H & M Hennes & Mauritz AB (publ)

Good afternoon and welcome everyone to the H&M Conference Call Full Year Report for 2023. For the first part of this call, all participants will be in listen-only mode during the speaker presentation and afterwards there will be a question and answer session. If you wish to ask a question, please register via the link in the confirmation email and then dial in and press star followed by the number 1. Please be advised that today's conference is being recorded. Today I am pleased to present Joseph Alberg, Head of Investor Relations. I will now hand you over to our speakers. Please begin.

Hi, everyone. Thank you all for joining us today. Welcome to this telephone conference in connection with the H&M Group's full year report for 2023. With me today is Helena Helmersson, Adam Karlsson, and Daniel Ervea. We will start today with the news that Helena Helmersson has decided to leave the CEO role and H&M Group and that the board of directors today has appointed Daniel Ervel as the new CEO. We will hear briefly from both Helena and Daniel before we start with our full year presentation. After that we will be happy to answer your questions. Now I'll hand over to you Helena.

Thank you so much Josef. Well as communicated this morning I have today informed the board my decision to step down as CEO and lead the H&M Group. And for me, this has definitely not been an easy decision as I've spent almost my entire professional life in the H&M Group. I am so proud of what we have achieved in this time. As you can see in today's report, we are gradually taking steps in the right direction and towards our long-term goals. The last few years have been very intense with the pandemic and several geopolitical and macroeconomic challenges. It has at times been very demanding for me personally, and I now feel that it's time to leave the CEO role to slow down a little bit and reflect. I will, of course, secure a good handover to Daniel. He is a very talented leader with a broad competence and experience in many different parts of the company. And with that, I hand over to you, Daniel.

Thank you, Helena. I just wanted to join this call to make a brief introduction. My name is Daniel Aver. I've been with the H&M Group for the last 18 years, and I spend most of my time within sales. I've been two years in Germany, three years in the US and two years as country manager for our home market here in Sweden. The rest of the time I work closely to the product and the creation of our customer offer. I have overseen both the women's wear and the men's wear business as well as being buying director. And during the last few years I've been leading the H&M brand. I'm excited to be here and to talk to you. I believe our industry is filled with opportunities and that our business idea to offer fashion quality at the best price in a sustainable way is more relevant than ever. And I see great opportunities ahead to continue to create profitable growth. While I'm humbled for the challenges we face in the world around us, I look forward to taking on the journey ahead together with our great teams here at the H&M Group. I'm really impressed by the way Helena has been leading us and navigating the company over the last four years during a very challenging time. I have really enjoyed working with you and I think you are a very wise, driven and energetic leader. So I look forward to talk to you more in the coming reports. But for now, I hand back to you, Elena.

Right. So let's then turn the focus to the report. In 2023, we took important steps towards our long-term goals. We continued to drive our improvement work in the supply chain. The cost and efficiency program was implemented. and the external factors that influence purchasing costs continued to normalize. All this resulted in a stronger gross margin. Our focus on cost control, profitability, and improved inventory productivity also contributed to increased cash flow, that is financing and increased reinvestment in the business. For many consumers, 2023 was marked by lower purchasing power because of high inflation and high interest rates. Despite this, our net sales in comparable markets increased in relation to 2022. The fourth quarter started with unusually hot weather in several of our important European markets. From mid-October, sales recovered as more normal autumn weather arrived with well-received collections. Our fall fashion and holiday collections were much appreciated by our customers. Sales gradually recovered during the quarter and ended strongly. To highlight some large markets where we have seen continued strong development, we have Eastern Europe. where Poland is continuing to grow, Southeast Asia, where India is also in double-digit growth, and China, which has started to grow after a period of weak sales development. We also saw a strong trend in North America, excluding the USA. Despite ongoing uncertainties in the world around us, we continue to pursue opportunities that will increase sales. For example, through our increased investments in the store portfolio and the supply chain. This is an important component in achieving our long-term goals. During the quarter, we have taken further steps towards our goals, creating the conditions for profitable growth over time. We see it as possible to drive both sales and profitability forward. It is about becoming even more efficient, flexible, and fast. For the fourth quarter, the gross margin increased from 49.8% in 2022 to 53.7% in 2023. and for the full year from 50.7% to 51.2%. We have seen a recovery now in the second half of the year and we foresee that the external factors affecting the gross margin will continue to be positive relative to last year also into Q1 2024. Inventory efficiency remains a focus area. The inventory continues to decrease in relation to sales. So far, the situation in the Red Sea has had no significant impact on the company's freight costs or stock levels, but the situation and developments are continuing to be closely monitored. Selling and administrative expenses have developed well in the quarter with good cost control. Management of costs has mainly involved continued positive effects from renegotiations as well as good and flexible planning of staffing in stores and logistics centers. In addition, during the quarter, we have continued to see the effect of the cost and efficiency program that we launched in 2022. Operating profit continues to develop in the right direction. In the fourth quarter, the operating profit excluding HIP was 4.5 billion Swedish crowns. We are making progress in all our growth areas and taking further steps towards our long-term goals. Our top priority is H&M. We have high ambitions and therefore the most important thing for us is to continue working to improve the customer offering and the customer experience. We are strengthening our offering through continued investments in areas such as tech and AI that enable better accuracy and better quantification. Among other things, this results in improved size availability, faster response times and increased precision in product purchasing, giving them the customer's access to an even broader and more relevant assortment. At the same time, we are providing added convenience by digitalizing the in-store experience and offering omnichannel services. We are improving the look of how our products are displayed in our online shop. Our test in Denmark shows this has had a very positive reception and positive results. For example, we can see that providing more inspiration increases visitor numbers to our online site and that clearer help with fit and styling is positive for conversion. Through our digital expansion, we are attracting both existing customers who want to shop in more channels as well as new customers who can meet us when, where and how they choose. Alongside continuing to integrate the two channels for a smooth customer experience with good product availability, we are also increasing the rate of investments in our store portfolio. The physical stores are still extremely important. Customers appreciate the accessibility of the stores and the opportunity to try on clothes and be inspired. we are continuing to ensure that we have the right store with the right format in the right place. One example of our store investments is our new H&M store in Soho in New York, which opened in January. The store has been strengthened in look and feel, with the fashion products being presented in an even more inspiring way to elevate the customer experience. The store portfolio has reached a level where fewer closures will occur in the future, while at the same time new stores will be opened. For 2024, we plan to open about 100 new stores and close about 160. This will result in a net reduction of approximately 60 stores. These portfolio changes will start to contribute positively to the H&M Group's Most of the openings are in emerging markets, while the closures are mainly in established markets. H&M is one of the world's largest fashion destinations, receiving billions of visits each year in store and online across the world. Over the past year, we have continued our investments in our lifestyle brands. These are sport, beauty and home. H&M Beauty has had a very strong year and we see good opportunities to continue to deliver strong growth going forward. The concept is developing well and is successful at recruiting new customers, especially in the younger segments. Our sports brand, H&M Move, continues to be fantastically well received by our customers and we are also growing through H&M Home. In 2023, H&M Home opened 46 shop-in-shops globally. Our second growth area, Portfolio Brands, continues to show good developments. It consists of COS, Monkey, Weekday and Other Stories and Arket. The COS, Arket and Weekday brands have had particularly strong sales trends during the year and are increasingly contributing to the group's profitability development. Sales by our portfolio brands increased by 15% in SEK and by 9% in local currencies. during 2023. In our third growth area, new growth and ventures, we are creating new revenue streams through a series of strategic partnerships and new circular business models. We see great potential in the companies we continue to invest in. One example is SELPI, which is growing at a rapid pace as the demand for secondhand fashion increases among consumers. Our investments in innovation also mean that we are taking important steps in our circular transition. Through increased use of recycled and more sustainably sourced materials, we are getting closer to our long-term sustainability goals. We have ambitious climate targets and preliminary results show that we have reduced greenhouse gas emissions by more than 20% compared to our 2019 baseline. This takes us even closer to our science-based targets, which are some of the most forward-looking in our industry. Finally, looking ahead, we can conclude that despite a turbulent world, the H&M Group stands strong with a robust financial position, strong cash flow and improved profitability. Together with a continued customer focus, engaged colleagues and an increased rate of investment, we see good conditions for continued profitable and sustainable growth. in 2024. Thank you so much for listening and now we are happy to take your questions.

The kind reminder please ask one question at a time.

Thank you. As a reminder if you wish to ask a question please register via the link in the confirmation email and then dial in and press start followed by the number one. If you change your mind or you feel like your question has already been answered, you can withdraw yourself from the queue by pressing star and then two. Our first question today comes from the line of Sridhar Makamali with UBS. Please go ahead.

Hi, good afternoon. Joseph, I don't know if you meant just restrict yourself to one question or ask one question, even if I had. a couple of them, so maybe I'm just going to take the latter interpretation. I'll ask you a couple of questions if that's okay. So firstly, just in terms of the margin target for 2024, the 10% that you've referred to through time, there's clearly different words we used over the past year or so to describe that in terms of objectives. Is there any change in the underlying thinking that you are going to register a 10% EBIT margin operating margin for 2024 as a full year? Is your conviction greater or lower or anything that you can describe that will be very helpful? And secondly, I think you brought back the 10 to 15% sales growth, medium term, long term target. Perhaps you can describe, I don't know, Daniel, I know it's realizing it's day one. You've referred to challenges in your remarks. Both of you perhaps address how you see getting to that 10 to 15 percent sales growth. How do you bridge from where we are today in moving towards that and how long that might take? Those are my two questions. Thank you.

Thank you so much. First, when it comes to the 10% margin target, it really remains. So we have had since we set the goal and we are very focused, of course, on reaching it. When looking at 2023 and also the last quarter, we see that we are taking clear steps. towards that goal and we will continue to work hard with of course increasing sales by focus on the product the products and the customer offer together with customer experience also we're continuing with implementing the cost and efficiency program also during 2024 where we where we will see more effects And also we are seeing that the external factors influencing the purchasing cost is getting more normalized. So looking at Q1 compared to Q1 last year is positive. Then we had the phase question. The long-term target. The long-term target, I can just say a few words and then you get some reflections from Daniel. As you know, since the past few years, I've been locked around navigating through a pandemic and then many geopolitical and macroeconomic challenges. We've been focusing mostly on profitability, having a good robust financial position and a good so we can keep on investing in our business and stay flexible and, of course, always focused on our customers. We see that we now have a more robust foundation to stand on for future profitable and sustainable growth. And that also means that when looking at investments, we focus more on customer-facing initiatives, for example, more investments in our store portfolio going forward. Also, we continue to focus on customer offer, integrating tech and AI to be able to do the even broader and more relevant assortment.

Daniel? Compliment what you said, Helena. What you referred to, it's my first day on this new road, so I would need to take time to come back to that question. But for now, I think referring to what I said in the introduction, we are in a market that is growing, that is very fragmented. I believe our model with having physical and digital retail in combination with strong direct-to-consumer brands in our portfolio is a great model for growth and more relevant than ever in the existing market. market conditions. So recognizing there are a lot of challenges, I believe there are big potentials with our model and that coming out of 2023 on a more solid foundation, we are able to, what Helena said, invest towards the customer to strengthen and accelerate that model and that will lead to profitable sales growth over time and that will be our focus.

Thank you. Thank you, Sreda. Next question, please.

Our next question comes from Adam Cochrane with Deutsche Bank. Please go ahead.

Hi. Good afternoon and good luck for the future, Helena. In terms of my couple of questions, you talked about sales improving at an exit rate, but the current trading at minus four looked a little bit weaker than maybe a strong exit rate. from November would have suggested. If you just talk a little bit about maybe November, but certainly December and January, and you've got an increased markdown guidance for the first quarter, has that excess inventory that you left over from Q4 cleared in the first quarter, has that impacted sales in those months, just because you're selling more products at a discount? And has all of that excess inventory been cleared now and we're on to hopefully the new ranges as we look into February. And the second question was really related to, there was a 700 million write-off in the period. I just wanted to check what that was in relation to and whether that would see a lower depreciation chart in the next financial year because of the write-off. Thanks.

Thank you very much. I can start to answer on the question of current trading and sales in December and so far in January. Of course we have higher ambitions than this moving forward. We do see during these past few weeks that the industry as a whole has gone down in for us big markets in central Europe, especially then Germany. And we also see that we have high comparable figures from last year. And also we still, as you know, have worked a lot with the store portfolio overall, where it will start to have a positive impact impact on growth, but not yet in Q1. We also see in the US that we have potential to do even better. It's a big country and we have identified certain areas that we work even more on, for example, improvements in supply chain to make it even more flexible and also integrate the channels and strengthen the customer offer even more. So a lot of activities going on for this to change the coming quarter.

Good. And then the second question on the markdowns. As communicated, you saw that the queue for selling was not so strong and particularly at the beginning of the quarter with a very warm September and the first half of October. And that we're now working with to ensure that the stock composition stays relevant and when we come out of the sale period now that we have a very strong and relevant full price offer when the selling kicks off. But in addition to that, the benefit of having higher productivity in the stock and lower stock-to-sales ratios is that we can also use the markdown as a commercial tool. And that we have decided to do somewhat during the holiday period to ensure that we engage and communicate our strong price offer with the customer. So it's less of a stock clearance, but more of a commercial decision to use markdowns as a tool to drive some of the holiday selling. And then to your third question, Adam, about the 709 million write-off in the fourth quarter. It's two main components here. First one is, and the biggest one, is the impairment test that we do as a Q4 exercise together with the auditors when we do the yearly cut. We then impair the right of use assets. And here we have then increased the impairments compared to the outcome of this process last year. The second part of this write-off is provision for decided store closures. So you can say that we are with both these write-off front loading and accelerating our depreciations. Foreclosures ahead, we have already taken the depreciation in our book, so to speak. I hope that answers your question.

Yeah, then you get on that stock clearance as a commercial tool within the current trading number. Are we saying that you think by selling that product with a lower price, it actually improved your sales compared to what the sales would have been without it in that period?

It a little bit depends and that's why I answered like that on when you do it. We believe that in sort of the up into the holiday period we see that the consumers respond well to in some market at least and a slightly earlier start of the discount season. So that has been a in some markets a positive effect from activating the customer through some increase.

Thank you.

Our next question comes from the line of Warwick O'Keens with BNP Paribas. Please go ahead.

Thanks very much. Good afternoon. My first question is how much of the 2 billion SEK cost efficiency program did you land in the P&L in 2023, please?

From an activity and what we have done point of view, we are done with the majority of the work. we can see that the isolated admin costs are down with about 800 million for Q2 to Q4. And in addition to that, we also have effects from this program in other parts of the P&L. Overall, we are on track on a yearly basis, a rolling 12-month savings ambition of 2 billion SEK. And as previously communicated, we believe that about a billion of that would be realized through the P&L during 2023.

Great, thank you. And the second question, I'm a bit embarrassed to ask this question, in fact. The 177 million incentive charge that you booked, Could you just explain how that's calculated? I'm sure I'm wrong, but I thought it was 10% of the year-on-year profit after tax increase, which would be a bigger number than that.

It is, but it also caps at 2% of the profit. So depending on if there's a huge this year, then a profit recovery is also a cap at 2% of the profit.

I understand. All right. Thank you very much.

Our next question comes from the line of Nick Coulter with Citigroup. Please go ahead.

Hi, good afternoon and best wishes to both Helana and Daniel coming into the role. Two questions, please. First, you can ask about your U.S. sales trajectory in the fourth quarter. I guess the numbers suggest a softness and I guess how you see the U.S. consumer or your U.S. customer behavior. of kind of global pricing aspirations for the coming year, please, given the narrative around commercial decisions to lower the gross margin. Thank you.

Thank you very much. Yes, we have seen some challenges in U.S. As you know, it's a highly competitive market. and we do see opportunities for us to improve further. For example, we see when looking into the customer offer that we can do further investments in that to be even more competitive on some of the product types. And also, as I mentioned before, it's really important when the country is so big and that we also have a very flexible supply chain where digital online and physical store supply chain is integrated so we can fulfill the stores in a very responsive way moving forward so a lot of focus on supply chain and integrating the channels and also further investing

And on the pricing strategy, I think consistently with how we maneuvered through times with sort of headwinds when it comes to external factors, keeping an always close eye at the customer offer, ensuring that the customer can always feel that they find the best combination of price, quality, fashion and sustainability. um but also of course um monitoring uh towards the gross margin needed to reach the the 10 margin target that we are are committed to reach this then allows given now the the development of the the gross margin and the external factors with of course some kind of of caveat for for the effects of the red sea disturbance that we see that we believe that we can invest further in the customer offers and in selected markets and selected product categories to to invest in the customer offer and now start to lower prices in a tactical way to really feel secure that the customer offer is still as strong as it has been in the period in the past.

Brilliant. Thank you.

Our next question comes from Georgina Johanen with JP Morgan. Please go ahead. Georgina, your line is open. Please proceed with your question.

Oh, I'm so sorry. Can you hear me?

Yes, now we can hear you, Georgina.

Oh, my apologies. Thanks for taking my questions. Two from me, please. First of all, just coming back to the write-off, and thank you for your explanation around the accelerated depreciation and so on. I'm just trying to understand why Where the store closure program is slowing and potentially coming to an end by the end of 2024, does that mean we should expect much more limited write-offs in 2024? Or is it sort of far too early to tell? There could be impairments for other things that we might just not have paid so much attention to over the years and so on. Just a bit of understanding as to whether we should be accounting for that in the P&L through 2024, please. And then my second question was just with regards to Germany and your comments on recent trading. Do you think the protests that we've been seeing in Germany and the strikes and so on, is that something that's really weighing incrementally on the sales in that market at the moment and therefore we should see as temporary?

or actually is it just more about the consumer remaining quite quite lackluster in that market please thank you thank you for for your questions george i'll this is joseph i'll start with with your first one so you you make a good remark that um if we manage to close fewer stores they should contribute positively for the outlook of lower write-offs moving forward. Then of course when we look at the impairment tests also what will speak positively for that outlook will be if we manage an overall higher profitability for our markets which is a high priority for us. And then in combination with the work that we continue to drive and the securing partnership deals with landlords where we pay turnover-based rents. So these are all factors that we work actively with to reduce the needs of our writers.

And then when it comes to Germany, it's more a general customer sentiment, which we see for the whole industry, and that where purchasing power is down. So it's more than the protests that you mentioned, where we can see an effect. So again, really important for us to focus on giving the best customer offer and value for money. And we also see good receipts on some of the newer campaigns and parts of the collections, for example, fall fashion and also the holiday campaign. Thank you very much.

Our next question comes from William Woods with Bernstein. William, please go ahead.

Hi, thanks for taking the question. I'll take them one by one. The first one is, why do you think now is the right time to invest in more capex? Is that a sign that investment should pay off and that there's limited restructuring to cut? Thanks.

We have, over the last couple of years, as Sirianna mentioned, focused on creating a platform for creating future and we believe that we now do have so we see a good opportunity for creating good returns if you look at the sort of financial aspect of why we increased capex but I think Even more importantly, I think it's also a way to, of course, continue to stay relevant in the customer experience, both when the customer meets us in the physical stores that we now put a lot of investments behind, but also that we keep relevant in the digital experience. So we see it as a good business case, creating returns for us given the work we've done, and also, of course, generating long-term positive effects on the customer experience.

And then the second question was just on your 10% margin ambition. How much are you willing to trade volume in order to achieve that margin target?

Sorry, say again. Repeat the question, please.

Sorry, on the 10% margin ambition, how much are you willing to trade volume in clothing sales for the 10% margin target?

We don't see them as contradictory. We've had periods over the last year where we've had to sort of maneuver the balance and we see that as we have been so committed to putting ourselves on the EBIT margin improvement trajectory, potentially could have driven slightly more selling during certain periods. But in a long period, we don't see them as contradictory. We believe that The gross margin is attributed to other factors or work within optimizing the supply chain and our strong collaboration with the partners up in the social markets. We believe that we will get the benefits from leverage in the platform we created on the OPEC if we increase selling. And that goes in the same way for leverage on the tighter overall admin structure that over the last year and a half. So we see them as contradictory rather than the work and hard work they've done this year in a good position to leverage sales growth and by that then supporting the 10% margin journey.

That is it. Thank you.

Our next question comes from Richard Chamberlain with RBC. Please go ahead, Richard.

Thank you. Hi, team. Yeah, I've got a couple, please, on the results. You talked about CapEx going up quite a lot this year, I think about 30% because of tech and store investments and so on. But what about marketing? How has that been trending as a percentage of sales? And how do you expect your marketing budget to trend in the coming year? So that's the first one. And then the second one, I see the average number of employees I think has fallen by about 5,500 last year. Can you just run through the major markets where you've reduced the number of employees or talk about it by geographic region? Thank you.

Well, if you look at the marketing, it is a part of our sort of commercial offer that we monitor very closely. It's both intended to build the brand and give the customer the feel of who we are and and the long-term impact on the brand perception, but also it, of course, can be a support to drive short-term traffic and the whole performance marketing toolbox that we use. We have, over the last year, shifted our marketing towards building a more robust platform when it comes to our brand building and creating that long-term perception of the brand. And now we will then assess the marketing spend going forward based on how to balance these, how to leverage the branding lessons we've done with ensuring that the customer becomes aware through our marketing about the great prices and offerings we have at every given point in time. Marketing has been overall fairly stable over the last year with a slightly shift towards brand building and going forward. We don't guide on that but it will be a balance between leveraging the brand investments we've done with ensuring that the consumer is aware of our offering. I think it's very important in the context of talking about building the brand and marketing and so on to remind everyone of the fantastic power of all the visits that we have on a yearly basis to our digital channel and also to all our stores. And here we are improving the digital experience. We have a lot of effort going into even more inspirational pictures of the fashion and the styling and so forth, improving that part of the experience and the big investments going into the store portfolio. in key locations in the major cities in the world. So I mean here is also talking about marketing a very big area where we invest a lot of resources.

I can give a few comments on the other question when it comes to size of organization. As you know we launched a cost and efficiency program during fall 2022 and what we have done so far is to look into making the organization leaner most within our central hubs where of course the biggest is in the head office here in Stockholm but also in some of the other central hubs and moving forward it's more activities when it comes to our regions where we see further opportunities to do changes to make sure that we can become really fast and efficient. When it comes to stores, it's more of a continuous work to follow also customer behavior to see where our customers prefer to meet us. As you know, more and more it's been also going more in online channels and digital channels. We see that it's strength to have both physical stores and being digital channels and that many prefer to meet us in both of these channels. But regarding that, it's more a continuous job that we're doing to make sure that we have the right stores at the right place. And that looks a little bit different on different markets.

Thank you. Thank you for the call.

Before we take our next question, as a reminder that if you wish to ask a question today, please register via the link in the confirmation email and then dial in and press start followed by the number one on your telephone keypads. Our next question comes from the line of James Grisnick with Jefferies. Please go ahead.

Thank you. Yeah, thank you. Thank you for that. And I guess best of luck for the future, Helena, and congratulations, Daniel, on your appointment. I just have a couple of questions. The first one, can I just confirm if sequentially spring, summer cost of products versus the autumn, winter you just traded, whether that is still deflating? What in terms of cost of product and supply chain costs, please? That's the first quick one.

We are referring to a year-on-year improvement in the sourcing cost and the cost of product. So that's when we refer to that, we mean that the external factors from a year-on-year basis are still favorable for the first quarter of 2024.

So I was wondering whether sequentially that also applies, whether spring-summer is sequentially still deflating versus autumn-winter just traded?

We see that we are up against a fourth quarter of last year and a first quarter of this year with very, very inflated levels. We haven't guided on the sequential level, but over the six-month period, we can see that there are big improvements on a year basis on the external factors. So we don't speak about the sequential levels, but we can see that they're fairly similar when it comes to external factors and how they are improved for last year, both for Q4 and Q1.

Okay, understood. So essentially, if you take away the sweet spot of the COGS deflation should be the Q4 just traded and the Q1 coming. And secondly, we've seen media reports last week of a few store closures in Spain. going back to the point you were making about cutting established markets into reopening in emerging markets. Are there any other major geographies where we're seeing exercises of that type that are worth plugging at this stage?

Thank you, James. This is Joseph speaking.

Spain is the big market, the market with a high number of store closures for 2024. There are no other markets of that magnitude. Understood.

Thank you. This is something we're overseeing kind of all the time to make sure we have the right source and also know how we move into the phase where we can close that that can contribute to growth again.

Thank you.

The next question comes from Nicholas Champ with Barclays. Please go ahead, Nicholas.

Thank you. Good afternoon. I have two questions. First one, quick one. What is the current share of nearshoring and how does it compare versus 2022, please?

We don't have any specific numbers on that. As we've spoken about before, it's a clear shift when it comes to sourcing that we do more and more nearshoring. We're developing it in Europe, in Asia, where of course we already have a lot of production and also exploring Latin And we really let also the assortment decide how much we do it on the parts where we need to be very, very responsive and quick in delivering according to customer demand. So it's increasing over time. And when talking about sourcing, it's the biggest shift that we're doing.

Okay, thank you. Second question is about the Red Sea disruption. So you say you are acting to minimize impact on the product availability and freight costs. Could you elaborate a bit on this action plan? And looking forward, assuming freight costs remain at the same level, at the current level, when will it become an issue for you and When will you be forced to pass on this higher supply chain cost to customers? Is it a three-month issue? Is it a six-month issue, for instance?

Looking at the actions we're taking, we are in continuous and very close collaboration with our freight partners and obviously respecting the challenging situation and of course working together with them in finding the best solution. What we've done so far is that we have adjusted some of the commercial planning to ensure that we always can offer the best assortment even though we can start to expect some delays and then later on we will most likely if the situation persists start to adjust some of the sourcing mix and the timeline for making the order placement decision. So closely monitoring, trying to mitigate as much as possible both on the commercial side but also then adjusting some of the order placement timeline to ensure that we always are able to hit the commercial agenda that we set out to. It is still on levels that are far lower than they were a while back then with sort of the worst situation when we had supply chain disturbances. We, as I mentioned, work very, very closely with our partners to mitigate it to the utmost extent. We do have some kind of delay, so I think it would be rather a a three-month and a six-month delay if anything of this would be needed to sort of be taken upon us. But all in all, we do our utmost to ensure that we can always have the best customer offer and not pass it on, but rather work to find solutions together with the transportation partners.

Understood. Thank you very much.

Our next question comes from the line of Paul Rossington with HSBC. Please go ahead.

Good afternoon and congratulations and best wishes again on the new appointments. Question number one, can you just remind me where your long-term inventory targets are, what they are, and whether they are still realistic? Are you still happy with those targets? How much further have we got to go to get there? That's my first question. Thank you.

We described the inventory target as a share of sales, and that interval has been set to be between 12 and 14%. And we just now, by the fourth quarter of 2023, came in at the level of sub-16%. So we absolutely believe that they are relevant, and also with the improvements that Siljana briefly spoke about, about the sourcing mix, everything we do with the supply chain improvements, and also Of course, with precision and digitalization of how we work with quantification, the product and assortment design process, we absolutely believe that they are relevant.

Thank you. My second question ties into something that was mentioned earlier. Does the increase in the proportion of nearshoring make a meaningful difference to the amount of inventory you're holding at any point in time? I don't know if you're able to quantify it. Are you moving one or two percent per annum out of Far East into near shore, for example? Even if you can't give an absolute level, a kind of delta would be quite useful.

Thank you. It is obviously a contributor to reaching that target, and also, of course, increases the uh the relevance of hoping to be more uh more precise it helps to sell more full price and so the inventory needed to be carried and it is a shift that we're working on and it's not a one near showing mark that is at all regions uh to a higher extent than previous they should be able to be supplied from a nearer shore so to say thanks very much Thank you.

Our next question is a follow-up from Georgina Johanan with JP Morgan. Please go ahead, Georgina. Your line is open.

Hi, thank you. Thanks so much for taking the follow-up. It was just a quick clarification question. Where you were talking about the improved cost of product sourcing, obviously having come through in Q4 and Q1, I just wanted to clarify, particularly given how big some of the FX swings were last year, which maybe clouded what we could see from the outside in. May I clarify that everything being stable in the Red Sea, would you assume that from Q2 onwards, external factors were sort of neutral to perhaps marginally positive in 2024, or should we actually still be assuming some tailwind from freight and so on in 2024, please?

Yes, Adam here. It's obviously difficult to predict the uncertain world from a long-term perspective, but as the external factors sit today, we believe that the first half of the year they will be still contributing positively to our at a lower cost than previous year. Then I don't dare to make any estimates of the autumn here. And we have still not purchased the autumn, so that is still to be realized and seen how the effects will play out then. But for the spring, we believe that as it sits today, we will have positive effects from the external factors.

Thank you, so some ongoing benefits into Q2 as well as Q1?

Yes.

Great, thank you very much.

At this current state, this is Joseph speaking, it's the freight cost which is the biggest uncertainty at this point in time, moving spot prices there.

No, of course, that makes good sense. Thank you very much.

We have no further questions, so I'll turn the call back to the management team for any final comments.

Thank you so much for today, for all the questions and engagement around the H&M Group. We wish you all a great day.

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.