has been to act fast and to adjust our purchasing according to the decreased demand. And that we follow closely now also, of course. So without giving exact figures, we have during this time then, of course, drastically shifted in those purchasing plans to be able to be flexible once we can welcome customers back and start opening again.

[Operator]

[Operator Instructions] Your next question comes from the line of Nicklas Skogman from Handelsbanken.

[Nicklas Skogman, Research Analyst]

I'd like to revisit the 20%, 25% potential cut to SG&A costs and the assumptions underlying that. So should we assume that you assume that April will be worse than March? And because you're present in so many markets, so it's difficult to sort of track all the different regulations in place in all these markets. It would be good with some more numbers, if you would be able to provide those on the underlying -- or your sales assumptions in April and May.

[Nils Vinge, Head of Investor Relations/Franchise]

Again, as Adam and Helena said, this is extremely difficult situation and very, very difficult to talk about the future, how this would play out. And we -- things change day by day and the situation change hour by hour. We do everything we can. And as Helena said, we take forceful measures here now. And of course, to even talk about April at this moment is very, very difficult and how the revenues will turn out. But of course, with so many stores, close to 4,000 stores, closed right now, as of now, it's very, very tough.

[Operator]

Your next question comes from the line of Paul Rossington from HSBC.

[Paul Rossington, Analyst]

Can you hear me?

[Nils Vinge, Head of Investor Relations/Franchise]

Yes, we hear you.

[Helena Helmersson, Chief Executive Officer]

Yes.

[Paul Rossington, Analyst]

Yes. I just want -- one very quick question. I just want to clarify that you haven't taken any inventory markdowns or provisions during the period. That's my simple question.

[Adam Karlsson, Chief Financial Officer]

No, we haven't.

[Operator]

Your next question comes from the line of Niklas Ekman from Carnegie.

[Niklas Ekman]

Also a question on the inventory. I was a bit surprised by your comment here that you don't expect any material change in markdowns in Q2 and that the inventory should normalize when markets reopen. I thought your lead times in general were quite long and that you're now basically offering spring and summer garments that are not facing any demand at all in most markets. So can you just elaborate a bit here? Have you really managed to stop the inflow of seasonal garments already here for the spring and summer collection? Or how can you be so confident that markdowns are not going to increase much in Q2?

[Adam Karlsson, Chief Financial Officer]

I'll try to give our view here. Entering the quarter, we believe that both the composition and the size of the inventory was very healthy, and that has been the trend over the last couple of quarters. And of course, assessing the situation forward, the longer the lockdown period will be, the more challenging the situation will be going forward. But as Helena also mentioned, we quite early, based on indication from China, also started adjust purchasing. So most likely, we will have an inventory increase during second quarter, but we believe that we will mitigate most of the inventory increases during third quarter with reduced purchases and somewhat increased markdown levels.

[Operator]

Your next question comes from the line of Ashley Wallace from BofA.

[Ashley Wallace, Equity Analyst]

So another follow-up question on the 25% reduction in cost in the second quarter, please. How much of this 25% cost reduction comes from like a rent holiday or business rate holiday, which will essentially have to be repaid at a later time?

[Nils Vinge, Head of Investor Relations/Franchise]

Sorry, once again, could you repeat the question, please?

[Ashley Wallace, Equity Analyst]

Yes, sure. So in regards to the 25% reduction in your cost for the second quarter, how much of the cost reduction comes from things like rent holidays or business rate holidays, which will essentially have to be repaid at a later time as stores reopen?

[Adam Karlsson, Chief Financial Officer]

In this assessment, very little. We have some cash flow-related reliefs when it comes to, for example, in Sweden where some of the sort of business rates and taxes are postponed. So those we, in the cash flow assessment, have sort of postponed but not on the cost side as it looks right now.

[Ashley Wallace, Equity Analyst]

And nothing from a rent perspective? Because my understanding is that a lot of the negotiations in some of the European markets at the moment around rent holidays. So essentially, big reduction or rent which have not been paid during the store closure period potentially is repaid over the coming 2 years, say, as the stores reopen.

[Nils Vinge, Head of Investor Relations/Franchise]

The simple answer is it's not -- I mean we are paying rents. It's just that we are doing -- we're pausing sometimes to renegotiate with the landlords. And as Adam said, in many cases, it's rents related to turnover. So when it comes to rent, you pay in advance, in most cases. And since turnover rents are based on last year's turnover, they are way too high in many cases. That's why we're now -- we have paused then and now are paying again at lower levels, so to speak. So it's not about pushing something in front of us.

[Ashley Wallace, Equity Analyst]

And maybe are you able to give us any color about like what portion of your rents or your leases are based on turnover-driven contracts? Again, I thought that the rent structure in Europe and the U.S. was mainly on fixed contracts and it was -- Asia was more where you saw the variability in the cost save from rent.

[Nils Vinge, Head of Investor Relations/Franchise]

Yes, we've been talking about this for many years now, to have a big part of rent -- variable rent. And when you look at the IFRS 16, around half of the stores are excluded because they have either -- they would break clause within 1 year or it's turnover-based rents. And I would say that turnover-based rents today are roughly 1/3 or more. And of course, when it comes to new negotiations, most of them have a variable rent part in the terms.

[Operator]

In the interest of time, we have approximately 10 minutes left with questions. [Operator Instructions] Your next question comes from the line of Andreas Lundberg from SEB.

[Andreas Lundberg, Analyst]

You might have indicated already, but can you give more clarification on why you're not taking an inventory provision?

[Nils Vinge, Head of Investor Relations/Franchise]

I think we touched upon that before. And again, we want to have to show you a clean Q1 as possible to show the underlying progress. But of course, we've been very transparent about how difficult Q1 will be...

[Adam Karlsson, Chief Financial Officer]

Q2.

[Nils Vinge, Head of Investor Relations/Franchise]

Q2 will be, sorry. So that's the main reason.

[Operator]

And you have a follow-up question from the line of Magnus RÃ¥man from Kepler Cheuvreux.

[Magnus Råman, Equity Research Analyst]

I have a question on the CapEx reduction that you guided for this year. Can you give any idea of what investments you are postponing here? Or are you canceling any investments?

[Adam Karlsson, Chief Financial Officer]

We've reviewed all investments and based on a couple of principles where we, of course, assess the overall level and then pull back in different proportions based on whether there are short- or long-term effects. But in general terms, we are reducing the number of new stores, and we're also postponing some of the refits as markets are not open to be refitted right now then. So this is the general answer.

[Operator]

Your next question comes from the line of Anne Critchlow from Societe Generale.

[Anne Critchlow, Equity Analyst]

Are you seeing any pressure from social media or the unions in any markets to close online warehouses?

[Helena Helmersson, Chief Executive Officer]

I would say that following the authorities, of course they are the ones that have the best overview and can give the best recommendations. So I think, to a great extent, that's what many stakeholders do and have a good dialogue with them in how to deal with the situation. So I would say our first priority when it comes to where we stay open and where we have fantastic colleagues who still kind of go to work, and that is really to make sure that they feel protected and that we take the right measures in that, but it seems like many stakeholders also have that kind of trust and listen to authorities' recommendations.

[Operator]

Your next question comes from the line of Rosie Shepard from Retail Week.

[Rosie Shepard]

You said that online sales in China didn't change as much as in other markets, but there -- and so China's recovery could indicate the same recovery pattern as the other countries. For other markets, do you predict a change in online versus in-store and where the demand will be?

[Adam Karlsson, Chief Financial Officer]

I think what we tried to say was that the shape of the recovery is different in the online channel than the store channel in China. We don't see the same pattern here. So it's been a more even pattern in the online channel than in-store channel. So that was the intended answer.

[Rosie Shepard]

In other markets predicting the recovery, though, do you see any change in demand online versus in stores?

[Adam Karlsson, Chief Financial Officer]

We can say that in some markets, we've had a transfer of customers that's previously been store customers that are now also starting to buy through the online channel. So we don't have a good proxy for how this will evolve, but we see a flow of customers that used to be store only now into also becoming omni, so to say, multichannel customers.

[Helena Helmersson, Chief Executive Officer]

I would add to that, that we do believe that the digital shift then will probably happen a bit quicker than before because of that, because of some customers that have not been shopping online before are starting to do that now.

[Nils Vinge, Head of Investor Relations/Franchise]

And also, if I may add there, we see that the omni is what the customers want and how the channels complement each other. So store drives, say, traffic to online and vice versa. This is very obvious.

[Operator]

Your next question comes from the line of Anton Wilen from Bloomberg News.

[Anton Wilen]

What more measures would you like to see from governments in terms of relief packages and so forth?

[Helena Helmersson, Chief Executive Officer]

Yes. No, we have a dialogue with the governments in several different markets, often together with others and together with industry associations, and that's ongoing discussions adjusted then in the different markets where simply we believe that it's a crisis for all of us and we have to help each other. So it really varies a lot from market to market in what kind of incentives that we believe is needed then and what discussions that we have.

[Operator]

You have a follow-up question from the line of Fredrik Ivarsson from ABG Sundal Collier.

[Fredrik Ivarsson, Research Analyst]

On the inventory, so the stock-in-trade increased by SEK 3 billion over the last month. And assuming that April more or less grows in line with the last month, is it sort of fair to assume that the stock can grow by a similar amount in April?

[Adam Karlsson, Chief Financial Officer]

We wanted to indicate the end of March figure as we -- although we haven't closed March fully, we wanted to give you that indication. But as previously discussed, it is beyond ourselves to make a fair assessment of how April will play out. But to the best of our ability, we have indicated at least what we can do on the cost side. But inventory, we will need to come back with after the quarter.

[Operator]

You have a follow-up question from the line of Daniel Schmidt from Danske Bank.

[Daniel Schmidt, Research Analyst]

Just coming back to operating expenses and being able to reduce them by 20% to 25%. You also write in the same paragraph that you're awaiting additional rent relief. Is that included in that 20%, 25% assessment?

[Adam Karlsson, Chief Financial Officer]

No. What we have included is the already confirmed and verified reliefs. So we don't want to speculate here but rather to have what we currently know. And even though, as I previously mentioned as well, there is a timing question here, so this is to give you our best view of the estimate for second quarter. But there's no sort of speculative on what may come here. It's the confirmed levels.

[Operator]

Your next question comes from the line of Adam Cochrane from Citi.

[Adam Gareth Cochrane, Director]

You talked about the CapEx reduction mainly due to new stores and refits. Can I just ask, how do you manage to keep going with the strategic changes that have been so effective over the last couple of quarters, make sure that you keep on track with sustainability or better fashion, buying, et cetera, as you go through this? Is that a real challenge to make sure that you keep the strategic improvements going whilst you're dealing with the tactical challenges of the crisis?

[Helena Helmersson, Chief Executive Officer]

Yes. That is a very relevant question. And of course, being in a crisis, we have to shift focus so that we are decisive and take the right short-term measures to adjust to the situation. That does not mean that we put all the strategic areas or we decide not to do them. It's just about the pace, meaning that some of the strategic areas and the priorities will simply have to shift and some initiatives will have to be postponed.However, I would say that this crisis highlights the need of a really ongoing focused work, sometimes even accelerated work in some strategic areas. For example, when we now see the digital shift and many customers who have been shopping in physical stores now going to online and the need for the omni experience, I would highlight. And of course also, strategies going forward when it comes to making sure we're a sustainable business with different revenue streams, which is another part that is important for us, where we still keep on working. But again, it's about the pace.

[Operator]

In the interest of time, we have time for one more question. The question comes from Chiara Battistini from JPMorgan.

[Chiara Battistini, Co]

Just a very quick follow-up one. On your online performance in March, I was just wondering if you could strip out Germany or actually comment on the Germany performance. Or to what extent are we platforming last year as -- or, well, the implications that your platforming of Germany last year has on the March performance this year in terms of comp base.

[Nils Vinge, Head of Investor Relations/Franchise]

Right. I think it's, in particular, when you look at the Q1 numbers where you see the very strong online, plus 44%, where, of course, Germany played a big role, where we did the platform transition last year, which held us back. And this year, of course, the comps were easier. For Q -- for March number, I mean Germany was in line with expectations and with the other markets and doing better. And of course, the new platform gives our customers an even better customer experience.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.

[Helena Helmersson, Chief Executive Officer]

Thank you all very much for participating in this conference call, and we wish you all a good day, and please be safe.