H & M Hennes & Mauritz AB (publ)

Good day and thank you for standing by. Welcome to the three-month report for 2022. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star 1 on your telephone and wait for your name to be announced. If you require any further assistance, please press star and 0. Please be advised today's conference is being recorded. I'd now like to hand the call over to your speaker today, Nils Vignier, Head of Investor Relations, please go ahead.

Thank you, and hi, everyone. Thank you all for joining us today, and welcome to this telephone conference about H&M Group's first quarter results 2022. With me today is our CEO, Helena Helmersson, and our CFO, Adam Karlsson. We will start with a short summary of the first quarter, and after that, we will be happy to answer your questions. You'll find the three-month report on hmgroup.com Investor Relations. So, I'll hand it over to you, Helena.

Thank you, Nils. I would like to start by saying that we are deeply concerned about the war in Ukraine and sympathize with all those affected. We closed our stores in Ukraine for the safety of our colleagues. and since the beginning of March, all sales have also been paused in Russia and Belarus. H&M Group, H&M Foundation, and the Erling Persson Foundation have so far donated around 170 million Swedish crowns, as well as clothes and other necessities to organizations including UNHCR, Save the Children, the Red Cross, and UNICEF. The H&M Group cares about all our colleagues and stands with all those around the world who are calling for peace. If we then look at the first quarter, we ended last year with sales back on pre-COVID levels and with a strong financial position. We began the year with increased growth-related initiatives to create an even better foundation for long-term growth. The initiatives mainly involve continuing to develop the customer experience by further broadening the assortment and integrating the sales channels, and by continuing to invest in infrastructure such as tech and the supply chain, but also in renewable energy and sustainable materials. In addition to the general consequences of the pandemic, such as disruptions and delays in the supply chain, some of our major markets were impacted by a new wave of the pandemic in the first quarter. Despite this, we saw a recovery of sales in physical store compared with last year, while online sales continued to perform well. shows the value of having both physical and digital channels which strengthen and complement each other. Well-received collections led to full-price sales continuing to increase, which led to more than expected decrease of markdowns. We are taking further steps towards offering customers more sustainable products. H&M Group has a long history of working with sustainability and it has been an integral part of our business for many years. To acknowledge this even further, we are integrating our annual and sustainability report, which is launched today. Some of the sustainability links highlights are that we have tripled the share of recycled materials used in our garments. We have strengthened our climate goals, committing to achieving net zero by 2040 and reducing our absolute emissions by 56% by 2030. And we have launched our innovative circular design tool, Circulator, underlining our ambition to have all our products designed for circularity by 2025. Looking at current trading, we are, of course, impacted by the consequences of the war in Ukraine, but also by continued effects by the pandemic. Sales from 1st to 28th of March were up 6% compared with last year. And adjusted for the closed markets, sales were up 11%. The group's plans remain intact apart from the consequences related to the paused sales in Russia, Belarus and Ukraine. We have proven that we can be flexible and act quickly as circumstances change. Value for money is more important than ever and we are well positioned to meet customers' continued increasing demand for affordable and sustainable fashion. Thank you so much for listening and we are now ready to take your questions.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. So star and one to ask a question. Your first question comes from the line of Rebecca McLennan of Santander. Please ask your question.

Yes, good morning. Can you hear me? Yes. Yes, hi, good morning. A couple of questions. Firstly, can you talk about the trends in the neighbouring markets that are still open rather than the closed markets, what you're seeing there? And secondly, could you give us any update on China, please?

Yes, first about neighboring markets. It really, really varies. And of course, it's difficult to know also the reasons why, since we still have the pandemic in some markets and some consequences from that as well as the war. So it's difficult to say something general since it's different from market to market. However, we see that in those markets where spring has arrived, we do see that our spring collection is very well received by our customers. And when it comes to China, we are still in a complicated situation. As you all know, one year has passed and we are still not on the level of sales that we would have wished for. Of course, we are working really, really hard on this, and we still see China as an important market for us.

Just to add on that, remember that China marched and was very strong in China last year for us.

Thank you. Thank you. Your next question comes from the line of Simon Irwin of Credit Suisse. Please ask your question.

Good morning, everyone. Noting your comments about the factors on input costs, can you talk a little bit about what your response is going to be to this? Quite a lot of your peers have now openly discussed price increases in the current year. Will you be following them?

Of course, we will also need to adjust But our overall focus, as usual, is truly to make sure that customers can feel secure, that they can come to us and get the best combination of fashion, price, quality and sustainability. And yes, we have seen that competitors have already started to increase prices. We will adjust different on different markets and also different on different product types. and always to make sure that we strengthen our position also compared to competition.

Thank you. And just in terms of the outlook for gross margins, obviously you've mentioned that 2Q is negative versus slightly negative for 1Q. Can you just give us a sense about will 3Q and 4Q be worse again than 2Q in terms of input costs? Yes, that's correct. Okay. Thank you very much.

Thank you. Your next question comes from the line of Adam Cochrane of Deutsche Bank. Please ask your question.

Hi, good morning. A couple of questions. Firstly, the trajectory of sales as you went through the second quarter last year. Can you just remind us of how... Because of the impact of COVID, sometimes it's quite hard for us to really gauge. Can you just tell us, as we look through the comparisons from last year, how the second quarter evolved from March onwards? Does it get easier or tougher as we look forward?

And the second question is... Take one question at a time. I don't want to take that one.

Looking into second quarter, then April was a month where the number of store closures increased quite substantially versus March of last year. So that's one part of Q2 last year, that we had a fluctuating number of stores, but April was a high level of store closures last year.

So you'd expect the sales to accelerate? Just on a comparative basis, they get easier as you go through the rest of the second quarter?

All other things equal, yes. We will meet a higher number of stores closed in April than we did in March.

Okay, fine. And on the second question, have you been able to work out whether the sales that you've been seeing in March – appear to be more cyclical factors or more structural factors in terms of the consumer spending? Maybe, are you seeing any signs that it's a bit weaker due to concerns over inflation or anything else? Or are you still of the view that this appears to be more of a cyclical issue?

What we still can see is that customers appreciate novelty and renewal more than a year back when there were more basic demands. So that is our focus to continue to ensure that the offering is updated and meeting that overall demand.

And we see big differences from market to market again. due to various, I mean, there's COVID, different COVID situations this year and last year, also different weather. And as Helena said, where we have spring weather, we see strong, well-received collections in those markets. Okay, thank you.

Your next question comes from Daniel Smich of Danske Bank. Please ask your question.

Yes, good morning, guys. Do you hear me?

Yes, good morning.

Yes. So a couple of questions from me. I might have missed it, but could you give us any indication of what you see in terms of markdowns for the coming quarter if I start there?

No, we haven't guided. We typically don't guide for markdowns. But just to remind you, second quarter is more full price quarter and not so much markdowns typically.

All right. Coming back to Q1 then and sort of the operating leverage, and you have, of course, talked about more growth initiatives and expenses for that and also the pandemic. Is mix an issue as well when it comes to the sales channels, offline versus online, and given that – that online is a little bit down and you see strong growth in offline. Although in my head, that would mean good operating leverage as you have a lot of fixed costs in offline. But could you set some light on that?

It's true. There are mixed effects, both channel but also geographical. So it's complicated. But you're right. The online channel obviously has been very profitable during the pandemic. And now when we see that the store channels is picking up from very low profitability, of course, during the pandemic. So it's improving, but it has a negative mixed effect now. That's the equation. Okay, okay.

Good. And then sort of speaking about these growth initiatives, and you mentioned tech and supply chain. Could you quantify... in numbers what that was in Q1 and what should we expect for the rest of the year?

Well, the overarching theme is, of course, the nature of the tech agenda. Looking at Q1, we increased the pace and accelerated the innovation and test agenda. And that, of course, affects how the IT costs are taken rather expense than capitalized. And, of course, we will follow this. When we will build something, we test it and really roll it out. That will then change the balance between capitalized and expense costs. So it's sort of a moving target, but I think one assessment that can be made is that the expense levels will be higher this year than the pre-pandemic levels.

But you don't give us... You're onto something here, and of course, what Adam says, mainly the delta between 19, you should refer to that, mainly explained by the nature of the tech investments, which is more forward-leaning more about testing innovation, as Adam said, thus expensed.

Okay. But you can't give any sort of range in how much more is going to be expensed compared to the base that you referred to?

We will continue, of course, with the testing innovation and tech, because we are still our long-term target and 23rd target to remain intact. However, of course, now with the given circumstances, we are reassessing a lot of things. But our long-term, again, is still important. Of course, we will continue to invest. Yep. Yep. Okay.

Okay. That was all for me. Thank you.

Thank you. Your next question comes from Richard Trainbillen of RBC. Please ask the question.

Thank you. Morning. Yeah, a couple of questions from me, please. So in the statement, you talk about ongoing supply chain efficiency efforts and the integration of sales channels. And it sounds like inventory might have been down if it were not for orders brought forward. And you think you can run with a sort of lower inventory level structurally in future. So can you sort of elaborate a bit more on the work you're doing in terms of supply chain efficiency and integration? That's my first question.

Thanks. Well, overall, as you know, we're investing in supply chain and technology. It is a lot about being able to react faster to customer demands and also integrating the different channels. And this will also, of course, make sure that we have a great customer experience. When looking at the stock levels, of course, these type of efficiency will gradually lead us towards our goals. And what you see in the report now is a slight increase, mainly then due to also the disruptions that the industry has seen overall. in the supply chain where we have also placed some of the orders earlier to avoid delays.

Okay, thank you. And another one from me is in terms of cost, so you talked about the tech investments. Are you going to be making any specific sort of cost or undertaking any kind of cost control initiatives in response to you know, the Russian-Ukraine crisis or recent sort of COVID outbreaks. Are you going to be taking a different approach now on costs for the rest of the year?

I think the last two years has really shown us that we need to be very agile and flexible. So, of course, we are reassessing based on the current situation. I think we can also conclude that a lot of the work done previous years, for example, in the store portfolio optimization initiative and so forth, will continue to benefit us during this year with a higher share of turnover-based rents and so forth. So some initiatives that we've previously done will still benefit us, but, of course, we will reassess the plans for the year given the circumstances around us. Understood.

All right. Thank you.

Thank you. Your next question comes from the line of James Grisnick of Jefferies. Please ask your question.

Yeah, thank you. Good morning, Helena, Adam and Niels. Really, I'm trying to understand how you're approaching prices or you approach prices for the spring, summer season and the autumn, winter season, upcoming one. Are you not budgeting for unchanged bought-in Are you basically saying we'll keep pricing unchanged to start with and see how competition develops on price points and how we can recover that bottom gross margin as the season goes by? It would be really, really interesting to understand how you're going about that because it doesn't feel as if you're starting by landing prices at the start of season so to fully recover the incremental costs.

But of course, we are acting on the forecast that we can do on how the cost will develop going forward. And there are two big levers. One is the price increases that Helena indicated that will start now, too. to come during the second part of the spring. The other part is, of course, how we can offset that with lower markdowns and more full price selling. So we're working with both of these levers. In Q1, it was the markdown lever that was the significant one. But for second quarter and onwards, we will work more on the out price.

Okay. So in terms of that pricing policy, you adjust within season to in specific markets looking at how the pricing architecture has developed around you, basically. Is that the way you should be thinking about it?

Yes, exactly. As Helena said, we will do it to ensure that we are competitive in each market and within each product category.

Okay. That's very clear. Thank you, Adam.

Thank you. Your next question comes from the line of Georgina Johannon of J.P. Morgan. Please ask your question. Oh, hi. Thanks for taking my question. Two from me, please. I'll ask them separately. The first one was just with regards to the gross margin. Just to understand a little bit better than moving parts there, if possible, please. Because if I look at your gross margin sort of back versus 2019, I think it was still down. So is it possible to provide some sort of bridge for us, On that, please, I'd have expected it to be better given that markdowns came in better. That was my first question, please.

Right. I think it's easier if we start actually with last year. And as we guided for improvement in markdowns of 100 bps, which we actually exceeded. So there's one part of the deposit compared to last year. And, of course, we got some leverage on the increase in revenues compared to last year. And then finally, as we state in the report, we saw the increased input prices mainly on freight started to come through a bit earlier than we planned. So that's basically the equation.

And from a leverage perspective, is that now kind of back to normal or should we be still expecting, say, next year some further leverage to come through if you can go further on sales?

As revenues are coming back to more or less normal levels, of course, that doesn't mean that everything is fixed. That's why we call it semi-fixed because there is always things that we do to improve things and also invest. And part of the investments that Adam was referring to that we talk about is also applying in COGS for logistics and supply chain, of course.

Okay, thank you. And then my second question was, apologies if I've missed it in the annual report, but I was just wondering if you could clarify what portion of EBIT is actually coming from Russia and Ukraine, please?

We don't specify, but it's not a secret that Russia was one of the most important growth markets. and it was also very profitable.

Okay, great. Thank you. Thank you. Your next question comes from the line of Critchlow of Society General.

Good morning. Thanks for taking my questions. I've got two, please. So the first one is about Russia. I'm just wondering how flexible the cost base is there. So what percentage of normal operating costs do you think you might be able to save this year?

It is a flexible cost base in Russia, not 100% obviously, but we are looking into how to manage that, of course, day by day now, given the conditions in the country. So generally, it's a flexible cost base.

Okay, thank you. And then my second question is about the marketplace that you've started in a few countries, I think, for H&M. Just wondering how many brands so far and how that plays into your assumptions for 2030, the doubling of sales that you're targeting. Do you think marketplace will be really quite important within that? Thank you.

Yes, we're now testing several brands on H&M.com. We have started to test it in Sweden. and also in Germany. And here we have invited, of course, our own amazing brands, also the smaller ones. And also we are in partnership with some external brands. And this is a trial where we simply want to widen the assortment for our customers. and make sure that we can offer them and kind of inspire them to really have their own personal style. So early days, difficult to say exactly how this will proceed, but very, very interesting testing and positive feedback from our customers. And of course, this is one out of many initiatives to take us towards our 2030 goals.

Thank you very much.

Your next question comes from the line of Frederick Iverson of ABG Sendar Collier. Please ask your question.

Yeah, thank you. Good morning, guys. Two from me as well. Firstly, can you help us understand the March figure a bit better? Because if I do my math right, we're looking at a double-digit decline versus March in 19, and that's obviously a steep discreation from Q1. So is this a result of the supply chain issues, or is it anything wrong with the spring collection? Or, yeah, if you could talk around that for a second. Yeah.

No, but there is, of course, as we mentioned here, one effect of the post-operations in Russia. But if we look at the like-for-like versus 2019, we are seeing 2-3% decreases versus 2019.

If you take out Russia? Yes, exactly. Excluding Russia. Okay, fine. And then a more general question on consumer behavior. Have you seen consumers reacting to the surging inflation rates yet? If you could give any color on what you're seeing out in the markets.

Of course, it's a competitive environment and with all other costs increasing, we closely monitor this. But Primarily, we see that customers appreciate our collection, and we believe that we are well-positioned with our complete offer to be successful also within this sort of inflationary climate.

Great. Thank you.

Thank you. Your next question comes from the line of Charlie Mersans of BNP Paribas. Please ask your question.

Yes, good morning. Thank you. I've just got one question that hasn't already been asked. It relates to your annual report. Obviously, last year you did a fantastic job with working capital and generated over 12 billion kroner in inflows from payables. And I remember at the time you said that that was effectively through facilitating your suppliers' access to reverse factoring or supply chain financing. I wondered if you could disclose what the figure is for some companies who...

For last year, you mean, for 2021?

Yeah, correct. How much of the 12 billion was driven by reverse factoring or supply chain financing that you facilitated?

The vast majority, 90% of it, so about 11 billion was the total for 2021. Many thanks.

Thank you. Your next question comes from the line of Anton Willen of Bloomberg News. Please ask your question.

Yeah, hi. Thanks for taking my questions. I wonder if you can tell me those 42 stores that were closed as of yesterday due to the pandemic, which markets?

We have 42 stores closed in China right now due to the pandemic.

All right. And can you tell me which markets do you see now as most interesting for growth going forward?

That's an interesting Interesting question, and of course we see a lot of possibilities moving forward, both when it comes to mature markets, but I would say also a lot when it comes to the new markets. Right now we're seeing great development in North and South America. So again, a mix of mature markets and more new markets. Also in UK, also great development in India, just to give a few examples. But we have a lot of initiatives ongoing with integrating channels, which obviously it's a true strength that we have physical presence as well as digital. And we also have a lot of other growth initiatives. So a little bit of mixing. of new markets and mature markets when looking at the potential.

Okay, thanks.

Thank you. Your next question comes from the line of Magnus of Raymond. Please ask your question.

Yes, thank you. I would just like to ask about the inventory position in Russia. If you can comment on to what extent you had a sort of currency-affected write-down of the inventory due to the ruble depreciating when you exited this quarter, since the interest rate of course has been jumping up quite a lot, and if you use the end date there. And then if perhaps you can give us any lead into the size of the inventory position in Russia, if I would use, for example, the global index, inventory trailing sales number it would suggest roughly 1.5 sec 1.5 billion sec of inventory value in russia could you comment on on if that's around the lines correct thank you if we start with with the second question um i think the the uh the sales proportion of russia i think it's a good proxy for the the share of stock as well though even though russia has

been able to trade with slightly lower stock to sales than average. So your number there is probably on the high side. If you look at how we handled it for Q1, we haven't done any adjustments to the inventory levels from a valuation point of view. But of course, we will look into it during the quarter here, how to assess the situation.

All right, but is it correct that you translate the inventory value into Swedish krona each quarter, so all the markets?

Yes, it is in Swedish krona. It's valued in, yeah, exactly, Swedish currency.

Yes, so if it was a 25... depreciation of the ruble versus the SEC that would be also the then the impact would have been like 45% of that 1.4 billion or whatever so my question on the depreciation from translation is essentially if you use the average currency rate or if you as a balance sheet post the end sort of date of the quarter currency for the translation

The stock is valued in SEC, and then when it's sold, it is then paid by the local market. So it's kept in Swedish crowns.

All right. Thank you very much.

Thank you. Just to remind you, it's star and one should you wish to ask a question. Your next question comes from Olivia Townsend of UBS. Please ask your question. Thanks. Yeah, sorry, I just have a few sort of clarification questions. So for markdown in Q2, I understand you might not want to give a number, but I just was wondering if you could give your view in terms of where you were expecting that to go directionally, i.e. up or down your own year, that would be helpful.

It's still very early days in the quarter. And we, as I said, we prefer not to guide on markdowns. And it is a small markdown quarter. So, sorry, we will come back to that later.

Okay, understood. And then just secondly, on the investments to be made in order to reach that 2030 target on sales, Again, I understand you might not want to quantify the amount that's needed to invest in order to get there. But given you've done quite a few investments into online over the last few years, I was just wondering if you could give us some kind of sense of where you feel you are already in terms of the amount that you would need to invest. You know, are we very early on in that process? Or do you think it would kind of feather along just to be helpful to get a sense of that, please?

I think we can say that a lot of the platform investments have been taken and we've been seeing the benefits of the previous investments during the pandemic and primarily connected to our digital store and our supply chain. Now, as mentioned, we are accelerating the sort of the testing innovation agenda, so it will still be high activity to ensure that we that we develop and primarily within the tech side, but it will be less of the big platform investments this year than compared to pre-pandemic levels.

Great, thanks. And just one final clarification just on a question that was asked earlier, just around Q2 and the plans for the investment in Q2. it sounded like you were suggesting that maybe you focused a bit more on protecting profitability for Q2, given the obvious situation in Russia and Ukraine. Is that the right way to think about it, that the investments might have been dialed back for Q2, but you would be looking to sort of ramp them up again for Q3? Or is that sort of a bit too granular to comment on?

Well, no, of course. I mean, in this current situation, we have to be agile and assess and make a holistic decision. assessment, so to speak. So, of course, margins, profitability is also an important part for a term.

Thank you. Thank you. Your next question comes from Daniel Smith of Danske Bank. Please ask your question.

Yes, just a follow-up question for me and maybe related to what Adam just talked about a while ago when it comes to price increases. I think you said that you will start to do price increases entering the second part of the spring. Does that basically... How should you sort of stack that against external factors entering this quarter? Does that mean that you would sort of aiming to get half compensation or some compensation or full compensation for what you're seeing in terms of input costs?

Of course, we can't be that granular. But what is clear is that we won't – give our customers all the burdens and we'll take part of it. But as Elena said, that's the most important. The customers always trust us. You can always find the best combination of fashion quality prices with H&M. But of course, given the substantial import price increases, of course, we need to adjust. And then, as Adam said and Elena said also, it will vary how much from market to market and from category to category and even product by product.

And entering the second sort of fall of the spring, is that April and onwards or?

It's a gradual shift, of course. It's not from one day to the other. So it's already, I mean, it's a gradual ramp up, of course. Okay.

But is it fair to say that you haven't done the adjustments yet?

It's a gradual ramp up, as I said, and if you walk the stores and online, you will see that some prices might have been adjusted already.

Okay. Thank you.

Thank you. There are no further questions coming through on the line. Please continue.

Well, thank you all very much for participating in this conference call, and bye for now.

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