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H & M Hennes & Mauritz AB
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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today’s Full Year Results for 2018 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, 31st of January 2019.
I would now like to hand the conference over to your first speaker today, Mr. Karl-Johan Persson. Please go ahead, sir.
Hello, everyone. Thank you all for joining us today. I am very please to welcome you all to this conference call about H&M Group’s fourth quarter and full year results for 2018. With me today is our CFO, Jyrki Tervonen; and our Head of Investor Relations, Nils Vinge.
I will start with an overview of the fourth quarter and Nils will take us through the financial details. Then, I will give an update on our strategic focus areas before we answer your questions. And you will find the slides to this presentation on hm.com, Investor Relations.
The fashion industry is going through rapid changes as we all know and we are accelerating our transformation in 2018 to secure a positive long-term development for the H&M group.
And 2018 was a challenging year for us and for the whole sector. But we ended the year with strong signals that we are on track. We built momentum through the year with the sales growth in local currencies of 3% overall and 6% in the fourth quarter, and in the second half of the year we took market shares in most markets.
Importantly performance in the fourth quarter was driven by more full price sales and lower markdowns and this is one of many signals confirming that customers appreciate our assortment with the improvements that we have made in terms of design, quality, price and sustainability.
If we look at the inventory levels were still up year-on-year. However, the sequential improvement in level and composition from the third to the fourth quarter showed that we're moving in the right direction and we expect this trend to continue as a result of a stronger customer offering and our ongoing improvements in our buying processes and logistics. Therefore we also expect markdowns to be around 1 percentage point lower in the first quarter 2019 compared to the same quarter last year.
We did not reach the sales and profit targets we set up for the past year, and obviously we're not happy with that. But this should also be seen in the light of a very tough retail market and tougher than many anticipated. And I think more important also when you look at the performance, it's good to see that the core business of the company is at a better level - is at the better levels at the end of the year compared to the same period last year.
So we have seen the gradual improvement throughout the year and also in the fourth quarter the profits were negatively affected by large extraordinary costs related to our transformation program and these were costs generated in connection with the replacement of the logistic systems in the U.S. and Belgium last year, but also activities in preparation for the upcoming transitions, particularly the change of our online line platform in Germany.
In Germany we successfully migrated to our new platform last week. While these actions inevitably have a short term impact on the margin they will lead to a range of improvements for our customers over time.
So that was a short introduction and with that, I hand over to you Nils.
Thank you, Karl-Johan. Starting with top line. Net sales increased to 5% in the full year to SEK 210 billion. In the fourth quarter net sales increased 12% to SEK 56.4 billion, in local currencies the increase was 3% in the full year and 6% in the fourth quarter.
Looking at some individual markets in the fourth quarter. In the UK online sales grew by 38% which compensated for a 1% decline in stores, leading to total growth of 8% in local currencies. In several markets both digital and physical channels are driving growth. In China sales increased by 24%, in India sales grew by 43%, while Russia had sales increase of 27%.
However in some markets development was more challenging such as the markets that experienced logistics difficulties like the US. But sequentially sales improved in the fourth quarter compared to the third quarter.
Gross profit in the quarter was SEK 30.6 million which corresponds to a gross margin of 54.2%. Markdown costs as a share of sales decreased by approximately 60 basis points, and this was due to better full price sales driven by stronger collections.
For the fourth quarter, the company decided to invest the positive dollar effect into a stronger customer offering and apart from this, the gross margin was affected by a number of factors.
Continued costs of around SEK 250 million to resolve the issues that arose in connection with implementation of new logistic systems in the U.S., France, Italy and Belgium of which SEK 125 million were booked as SG&A. In addition we had costs of approximately SEK 200 million to secure future transitions of platforms and logistics systems. We also had a negative year-end effect of approximately SEK 110 million.
Gross profit for the full year was SEK 111 billion, corresponding to a margin of 52.7%. And looking at the first quarter 2019 for the purchases made for the current quarter the market situation regarding external factors is expected to be slightly negative. The main reason for this is the strengthening of the US dollar.
SG&A increased by 14% to SEK 26.3 billion in the fourth quarter and local currencies the increase was 8%. The increase is mainly related to the expansion stores and online, along with investments in the H&M club, our digital loyalty program. In addition, SG&A were affected by the cost to resolve the logistic issues we had in some markets earlier in 2018. For the full year, SG&A was up by 9% in SEK and 6% to local currencies.
Profit after financial items was SEK 4.35 billion in the fourth quarter and for the full year profit after financial items amounted to SEK 15.6 billion compared to SEK 20.8 billion last year. And like Karl-Johan answered, it's been a challenging year for the whole industry and as also for the H&M group.
We've made improvements gradually during the year and strengthened by these positive signals we decided to accelerate the transformation further with a particular focus on the replacement of logistics system. Along with negative year end effects, this resulted in costs of around SEK 560 million.
Net profit was SEK 3.54 billion in the fourth quarter, equalling earnings per share of 2.14 kroner compared to 2.41 kroner in the corresponding year earlier period. And with a tax rate of 24% for 2018 net profit for the year was SEK 12.7 billion compared to SEK 16.2 billion ’17. Earnings per share thus amounting to 7.64 kroner.
Looking at some key data. The inventory by the 30th of November amounted to SEK 37.7 billion, an increase of 12% in SEK and 10% in local currencies. Although the inventory level was still too high, levels and competition improved sequentially from the third to the fourth quarter, showing that we are moving in the right direction.
And with a stronger customer offering and the ongoing improvements in buying and logistics, we expect a gradual improvement in inventory levels going forward. Therefore in the first quarter of ’19 we expect markdown costs in relation to sales to decrease by around 100 bps compared to the same quarter last year.
Cash flow from current operations was SEK 21.3 billion kroner and investments in terms of CapEx totaled SEK 12.8 billion, up from SEK 12.5 billion last year. In constant currency CapEx was SEK 12.12 billion slightly down from last year and for the full year of 19. CapEx is expected to decrease to approximately SEK 10.5 billion to SEK 11 billion in constant currency with a continued shift of the balance towards digital.
Liquid funds at the end of the year were SEK 11.6 billion. The Board of Directors will propose to the AGM an unchanged dividend of 9.75 kroner per share to be paid out in two separate portions. Return on equity was 21.4% and the number of employees was around 123,000 translate into full time positions.
And now back to you Karl-Johan.
Thank you. So our transformation work continues and we are driving change as we have communicated before through four strategic focus areas, which are to strengthen the customer offerings for each of our brands, two, to ensure a fast and flexible and efficient supply chain to set a stable, scalable and innovative tech and IT foundation and for finally to add growth by extend - expanding with physical stores and our online stores.
The most important part when it comes to securing the best customer offering, obviously is to improve our - to continuously improve our assortments for all our brands. And we're now seeing clear signals that customers appreciate the improvements that we have made.
We see this in more full-price sales, higher conversion rates, more recurring customers and increased customer satisfaction. This clearly shows that we are moving in the right direction when it comes to the assortment. Part of this improvement comes from us investing in better prices and higher quality for our customers.
We're also working hard to further improve the shopping experience for the H&M in the physical stores, as well as online. When it comes to the physical stores, we continue to do many tests around the world to develop a better shopping experience.
And here too we have received positive feedback in terms of increased customer satisfaction, but also when it comes to good receipts in sales and better results. So we are evaluating these tests and at the same time we are planning for a gradual rollout.
If we look at the shopping experience online, we're making improvements to the dot com sites and our mobile app where we have made improvements in terms of stability and speed. We're also improving in terms of navigation, product presentation, improved delivery times and new payment options just to mention a few examples.
And then we are also working hard when it comes to further integrating the online and the physical stores. We are improving and rolling out features like returns in-store, Click & Collect, online purchases in-store, our in-store mode, just to mention a few examples.
And then finally when it comes to the customer offering, we would also like to mention that we're continuing to develop and to rollout our loyalty club, rollout to new markets, today its only present in 16 markets and we're quite new with the club in many of those markets.
But we have - by the end of 2018 we have reached 30 million club members which is a good growth from ’15, so doubling the growth from ‘15 in the beginning of the year and we're looking for a big increase in that number for 2019 as well. We will also rollout the club to further seven markets this year.
When it comes to improving the supply chain, we continue to invest a lot in the supply chain. And one example of that is our investment in new fulfillment centers. We have opened three new fulfillment centers in the fourth quarter. These are located in common [ph] in Germany and the street called in Poland. Together they add a total of two 230,000 square meters of logistics area.
We have also automated our logistics center in Poznan in Poland. And so good improvements from this will release the capacity constraints that we have had before during the year, especially during the second half of the year and also in the first quarter and also enable a range of other improvements for our customers. For example faster deliveries in a number of European markets, including Germany. Further ahead towards the end of the year, we will also open two more fulfillment centers one in Madrid and one in London.
When it comes to the product flow as well, AI is becoming an increasingly important tool for us and thanks to our vertically integrated business model. We can build - we can build AI models with algorithms designed to address various parts of the product flow from trend detection to quantification, allocation, pricing to mention a few examples.
We're also working hard to further improve our internal processes when we - in our buying process to further differentiate our buying depending on what product type it is. So to become even more precise in our buying and to shorten the lead times and these improved buying processes will lead to all other things equal to higher sales, lower markdowns and reduced working capital.
When it comes to our tech and IT infrastructure, here we also invest a lot, and this has made it possible for us to complete the transition of online globally to our new online platform.
Last week we successfully transferred online in Germany, which is our largest market and this means that now all H&M’s 47 [ph] online markets are now on the new platform, which will enable further improvements of the shopping experience for our customers.
Furthermore, we have ramped up initiatives ahead of upcoming transitions of logistics systems, applying the lessons learned from the difficult - difficulties we had with the transitions in some markets earlier in 2018, we have increased investments in the fourth quarter to secure transitions that are due this year.
In parallel, we are investing to become even faster in developing customer facing technologies and be innovative with tech wherever the customers are. When it comes to adding new growth, our expansion will continue with stores and online for all our brands.
For 2019 we will add the nest of 175 stores, in total we plan to open 335 stores, in total around 240 of these will be H&M stores that will open mainly in markets outside of Europe and the US. And meanwhile we are intensifying the optimization of the store portfolio and this includes renegotiations, relocations, closures, rebuilds and adjustments of store space. And during the year we plan to close approximately 160 stores.
The shift in the market is also opening up for further improved lease terms and we have the opportunity to renegotiate nearly a thousand store leases in 2019. We also continue the global rollout of online. In 2019, we will open the H&M online store in Mexico and buy our franchise in Egypt.
And when it comes to our other brands, COS, Weekday, Monki, and Other Stories, H&M HOME, ARKET and Afound I mean, we have a great portfolio in those brands and these brands are only at the beginning of their journey and we will develop them farther and see great growth potential for all of these brands.
But as always its always important to make priorities for our investments. And like we have communicated already, we will close down Cheap Monday in 2019. The business model of Cheap Monday is based on wholesale, a model which has faced major challenges due to the shift in the industry and the closure of Cheap Monday is part of our transformation where we prioritize and focus on our core business.
So this was a short update on our strategic focus areas and growth initiatives. As we said, the market is going through a big transformation. We are going through a transformation of our business as well. We set up some goals before the year. We haven't reached those goals and obviously we're not happy with that. But we also have done a lot of good work during the year which will benefit our business going forward.
We have a long-term approach. We are investing a lot in the strategic focus areas I mentioned. We have a clear plan. We have great colleagues that are motivated and working hard and we see results from that work and the positive signals that we are on the right track. So we are still optimistic that we have a bright future.
Thank you very much. And now it's time for questions.
Thank you. [Operator Instructions] Your first question is coming from the line of Chiara Battistini, JPMorgan. Please go ahead.
Good morning. Thank you for taking my questions. I have a couple please. The first one would be on the price and product investments you'll be making in Q4. I was wondering if you could quantify the impact on the gross margin from those. And also if you're happy about the current offer now after these investments or you see further need to reinvest there? And the timing with the gross margin maybe if you could give us some color on how you foresee gross margin evolution in 2019?
And then the second question just a clarification, can you just please clarify what exactly the negative effect impacting the gross margin we - at the end of the year please? Thank you.
Yeah. We - it's correct. As I mentioned, we have made investments in the customer offering in terms of better prices, a better quality. Also when it comes to sustainable materials, something we see that the customers are appreciating. That's one of the reasons for better full - price sales and the increased customer satisfaction.
We choose not to comment on the exact investment that we are making. We believe we are at the good level now, very competitive and in terms of that and we will always stick to the business idea. And that of course, it covers also to follow what the competition is doing, so we will constantly monitor what happens with the competition in all markets.
If we look at the gross margin, we normally comment on these large external factors, the currency, the raw material prices, transport capacity, salaries and they were slightly positive for the fourth quarter. They will turn to slightly negative in the first quarter. We will continue to do investments also, I mean, compared first quarter this year compared to first quarter last year. And price reductions we have commented on which was - which we expect to be one percentage units lower first quarter this year.
And then we have some extra costs that we have mentioned the SEK 450 million approximately that were part of that is affecting the gross margin in the fourth quarter. It will also affect the gross margin in the first quarter, but not as much as in the fourth quarter this year.
And then the year end effect?
Yeah, the question of year end effects and that's of course something that always happens and it's a mixture of the shrinkage, about inventory translation effects and so on. And this year the negative effect amounted to just about SEK 110 million compared to last year.
All right. Thank you very much.
Thank you.
Thank you. The next question is coming from Charlie Muir-Sands from Exane BNP Paribas. Please go ahead.
Yes. Good afternoon. Thank you. The first question relates to your capital expenditure. You've indicated that in the current year you will be spending a little bit less, but you also mentioned some promising signs of your pilots of new store formats. I wondered whether this would therefore be a transition year and perhaps from FY ‘20 you might be thinking of spending some more on capital expenditure again to refurbish a lot more stores or not.
And then secondly on the opportunity to renegotiate rents. Could you give us an indication of approximately how much you typically are saving on your rental when you are renegotiating at the moment? Is it 10% or more than that? Thank you.
It's - when it comes to the first question, the CapEx, yes, we are doing a lot of test with positive signs and we are rolling out, that means the small improvements we see and bigger improvements as well. So that is covered in the CapEx guidance that we have given.
We opened less stores compared to before, so that I mean, in terms of the CapEx levels, that is part of - part of the reason why it's coming down. And also when it comes to the digital CapEx the big part of the infrastructure setting the foundation is some of it is taken. One of the examples that we have communicated today is that all the countries are now on the new online platform. So we can leave the old ones so to say.
So I mean, everything is taken into account there, including the rebuild program for the stores and the gradual improvements of the optimization of the portfolio when we guide for SEK 10.5 million to SEK 11 million in CapEx.
And the second question was the renegotiations, we - you know, we prefer not to quantify exactly what we think it will give, but it's - I mean, thousands contracts that we have the possibility to renegotiate. The market is going through a huge transformation. I think there is a good chance that we will see a good improvement coming from that. Sorry we can't quantify.
Thank you. But the CapEx, I just meant whether you think this SEK 10 billion would be approximate and therefore you would think about spending for the next few years or whether 2020 as you start to really push with the store refits it might tick up again?
.
Yeah. The guidance as Karl-Johan just mentioned for 2019 is 10.5 and 11 and it's shifting towards in a more digital investment. So when the guidance for 2020 or 2021 it's hard to say at the moment, but we feel that we have in a way peaked in our CapEx as we see it at the moment. So - but that to say exactly what it will in 2020, its too early, but as I said, we see it as we have had a peak here in 2018.
That's very clear. Thank you.
Thank you.
Thank you. Your next question is coming from the line of Richard Chamberlain from RBC. Please go ahead.
Thanks very much. Just a few more on margins please. How should we think about the timing of the additional warehouse investments that you've mentioned in Spain, the U.K. and the U.S., should we expect those more in the second half of this year? That’s my first one.
No, that mean part of the costs are taken we have now and then it will come gradually throughout the year. But I mean, these are planned costs that we - I mean have in the prognosis for the year to come and the profit and loss prognosis that we do. So yes, we feel confident and that we have a good - I mean, it's in the plan.
So that's the additional, the new logistic centers, but then as Karl-Johan said, we also have a lot of transitions in front of us were we - similar transitions as we did in the US and Belgium, hopefully more successful going forward.
Got it. Okay. Thank you. And speaking of OpEx, can you say how much OpEx was increased last year by free shipping for H&M club. I see you're extending that to more markets this year, you mentioned seven. Has that materially increased OpEx?
No, its affecting, but we choose not to quantify on that. I mean, when we decided to roll it out for the club members obviously it's something that we have test it, it will create value long-term for the company and for - and it's a good value for the customers as well. So that's why we decided to do it. In the short term it's affecting the margins negatively. And here we – its also something where we have to see what happens in the market. Now we see more and more competitors actually introducing a cap and so on. So it's part of the total customer offering where we want to have the best customer offering, so we put it in relation to - in relation to what competitors offer as well.
Okay, great. And just finally, I guess, is interesting you're choosing to hold the dividend thought, but cut CapEx for this year. I wondered if you can say how much you'll be spending on digital CapEx this year and why you've chosen to hold the dividend instead of maybe accelerating CapEx on digital to catch up with some - with some of the other players in the industry? Thanks.
I mean, we are spending a lot and we feel confident we're investing a lot. We are - we're satisfied with that. We're really forward leaning and then doing a lot of good things there. So our focus is to develop the business and - in as good as way as possible, short term and long-term and that we are doing.
And when - I mean, it's more for the board to comment on, but they obviously look at the plans for the business, the financial statements, the cash flow prognosis and a lot of different things, and also the financial strength of the company and so on. And also the underlying trend of the business, which where we are showing positive signals. So I mean, it's their recommendation to the AGM and that we think it's good. We're happy with that…
Okay. So on the CapEx split, you – I would have thought you're still spending the majority on new stores, is that correct. But you know…
No…
You're doing that in your digital spend?
Yeah, it's likely about 60% of our net investments in CapEx is already in digital.
Slightly above 50%...
Yes.
Okay…
And it's increasing.
Got it. Okay. Thank you.
Thank you. Your next question is coming from the line of Adam Cochrane from Citi. Please go ahead.
Good afternoon, guys. Couple of questions if I may. In terms of the few bits on the balance sheet regarding a significant increase in accrued expenses and capitalized expenses would you be able to confirm what they - what they relate to and how that may impact the profit and loss going forward, whether it's depreciation or coming through – or cash payments later?
And then secondly, in terms of the net financial income, can you just explain the moving parts within that, still going into a net debt position, you see what the financial income coming through, is that something that you'd expect to carry on?
And then and then finally, the one-off costs that you had in 3Q and 4Q, should we assume that they completely reverse out next year, cost this year and let's assume that they go to [indiscernible] next year, albeit you might get some others coming in from other areas that those particular ones are done and dusted? Thanks.
Well, to start with the capitalized expenditures. So that's all our investments in the IT systems and digital investments that is capitalized in the balance sheet. And during the years we have invested - I think accumulated somewhere slightly about SEK 10 billion and also depreciated - accumulated slightly above SEK 1 billion.
The depreciation during 2018 was slightly over SEK 500 million connected to the capitalized expenditures. So it's a net depreciated in the balance sheet, it's now more or less SEK 9 billion. And of course, when we are taking these in use in more and more countries, the depreciation will increase, probably the depreciations just for the capital expenses to increase during ‘19 from SEK 500 million to the maybe SEK 800 million.
Could you just give us a guidance on what the overall depreciation charge would be, because I presume with lower store count that there's a few - a few benefits in there as well.
I think the increase will be in line with the increase from ‘18 to ’17.
Okay. Thanks.
And when it comes to what's the final question there, the extra cost that we had now in the third and fourth quarter and the fourth quarter we said it was 450. And then also adding the year end effect, if that will happen in the third and fourth quarter in 2019, that I guess you're…
That's right, yes.
Yeah, exactly. The things, its extra one-off costs, so connected to one part in the fourth quarter then is connected to the ramp up and securing good transitions of the logistics system, and one part is securing a good transition of the online transition in Germany. So it has affected the quarter one as well. But they were not - those two will not affect the third and fourth quarter next year.
I mean, how do you spent the money in advance to sort of secure there's going to be less issues with logistics and IT in the following quarter before you implemented it. What exactly or just generically, what do you mean by you spend this money to secure the transition?
Well, it's securing the – one, when it comes to logistics systems, one is the spillover effect and the backlog from the transitions that we had in U.S. and Belgium. So its something that right in the fourth quarter that we have done. The second part is making sure that we improve the system so that the following transitions in the year to come in 2019 is in at a much better level that because we have a lot of problems, that’s what happened in the U.S. and Belgium.
So a lot of investments have been made to secure that we improve the logistics systems, so we can roll it out. And in the fourth and first quarter, we have prepared for Germany that transition from the old platform to the new platform in the first quarter. So those were costs that we took in the fourth quarter and now in the first quarter, but that will not happen obviously in the second quarter, third quarter and fourth quarter during 2019.
And also to your question about change management to invest in training the staff et cetera better than we did in the US and Belgium. So we are prepared for the coming transition.
Okay. And finally one of the accrued expenses increased by about SEK 4 billion. Can you just tell us what the - what's in that balance and then why it increased by so much?
Yeah, I don't have the balance specification next to me, but there is normally one big part of the SEK 23 billion is landlord contributions. There are also always vacation pay accruals, social charges accruals, salary accruals and duty and freight accruals. So it's a mix part, but the biggest part is connected to landlord contributions.
Okay. That's great. Thank you.
Thank you.
Thank you. Your next question is coming from the line of Magnus Raman from Handelsbanken. Please go ahead.
Thank you. I have a question on the Click & Collect rollout that you talked about, when you considered a - consider a country rolled out to how many stores typically do you offer Click & Collect. Could a country with only say 5% or 10% of total stores having they can collect be called a Click & Collect rolled up country?
Yes, it varies from country to country. So we look - obviously we look at introducing something that we believe is good for customers. And we also have to take financial - what makes financial sense for us into account. So we set the target for a country how many stores we want to roll it out, how many stores in each country we want to rollout and then when we have completed that or nearly completed then we see it as a rollout.
And I mean, if you look out in time and more mature face of that rollout, how many stores typically in the county would you say roughly would be included?
How many stores in the country?
What share of stores would be having Click & Collect?
It depends from market to market and the city to city. I mean, some cities we have a lot of stores and then it makes sense to maybe I don't have a huge share and if we only have one store in the city then - then it will be 100%. So it varies a lot and we are present in more than 70 markets. So there's a big difference, depending on markets and city and how many stores we have.
And how is it alluding to county by county, perhaps you can provide a number. Anyhow, I have a second question on logistics centers. The three ones that you've mentioned that you just opened and then the two coming logistic centers are they for online deliveries only? Or is it also store fulfillment here or can you elaborate a little bit about that?
Online one is a combination. London is an omni warehouse so to say.
Okay. Thank you.
Thank you.
Thank you. Your next question is coming from the line of Anne Critchlow from Societe Generale. Please go ahead.
Thank you. And I've got two questions. The first one is about the percentage of sales from the newer brands. If you can give an update on that, because you gave us a figure last year of 10% of total sales.
And then the second question is more about customer behavior and so in the countries where you have H&M club with free shipping and returns and you also have collection and return to store. And what's your feeling about what customers actually prefer. And what's driving the sales in those types of countries? Thank you.
Sorry, can you repeat the last question there.
Yeah, sure. Sort of interested in whether it's H&M club free shipping and returns or the ability to Collect & Store an online order and return to store that is driving sales in countries where you have both on offers for customers. What do you think customers prefer in terms of free shipping to home or collection in-store?
Yeah, okay. If we look at the new business park and we had the target of more than 25% for the year. We didn't reach that. We still had good growth. We increased by 21% in Swedish crowns and 20% in local currencies. The brands were - all I mean it's been a tough market, it affects all the brands. We've pulled down a little bit of expansion for some of the brands. So good growth, but not really satisfied thus we had higher ambitions.
When it comes to the question about what customers appreciate most or what's driving most sales, I think that was your question in terms of the free returns and political conflict.
I mean, it's a combination of different things, its part of the total customer offering, customers are appreciating it and the whole integration of online physical stores we believe that's a great strength. So it's hard to say exactly what each feature, what each which services is driving in itself, it's a total package.
And this is the message we’ve had for a long time. There isn't one specific feature that will drive everything. It's a combination of having everything aggregated that become - shopping experience becomes more seamless and more convenient.
Okay. Thank you.
Thank you.
Thank you. Your next question is coming from the line of Rebecca McClellan from Santander. Please go ahead.
Yes, good afternoon. And a couple of questions please. Firstly, in terms of your inventory across online stores, how integrated is it? And my impression is that it's not particularly integrated and therefore, as the business upgrades, et cetera, progress, what was spike going to be on inventory, overall inventory through inventory integration?
Part of it is integrated, but it's getting more and more integrated. I mean, we have several initiatives on how to improve the selling, how to reduce markdowns and how to improve the inventory levels. That is one thing.
I mean, setting a better logistic infrastructure connected to the more complex world that we are in today, we're in more markets, we have several channels, we have several brands. So we map up a good logistic infrastructure in terms of number of logistic centers, the size of them, how many for online, how many for stores, how many should be omni, so that we have done and we are building towards that. So examples of that from the three new centers that we opened up in the fourth quarter and two more to come during the year in London and Madrid.
All AI or not all, but part of the AI initiatives that I mentioned earlier will help us as well when it comes to being more precise in how we buy, how we quantify and allocate the product. And then also again to segment the products we buy depending on what product type we are buying, in a better way than we have done in the past will shorten lead times, and we will tie up less capital in that as well.
So just - and then obviously the most important part is to continuously improve the assortment. So we sell more, sell better. So all of those are initiatives that we believe will lead to better sales, lower inventory levels in relation to sales.
Is there an element of being a bit of a tool inventory position because you need to have a certain amount of inventory for online and a certain amount of inventory for the stores and because there's not much cross tunnel inventory integration, you can perhaps sort of over inventory because of that?
Well, we come from two different channels, but we're getting more and more integrated in everything we do. So I mean, we're - obviously when we found the assortment we don't – we look at the total and we find what we believe is good for the stores and what we believe is good for online.
But then we have some infrastructure constraints and we have some technical constraints and that's one of the reasons why we are investing in a better logistic infrastructure and IT and tech infrastructure so we don't have those constraints and we can become even more integrated between markets, between channels.
Okay. My second question just in terms to determine warehousing upgrade, is this equivalent of what you did in the US and Belgium, that's two cheaper [ph] springs is it?
We haven't set any time yet, but it's still - it's in front of us, yes.
Okay. Thank you.
Thank you.
Thank you. Your next question is coming from the line of Michael Benedict from Berenberg. Please go ahead.
Tough needle. You mentioned that Germany was re-platformed in January. Could you give us a sense of the impact it had on your sales and cost?
Yeah, but we mentioned the extra ramp up costs, not a full cost, but the extra ramp up cost that we decided to take in order to ensure a good translation of Germany. That's roughly SEK 200 million. And then we have had some capacity constraints for quite some time actually in Germany. So that's one of the reasons why we're building the new logistic centers to be able to sell more.
So now that has been going on for quite some time affecting sales negatively in Germany in quarter three and quarter four and mostly actually in quarter one because we have the capacity constraints and at the same time we're doing that transition.
So hopefully we or not hopefully, but we obviously believe with more capacity and also improved delivery times, we have a good chance of selling more. But affecting sales negatively quarter three, quarter four, quarter one and there is been quite a lot of costs connected to that transition as well.
Okay. That's really helpful. Thank you. And secondly, and you mentioned you've doubled your H&M club members. Do you have a target in mind for your club membership? And what do you suspect the impact of that will be on the profit?
Yeah we have targets. We choose not to give the exact targets for the year. What we have said is that we have - I mean, as I mentioned earlier going from 15 to 30 million club members by the end of 2018 we plan for a good - very good increase as well for 2019. We're improving the club and it's being rolled out to southern new markets during the year. So hopefully we will have many more club members by then in 2019.
Okay. And just last one from me, and you said your inventory position is expected to increase in Q1. Could you quantify the impact of that on your gross margin in Q1 specifically?
Sorry, I'm not sure what you mean. Can you say that again? How…
You mentioned your inventory position would improve in Q1, would you have to quantify the impact of that on your gross margin?
What we have said is that we believe - what is our best guess now is that reductions will be 1 percentage unit lower in quarter one and by the end of quarter one we will see further improvements in the inventory levels and composition. So going out of quarter one and their inventory level will be better in terms of level and the composition and we will also see 1 percentage unit lower reductions in quarter one.
Okay. Thanks very much.
Thank you.
Thank you. The next question is coming from the line of Geoff Ruddell, Morgan Stanley. Please go ahead.
Yeah. Good afternoon. And I just wanted to take you back to the guidance you gave us at the Capital Markets Day. I mean, you've been very open that you've missed it and fallen short of the 2018 guidance. But I'm wondering if you're still happy with the guidance you gave for the ’18, sort of ’19, ’20, ‘21 years and in particular are you expecting profits to grow this year and next year and the year after?
Yeah we - yeah exactly. We missed the goals we gave, obviously not happy with and I think it's very difficult given the transformation that we are going through in the whole market is going through and with all that uncertainty to be very precise on figures and timing.
So what we're saying now is that we believe we will see improvements during 2019 compared to ’18, improvements in selling, profits, inventory levels, satisfied customers. So that's what we are saying.
But you see what - just because you are saying you expect EBIT to be higher this year than it was - is in the year to just reporting today?
Yes.
Great. Thank you. And do you expect the stock in trade to be back between into the 12% to 14% range by the end of the new financial year?
Same there actually, I mean, we believe we'll see improvements, as we prefer not to give exact timing and exact figure.
Okay. Thanks so much.
Thank you.
Thank you. Your next question is coming from the line of Jörg Nowicki from TextilWirtschaft. Please go ahead.
Good afternoon. Thank you. My first question actually partly was already answered, it was about the new brands, but there's one point left which I would like to point again, which is Afound, can you give us - since this is such a huge market, the off price market and so on. I was wondering whether you - how Afound actually started and when or if you were going international with it?
It started well, but as always when we launch a brand it's been the same for H&M that was long ago in 1947, but COS [indiscernible] you learn a lot and tweak it and then improve and then when we feel ready we will expand and the same with Afound, we have a lot of good receipts. We are fine tuning maybe its not the right one, but in improving it and preparing for expansion. And so we will definitely expand with Afound.
And Germany is one of the markets that we're looking at.
Can you give a year on that. Is that going to be the case this year?
So we don't want to - we haven't - no we don't want to communicate on exact timing yet on when we will go with Afound.
Okay, okay. All right. Second one would be a big part of the business, and fashion retail today takes place in the marketplaces - on marketplaces and platforms and kind of I think you are business in China, your growth in China shows the impact of Tmall. When can we expect going, you know, H&M going on a marketplaces such as Amazon and Zalando and other big market places?
We have evaluated all the marketplaces that are out there in all markets just to see if there is a good fit between the brands we have and the marketplaces, and if it makes sense for us long-term to be on any of those marketplaces. Short term - financial short term it makes a good sense to go on a lot of the marketplaces because you would boost the selling and profits. But we always do what's best for the company in the long-term.
So we have certain criteria that we look for the different brands. If we are to go in a marketplace and right now for the H&M brand the only one that we are on is Tmall because it fits those criteria’s and but we are evaluating, we are looking.
Okay. All right…
Vague answer, but this all I can give now.
All right. Thanks…
For the smaller brands, we already own some other platforms as you know.
I know, I know, I know. I was just wondering whether you had plans with the – with the main brand. Okay. All right. Thank you.
Thank you.
Thank you. Your next question is coming from the line of Carl [indiscernible] from Unicredit Bank. Please go ahead. Carl, your line is now open. Please go ahead.
Good afternoon. Can you hear me?
Yeah. Can you hear me?
I have two questions regarding the segment reporting of your group. The first one is what's about the profitability of the online segment? And the second one is how would be the like for like development of sales will be in the stores segment?
When it comes to the online segment profitability, we choose not to go down in detail on that. Then it becomes - I mean as we mentioned earlier, the channels are getting more and more integrated, it's very difficult to say exactly what's online and what's in stores.
But what we can say is that profitability as for the whole group has gone down in both channels. We see in the fourth quarter the underlying business is improving. But we have a lot of costs connected to the ramp up of the logistics systems and the online transition which is affecting profitability in both channels. And then we have the free shipping, free returns on the online as well affecting the online a little bit more in the short term as well.
And when it comes to like for like development, we've - I mean as we said earlier we do - it's not something we comment on, but we have seen a gradual improvement throughout the year.
One question please. What's the amount of the off balance liabilities at the end of the last year, the balance sheet date?
We don't have that yet here, but that would be disclosed in the annual report. So we haven't finished the annual report at the moment. So I don't have the figure for the off balance sheet.
But there would be really no material differences from last year.
Okay. Thank you very much.
Thank you. Your next question is coming from the line of [indiscernible]. Please go ahead.
Good afternoon. Thank you for taking my question. I was just wondering how are you prepared for Brexit?
We are prepared for Brexit, almost had breakfast, but Brexit we're looking at different scenarios. Obviously there's a lot of uncertainty. So we'll see how it goes, but we have continuously - contingency plans in place. We believe if it happens the main things will be how it affects the product flows, import duties and also maybe some delays in the product flows as well. So we're looking at all the different things that will be affected and we have plans in place.
Thank you.
Thank you.
Thank you. Your next question is coming from the line of Andrew Hughes from UBS. Please go ahead.
Yes. Good afternoon, everybody. Let me just go back to – yeah, can you hear me?
Yes.
Let me just go back to the fourth quarter gross margin, and if we take out the markdown movement and the special factors you mentioned, your underlying gross margin was down about 100 basis points and that was with a benefit from external factors.
Should we expect the underlying gross margin should actually deteriorate, as we go into next year is the external factors moves against you? That's the first question.
As always Andrew, you know, there are a lot of different moving parts in the gross margin and you're right we go from environment or time when we had some help from especially currency and now it's turning against us, so all things equal. Of course, it puts more pressure, but for us the most important is always the customer experience and that's number one. And then of course we need to mitigate what we can improve and then we have the reductions as we mentioned that hopefully will offset some of the other negative parts.
Right. Okay. And in terms of your comments on the composition of inventory being better, it looks like you've got about 4.5 months of inventory. I mean, how can you say the composition is better because you are having to make a guess about what will be selling well in four, five months time. Is that quite difficult to do that?
We're not at levels where we want to see further improvements. But the sequential development from the third quarter to the fourth quarter to what we believe will be the case and by the end of the first quarter this year I mean, we are improving and the composition is improving.
And there are different parts in the composition of course, it's new, I mean, current seasonal garments, we have garments season less so to say and then we have older garments. So it's mainly the older garments with lower value that has come down and we are improving and so it's a better competition - composition in terms of the stock freshness.
Okay. Okay.
And also reductions are coming down as well in the fourth quarter and first quarter, so which is a sign in itself.
Yes. Okay. And just finally on clear upon [ph] depreciation, I think you said it would be up at the same rate in FY ’19, so it was up 14% percent last year. So we assume another...
Yeah. That's our best – yeah, that’s our best estimates for now. And as I mentioned the capital expenditure depreciations will increase in 2019. As I said, they were around SEK 500 million during ‘18 and our best estimation is then to - that they will end up in 800 something million Swedish crowns on the yearly basis.
But they shouldn't see any major other increases. So we look sort of into to any writedowns on the inventories. So at the moment we don't see any major impact to compare to 2018 in those items as well so.
Right. Okay. Okay. And just one I think well on [indiscernible] in terms of last year you certainly thought about the script dividend and it didn't happen. Did you think about it again or do you sort of comfortable with your level of debt and you don't think you need to go down that route?
We can't comment on that. I mean, this is recommendation from the board and we are happy with that. We think it's good. We are in a good situation, we can do the necessary investments. Underlying core of the business its going in the right direction. So we're confident.
Okay. All right. Thanks very much.
Thank you.
Thank you. Your next question is coming from the line of Sylvia Baugh [ph] of Credit Suisse. Please go ahead.
Good afternoon, gentlemen. Thank you for taking my questions. Two questions from me please. Firstly on credit sales, how much of sales is now driven by credit sales and how do you expect this to change in the medium term. If you could comment on that, that would be useful.
And secondly online delivery terms you mentioned that your overall customer - online customer fulfillment is improving with shorter delivery times and you also mentioned that some of your competitors are now introducing tighter delivery terms i.e. more expensive or like online services to protect margins.
My question is relating to how far do you think you will have to go competing on online service levels and when do you think that you might need to start reversing some of the rather generous delivery terms to protect margins? Thank you very much.
Regarding the credit sales, I don't know it, I don't have the figure.
No it's not something we comment on, but it is something that customers appreciate and we are. We have invested in the Clyna [ph] and we are developing a app so they – we will be able, customers will be able to use credit in stores and online at this point. So this is something we are developing.
And when it comes to delivery terms, when it comes to delivery terms, obviously something very important, it's something that we want to continue to improve. So we are improving quicker standard deliveries and that will be further helped by the new centers we're building.
We are introducing more countries with next day deliveries. We're trying out same day deliveries in some markets, time slots deliveries. We have been a number of markets rolling out and more as well. So that will be a very important part of the total customer offering, the free shipping free return as part of that as well.
But as we've said before when it comes to the products and this is part of the customer offering we want to make sure that we have the best customer offering of all competitors and we will also monitor what the competitors are doing. So it depends a lot on that as well.
All right. Understood. Thank you very much.
Thank you.
Thank you. Your next question is coming from the line of Chiara Battistini, JPMorgan. Please go ahead.
Hello. Thank you. Sorry. Just one follow up question on your supply chain. Could you please expand on the initiatives you're putting in place there and also you mentioned that the lead times are going down, so could you please remind us what the lengths of the lead times are today versus a year ago please? Thank you.
The improvements to the supply chain, we have quite a lot of initiatives connected to that. Again, we're building new logistics centers around the world for the online, for stores, omni warehouses, optimization of warehouses is improving the supply chain as well. The AI initiatives to be even more precise and allocation and quantification is part of that as well.
Using 3D in technique is helping the lead times differentiating the buying processes depending on what product it is will make us even more precise in lead times as well.
So - and all in all lead times are coming down. I don't think the most important part is not the average lead time. The most important part is that we can be super quick when we want to be quick and when we want to buy more in advance due to for better in prices for example we can do that. So it's constantly a balance.
Thank you. And maybe when you say when we want to be quick, we can be quick. How quick can that be? Can it be or are we talking a couple of weeks, a few weeks...
Yeah, it’s a couple of weeks. It depends on what market, what type of product we're talking about and what quantities we're talking about as well. So I mean, if we want to test something in small quantities and scale up when we see it's selling, that's one type of way that we want to buy. And I mean, we are constantly improving and in this as well and that we are differentiating different parts of the assortment.
Thanks a lot.
Thank you.
Thank you. Your next question is coming from the line of Dana Telsey, Telsey Advisory Group. Please go ahead.
Hello, everyone. As you think about the performance in the fourth quarter so far in your real estate portfolio, how are you thinking about the U.S. real estate, whether it's by store - the potential for store closures, lease adjustments or even taking a look at the other ancillary concepts and keeping them, not keeping them. How do you think about it? Thank you.
So I'm sorry not sure I follow, what was the last part of that question. If we think about the other concepts?
Yes. Do you close those stores, do you keep them open. What would be the appropriate number of stores in the U.S.?
I mean, U.S. it's a huge market. We still see growth opportunities in the U.S. for all brands. We're still opening stores in the U.S., but it's also a market, probably the market that is going through the biggest change at the moment with too many shopping centers around, maybe too many - too many physical stores.
So a lot of things are happening in the U.S. markets. I think we will see a lot of closures. So we really need as well as opening stores - we really need to be active with optimizing the portfolio that we have. And it's one of the markets where we will be most active when it comes to optimizing the portfolio and that we will rebuild a lot of stores, we will also renegotiate a lot of leases. We will close some stores in U.S. and move some stores. So it's a market that's going through a big transformation.
And when it comes to the new brands, we will continue to see U.S. as an important market for those brands as well. But it's a big step going into the U.S. market and if you take ARKET, Afound, Monki, Weekday they are not present there. And so we really need to be well-prepared when we entered the U.S. market.
Thank you.
Thank you.
Thank you. Your next question is coming from the line of Adam Cochrane from Citi. Please go ahead.
Hey. So a quick follow up, that's a few people have asked me, when you look at the price investments that you made over the course of last year, I know you don't want to quantify them, but would you be able to slightly identify when they started and how will they annualize in Q1, Q2, Q3. So as we've got the pressure from FX instead of being a source of tailwind moving into a headwind when do you think that the current price investments that you've made would annualize please?
We have made a gradual investment throughout the year, so more towards the second half of the year. When we make investments, if we make investments we of course look at what I mean the gross margin forecast, looking at the external factors, looking at estimates for reductions, looking at all the factors influencing the gross margin as well.
So we don't form to quantify what the exact effect is on the gross margin from that - from those particular investments for 2019. But looking at the year behind us more investments towards the second half.
And you have to look at markets by market, Adam.
That's right. And one other bet is, in terms of your total logistical changes that you've done in the business, how fast through that process do you think you are as it stands today?
For the logistical changes?
Your new distribution centers for the global distribution platform as you see it, how far along the journey do you think you are?
Okay. When it comes to online the new platform we're done with Germany. So that's great. And when it comes to the rest and mainly hitting the stores we're more or less half way through from a turnover base.
Yeah. And then we continue to grow I mean, and integrate the channels into new markets and so on, expand with new brands, we will continue to build new logistics centers. So we haven't I mean, really and - and the goal in mind, the business will continue to evolve, but, yeah.
That’s great. Thank you.
Thank you.
Thank you. Your next question is coming from the line of Andreas Inderst from Macquarie. Please go ahead.
Hello, everyone. I have a few questions. The first one on the slowdown in December and January versus Q4 ’18, what were the reasons behind that. I mean you mentioned one reason Germany, but maybe you can elaborate a bit more. And maybe related to that, you have an ambition to reach 10% to 15% growth again in the longer term. What is the timeline for that? That's maybe my first question.
Then the second one related to your comment that you expect 2019 profit growth, EBIT growth, is it on an adjusted EBIT basis given you had over SEK 500 million one-off costs or is that on a reported basis?
And then my final question is just a clarification on your comment on 1 percentage unit reduction in markdowns. Are you guiding a 100 basis points improvement in the gross margin from markdowns or what exactly do you mean with 1 percent units reduction in markdowns? Thank you.
Okay. If we look at the start to the year, December and January, 4% the local currencies and then we have to look out on the positive side, we have the Chinese New Year affecting sales positively in several markets in January.
On the negative side we have the transition of Germany their online store which has affected the sales negatively by quite a bit more for the online part in Germany. And then we also have more full price sales, less markdowns. We have bought more cautiously. So we have our highest stock turn on the new products, and you see some stuff we are buying.
So we're not the 10% to 15% growth target is a long term ambition. What we have said for the year is that we want to see improvements and we believe we will see improvement compared to 2018. That goes for EBIT as well. So on a report the basis we believe we will see improvements compared to 2019.
When it comes to the 1 percentage unit how that will affect the gross margin, we don't want to go into those details, but it's more - that reductions as an isolated part will be - we estimate will be 100 basis points below last year, as a share of phase, yeah.
Okay. Thank you.
Thank you. There are no further questions at this time. [Operator Instructions]
Okay. 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.