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Executives

Nils Vinge - Head of Investor Relations

Jyrki Tervonen - Chief Financial Officer

Analysts

Erik Karlsson - AKO Capital

Richard Chamberlain - BoA Merrill Lynch

Anne Critchlow - SocGen

Fraser Ramzan - Nomura

Charlie Muir-Sands - Deutsche Bank

Simon Irwin - Credit Suisse

Chris Chaviaras - Barclays

Richard Jaffe - Stifel Nicolaus

Nicklas Fharm - SEB Equities

Jamie Merriman - Stanford Bernstein

Paul Rossington - HSBC

Geoff Ruddell - Morgan Stanley

Caroline Gulliver - Jefferies

Hennes & Mauritz AB (OTCPK:HNNMY) Q4 2013 Earnings Conference Call January 30, 2014 8:00 AM ET

Operator

Ladies and gentlemen thank you for standing by and welcome to the Full Year Report Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions). I must advice you that this conference is being recorded today, Thursday, at 30th of January, 2014 at 2 o’clock pm Central European Time.

I would now like to hand the conference over to your speaker today, Mr. Nils Vinge, Head of Investor Relations. Please go ahead, sir.

Nils Vinge

Thank you. Welcome everyone to this telephone conference on the occasion of H&M's full year results of 2013. Our CFO, Jyrki Tervonen is with me today as always and we will be happy to answer your questions after the presentation. You will find the presentation slides to this telephone conference on hm.com. Please look at the slide fourth quarter 2013.

H&M showed strong performance in the fourth quarter. Autumn collections were well received and sales increased by 13% in local currency.

Translated into SEK, sales including VAT amounted to SEK 42.6 billion. Sales developed particularly well in Asia and Southern Europe. Online sales were also strong. Last year H&M shops online expand into the U.S. where it has been very well received since the launch on the 1st of August. The rollout of online to more markets will continue in 2014.

Gross profit in the fourth quarter increased by 11% to $22.2 billion. The gross margin was 60.8% compared to 61.6%. The difference in the gross margin is mainly due to currency exchange rates effects in connection with payments for the group's flow of goods and to the year-end effect. Increased markdowns in relation to sales accounted for approximately 0.2 percentage points of the difference.

External factors such as cotton prices, cost inflation and the U.S. dollar were more or less neutral for sourcing to Q4, compared to the corresponding year earlier period. Cost control remains tight. SG&A increased by 11%. The increase was due to the expansion and to our continued long-term investments in several areas such as IT and online and our new fashion brand and other stores. Cost in comparable stores decreased compared to the fourth quarter in 2012, both in relation to sales and in absolute terms.

Operating profit increased to almost SEK 7.3 billion, with an operating margin of 19.9% more or less unchanged year-on-year. Profit after financial items rose by 11% to SEK 7.3 billion, a good performance given the large long-term investments that we make. Net profit was SEK 5.6 billion which includes earnings per share of SEK 3.39 an increase from SEK 3.19.

Looking at the full year, please turn to the next slide. H&M continued growing and taking market share in 2013, although macroeconomic conditions remain challenging in many markets and marks on activity in the industry was high. Sales increased 9% in local currency, but due to the strengthening of the Swedish krona, the increase in SEK was 6%. Sales including VAT amounted to SEK 150 billion.

Looking at the development into the [individual] markets, please turn to the slide sales per market. H&M now has stores in 53 countries. Germany is still the largest market by far with over 400 stores and more than SEK 30 billion in sales last year, H&M is still growing in Germany. And U.S. is H&M's second largest market with the strong contribution from online since August and the total of 32 new stores during the year net. Sales increased by 13% in local currency. In France, which is the third largest market of the group, sales were strong especially during the second half of the year.

Sales develop well also elsewhere in Southern Europe, as an example Greece increased sales by 34% in the fourth quarter. China is H&M's largest expansion market, the number of stores grew by 71 net to 205 stores by the end of the year for the turnover of SEK 6.7 billion.

And now, if you continue with the results for the full year, please return to the slide full year 2013. Gross profit increased to SEK 76 billion corresponding through gross margin of 59.1% compared to 59.5% last year. Operating margin was 17.2% compared to 18% a year before. And profit after financial items increased to $22.5 billion. Profit was negatively affected by the large long-term investments, increased markdowns and negative currency translation effects of SEK 600 million compared to the previous year. Net profit for the year increased to SEK 17.2 billion, corresponding to earnings per share of SEK 10.36 up from SEK 10.19.

And now looking at some other key figures, please turn to the slide key data. Stocking trade increased by 10% compared to the same time of the previous year. The increase is mainly explained by the expansion.

The composition of the stock-in-trade as of the 30th of November is considered good, even if the level was somewhat higher than planned. There is news that markdowns in the first quarter of 2014 could end up at around the same level in relation to sales as in the first quarter of 2013.

Cash flow from current operations was SEK 23.8 billion, an increase of approximately SEK 5 billion. Investments in terms of CapEx amounted to SEK 8 billion. The increase is mainly due to the expansion but also to long term investments. CapEx for 2014 is estimated to be between SEK 9 billion and SEK 9.5 billion at today’s exchange rates.

The financial position of the group remained strong. Liquid funds amounted to SEK 17.2 billion. And the Board of Directors, reproposed to the Annual General Meeting, a dividend of SEK 9.50 per share. Return on equity was 38.5%.

H&M created more than 12,000 jobs net within the group in 2013. And today we are more than 116,000 employees. (Inaudible) close an average number in full time employees of around 81,000.

And now some words on H&M’s expansion. Please turn to the slide expansion 2014. We continue our strong expansion. Last year, we opened 356 new stores net. At the end of the year the H&M Group had 3,132 stores in 53 countries. China and the U.S. were the largest expansion markets. One of the highlights during the autumn was the opening of the new H&M flagship store at Time Square in New York. More than 2,500 people were lined up outside the store where Lady Gaga cut the ribbon together with the Chairman of H&M.

For the third consecutive year, H&M also added five new markets in 2013: Chile, Lithuania, Serbia, Estonia, and via franchise Indonesia.

And if you please turn to the next slide, here you can see H&M’s rapid global expansion in the longer perspective. Looking at 2014, please turn to the next slide. For 2014, a net addition of 375 new stores is planned. It is within our target to add 10% to 15% new stores per year. Again, China and the U.S. are expected to be the largest expansion markets. We see great potential for further expansion in other markets too including Russia, Germany, Italy and Poland.

Several new flagship stores are planned in the absolute best location for example New York, Milano, Shanghai, Beijing and Melbourne to mention a few. As we have mentioned before, we are very much looking forward to the opening of H&M’s first store in Australia. The store will open in the first half of the year in a fabulous location in the old Melbourne general post office building. In the autumn, expansion will continue to the Philippines where the first H&M store will open in the SM Megamall in Manila. In addition, a couple of other new markets are planned for late 2014 that we will come back to further ahead.

And in 2015, as we’ve already communicated, the first H&M store will open in South Africa. H&M’s global expansion also takes place online. Following the successful start of H&M's online store in the U.S. last year, the roll out in more markets will continue this year. Four new online markets are planned to open in 2014. The next market for H&M online will be France, with the launch planned sometimes this spring or summer. And three more large markets are planned for later 2014. And we look forward to come back with details later this year.

And now some words on the newer brands of the Group. Please turn to the slide COS. COS continued to perform very well in 2013, both in times of sales and profitability. During the year, COS opened 21 new stores and added four new markets.

COS has developed into an internationally well-established fashion brand in just a few years. It was launched in 2007 and has today 85 stores in 20 markets. In 2014, we plan to open more COS stores than in 2013. For example, in the U.S. the first COS store will open in Soho, Manhattan together with the launch of online sales for COS in the U.S. market. Australia, South Korea and Switzerland are also becoming new COS markets this year.

To have a look at the newest fashion brand of the Group, please turn to the next slide & Other Stories. & Other Stories has been very well received, since the first store opened in March 2013. The investment in & Other Stories includes not only investments in developing an entirely new fashion brand, it will also involve COS for the continued roll out.

In 2014, Stories will open further stores in both existing and new in markets. Expansion also continues for the other brands of the Group like Monki, Weekday, and Cheap Monday as well as H&M Home. The H&M Home concept opening around 10 new markets in 2013 and will open in another 15 new markets in 2014 in approximately 70 H&M Stores. Expansion also includes the broadening of the product range of the H&M brand.

Please turn to the slide H&M Sport. H&M Sport’s concept has been updated and renewed to include the significantly broader range than before. The new collections include fashionable and functional sportswear for various kinds of sporting activities for women, men and children. The long [schedule] and initially renewed collections are available in 18 markets and online.

We’re also delighted that H&M will dress the Swedish Olympic team for the upcoming winter Olympics and Paralympics in Sochi as well as for the Summer Olympics and Paralympics in Rio de Janeiro in 2016.

And now before we start the Q&A session, just a few comments to summarize. 2013 ended on a strong note with strong sales and profitability in the fourth quarter. The New Year has also started well. Sales in December increased by 10% in local currencies corresponding to an increase of more than 12% calendar adjusted. In January, sales are expected to increase by 15%.

Although there are still macroeconomic challenges in several of our markets, we’re optimistic about 2014, which will be an exciting year with new countries and new opportunities for H&M. We have a strong belief in our offering and are convinced that we will strengthen our market position even further during the year.

And with that, we are now happy to take your questions. And please remember to only ask one question at a time.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And your first question comes from Erik Karlsson. Please state your company name and go ahead with your question.

Erik Karlsson - AKO Capital

Hello, gentlemen. And thanks for the good set of results. I just had a question on China given that it’s now your biggest market in terms of space expansion. Could you just tell us little bit about how the profitability in China compares to other markets?

Nils Vinge

We are very happy with China and the development. And we look forward to even more new stores in 2014, could be as much as 80 or 90 new more stores. But when it comes to profitability, we prefer not to comment further profitability for market or concept, sorry.

Erik Karlsson - AKO Capital

Thank you.

Operator

And your next question comes from Richard Chamberlain. Please announce the company name and go ahead with your question.

Richard Chamberlain - BoA Merrill Lynch

Thanks very much. Company name is BoA Merrill Lynch. And couple of questions around gross margin, please. And just number one would be, I wondered if you could just talk around the promotional activity you did in the quarter. Whether that was more in store than online, which markets are particular were very promotional, and whether that was sort of driven by, I guess demand being very sort of back loaded, you had one very strong month November following a softer period, did that contribute to it as well? So any comment you can make around promotions please?

Nils Vinge

Yes. What I could say is that it was historically very warm autumn and if you remember September and October were historically warm. And I think official statistics from the industry show that was very weak in most countries. And I think that drove activities and markdown activities, price promotions in many of our markets. Of course we had to follow suit in many markets and also the fact that we had as we commented in Q3, the outgoing inventory level from Q3 was slightly above planned. So that's the one of the reason why our markdowns were slightly higher, but it was probably in 20 basis points more compared to last year’s and not big deal.

Richard Chamberlain - BoA Merrill Lynch

Right. Okay, thanks Nils. And I just one other on the gross margin; I think you are expecting broadly neutral external factors on gross margin for Q1. I mean I’m assuming there is a strong euro impact still to come through but also you talked about some wage inflation in certain markets. Are they the most material factors to think about for Q1 and the first half for this year?

Jyrki Tervonen

Yeah. That's correct. For Q1, we aggregated, we estimate that those was four, five main components that we used to talk about is more or less neutral and so also for Q2. But now we are buying for this period now, that we are buying, it’s slightly negative but Q1 and Q2 more or less neutral effect.

Richard Chamberlain - BoA Merrill Lynch

Okay. And it’s slightly negative now, is that because of the wage, mainly the wage inflation that you are seeing?

Nils Vinge

Yeah that's the most important factor. But again, this is not a proxy for gross margin as we've said a number of times.

Jyrki Tervonen

These are input costs and the gross margin, that's dependent on how we work with our cost of customer, customer offering with consumer prices taking them down, or taking them up in different markets. So, we want to be around that stage just the input cost and the market figures.

Richard Chamberlain - BoA Merrill Lynch

Right. Yeah. Okay. Clear. Yeah, okay. Thank you.

Operator

And your next question comes from Anne Critchlow. Please go ahead announcing the company name.

Anne Critchlow - SocGen

Hi, there it’s SocGen. My question is about the online launch in four countries that you are intending to 2014. I am just wondering whether you’ve taken any costs for that already or whether all of the costs are ahead of us still.

Nils Vinge

No, no. This is of course something we have been talking about for a long time now. The global rollout that we are comparing for and of course we have taken a lot of costs, but we continue to say of course a lot of cost because this is a very ambitious plan that we are doing at the moment.

Anne Critchlow - SocGen

Okay. So are the costs annualizing, I mean should we expect to further step up to be year ahead?

Jyrki Tervonen

If we talk of the long-term investments, including them the online investments, IT investments, investments in the new brand and other stores and broadening of the assortment. The investment levels for 2014 will be higher than 2013, but no drastic increases. But of course, as Nils said, an ambitious plan to open four new online markets this year, in 2013, we opened one market U.S. and now we have ahead of us four markets. So of course the initial investments will be higher during 2014. But as I said, no drastic increases.

Operator

Thank you. The next question comes from Fraser Ramzan. Please go ahead announcing the company name.

Fraser Ramzan - Nomura

Thanks very much. It’s Numora in London. Just, I guess a predictable question around the gross margin. Could you just explain what year-end affects are that you’re referring to? And then also I think you mentioned in your sort of earlier description of the changes in the gross margin, the U.S. dollar was sort of neutral in the period. So, what are the currency exchange affects in relation to the flow of good, did that seems to be coming different that you’re referring to in the commentary?

Jyrki Tervonen

Yeah, that’s correct. It’s a different currency affect. But let’s start with the year-end affects. That we have every year, and it’s mainly due to that we are recalculating the stocking trade based on first-in first-out, but the main part is relating to shrinkage. During the year we are making provisions for shrinkage and then once a year we have the inventory take-in and then we get the final results. So there is of course always a difference between the final actual shrinkage and the provisions we have made.

And this year it was -- normally this provision is higher than the actual shrinkage. It's a positive effect of this year, it was less positive than the previous year. So, that's the main affect concerning year-end affect.

And then coming back to the currency exchange rates, it's connected to when we are placing our order -- the order placement and actual hedging, there is a time difference because we are putting orders everyday and then we are gathering them and then making the hedging three days later. So there is the time difference. And then also the order stock is constantly changing, even though we have the finance policy where we aim to hedge 100%. In reality it will never be 100%, because the order stock is a moving part. We are putting new orders, canceling orders, amending orders, it will be delayed. So the actual hedging can sometimes be 98% or 102%. So there are small differences every month or actually every week when we're doing this.

And these effects are mostly insignificant when just looking at the single factor like the currency could be affecting the gross margin by 10 basis points negative this year. And the same factor was plus 10 basis points last year. So, there you got already a negative effect year-on-year by 20 basis points.

And looking into this, and this we’ve tried to explain in connection with the Q3 conference call that differs from quarter-to-quarter. And looking at the yearly difference, if we’re looking at this currency effect it’s more or less plus minus zero will be year-on-year effect on an aggregated yearly level it’s only 8 basis points. But sometimes small insignificant changes during that quarter, if they go on the opposite directions between the years they can cause, but it’s really -- it can vary from quarter-to-quarter.

I just looked back in Q3 when we had positive effects approx 60 to 80 basis points. And when looking at the reported gross margin compared to last year now we have minus 80 basis points compared to last year. So if we would aggregate Q3 on Q4 that would be more or less neutralized. But yeah, it’s small effects, but sometimes can go in different directions.

Fraser Ramzan - Nomura

I see. So, without -- I obviously don’t want to put words into your mouth, but if I think about this sort of in totality you’ve got the effects of the stock take which was maybe somewhat negative, you’ve got the effect of shrink and you’ve got the effect of this currency volatility. I mean obviously as analysts feel good, we will try to analyze these things and predict the matter in time, but broadly speaking what you’re saying is these are one-offs and quite unpredictable and couldn’t be moved in the other direction next year?

Jyrki Tervonen

Yes, that’s correct. That’s correct.

Fraser Ramzan - Nomura

Understood. Thank you very much.

Jyrki Tervonen

Thank you.

Operator

And your next question comes from Charlie Muir-Sands. Please go ahead announcing the company name.

Charlie Muir-Sands - Deutsche Bank

Hi, good morning. Charlie Muir-Sands from Deutsche Bank in London. I had a question on the operating [expense]. You commented in the fourth quarter, like-for-like store cost was down again which was a very good performance clearly given the positive like-for-like sales. Can you give some color around what’s driving that efficiency and whether we can expect that to continue as we go into next year?

And also returning to the question on long-term investment, when you say that it should grow year-on-year, but why huge amount. Should be we expecting it to be growing faster than total sales or not on the [long cycle]? Thanks?

Nils Vinge

Yeah. First of all the question about efficiency in the stores and in like-for-like stores, there are of course different parts, but the main part is relating to how good we are in our sales planning to estimate the coming week’s sales planning to be able to stop the stores in a correct way. So there of course we are working with different tools to get more accurate in sales planning to get the [soft] hours in place when we need them. So that’s the main part.

In the efficiency side in the like-for-like stores, and then the long-term investments and the OpEx grows year-on-year. Of course, the main factor is our expansion which is driving the year-on-year change, but also these long-term investments will affect it, but that will also vary from month-to-month and quarter-to-quarter. But as I said, there will be no direct drastic increases, but some quarters it might be looking a little bit different than the previous one. But no exact guidance of what the percentage year-on-year change will be. But we are comfortable that we are making those long-term investments that will enable us to strengthen our group and also we are comfortable with still working really good with cost efficiency.

Charlie Muir-Sands - Deutsche Bank

Great, thank you. And on the expansion side, the CapEx guidance year ahead is perhaps look ahead of the percentage growth in store numbers. Is that because it’s more into other areas, are the stores bigger or stores more expensive? Thank you.

Jyrki Tervonen

That's correct. The increasing CapEx is estimated, it’s the highest percentage increase than the number of stores. But one have to remember when we are giving this estimation in the beginning of the year, we have to remember that's a lot of contract or even we haven’t decided which or which stores [come] and lot of contracts are not negotiated. But this CapEx increase is mainly due to that we will be open more flagship stores and that's been really a fantastic thing for which improved the strength of our brand. We will open a couple of flagship stores in New York, Manhattan, one in Milano, in Shanghai, East Nanjing Road, a lot of new really big fantastic locations with good long-term contract. So that's the explanation and then also we will have been more rebuilds during 2014 compared to ‘13 that's the main recent highly increasing CapEx.

Charlie Muir-Sands - Deutsche Bank

So, you said more refits?

Jyrki Tervonen

Yeah. More refits, but looking at normal H&M stores, there our investments are more or less on the same level. So it’s more refits and more flagships.

Charlie Muir-Sands - Deutsche Bank

Okay. Thank you.

Jyrki Tervonen

Thanks.

Operator

Thanks. The next question comes from Simon Irwin. Please go ahead announcing the company name.

Simon Irwin - Credit Suisse

(Inaudible). It’s Simon Irwin it’s Credit Suisse. Could I just ask you going back to what you were saying about input costs in the year ahead, being broadly flat, given the FX movements that we know of through certainly the next two quarters if not three? Does that imply that there is going to be an implied investment in quality as we go through this year, you seem to be implying it. The costs are going up, but I am not certain that kind of like for like costs in too many markets are actually going up.

Nils Vinge

No. Again, this is not in guidance regarding the gross margin this is what we try to estimate the market conditions and of course FX is one important factor, but there are other parts as well because this is just I mean more or less this is not scientifically. And I think the -- but Jyrki said about cost inflation it is the biggest driver that it is I mean we have seen increases in Asia however double-digit which we think is good because it’s from a sustainment perspective, but you can’t rule them out so to speak. So there is going forward rest of the year, there is this pressure up for us and it’s already started somewhat.

Simon Irwin - Credit Suisse

Could I ask just a follow up in terms you were talking about doing more repicks or rebuilds in the year ahead and obviously you were continuing to broaden the range. Could you just given us an idea of ultimately what percentage of stores the new sportswear will be presented? And as generally what your average store size will be doing in the medium term, I mean you are going have to increase it to take all this broader range in.

Nils Vinge

That’s correct. So just start with the sports collection, we just launched and have a very good reception so far. It’s a gradual launch we start in 18 countries in selected stores with the full range. And then we have a limited range in several stores, and a large number of stores. And of course again we will try this out and test and gradually roll it out as we learned and get customer reference as I can't give you any so much more flavor on that yet.

Regarding store size, you're absolutely right. Already last year and year before we started to increase slightly the store size of H&M, because in order to get space for the new formals that we are rolling out including home, sports et cetera. And so we see that this trend will probably continue also this year.

Simon Irwin - Credit Suisse

Okay. And just as a quick follow up. How significant is receivable promotion that you're doing this year. I mean in terms of being a much bigger step in terms of where you promoted your business in the U.S.?

Nils Vinge

Well, it all depends on what you compare it to. But of course it's -- I mean we are investing a lot in marketing and the U.S. is our second most important market. We continue to grow a lot of our national brands in the U.S. with lots of fans and especially now with online really important player. And this is not the first time we're investing, it's actually the second time.

Simon Irwin - Credit Suisse

Great. Thank you very much.

Operator

And your next question from Chris Chaviaras. Please go ahead, announcing the company name.

Chris Chaviaras - Barclays

Hi, guys. The company name is Barclays. A lot of questions have been answered. I had one on the online launch in the U.S. Do you now offer click-and-collect there. And given that the sales growth has accelerated in the U.S. would you attribute sounds like sales acceleration to the online launch you did, because the fourth quarter acceleration coincides with the U.S. online launch. And staying in the U.S. could you tell us how big the Time Square flagship store is and when it was opened exactly?

Nils Vinge

Great. I think I said one question at a time.

Chris Chaviaras - Barclays

Sorry.

Nils Vinge

I am sorry. But if you start with the first one that I remember it was click-and-collect.

Chris Chaviaras - Barclays

Yeah.

Nils Vinge

No we don’t have that yet, but of course it is something we’re looking. Regarding sales in Q4, very happy and of course it’s contributing the online, a successful launch in the U.S. And also the third and fourth questions, sorry I’ve lost it.

Chris Chaviaras - Barclays

Yes. How big is the Time Square store and when you opened it exactly?

Nils Vinge

Okay. The Time Square it’s large but I don’t have the exact number but we come back to that later in the call, okay? 4,000 square meters in Time Square. It is huge.

Chris Chaviaras - Barclays

Okay. And when was that opened exactly?

Nils Vinge

In November I think, in November, yeah.

Chris Chaviaras - Barclays

Okay, perfect.

Nils Vinge

Ask Lady Gaga, she knows.

Chris Chaviaras - Barclays

Okay. Thank you.

Operator

And your next question comes from Richard Jaffe. Please go ahead announcing the company name.

Richard Jaffe - Stifel Nicolaus

Thanks very much. And a follow-up on your comment in accelerating the growth at some of the new businesses. I am wondering what the outlook is for these businesses particularly COS & Other Stories. Do you anticipate the operating metrics, gross margin, sales per square foot operating margins and the return on invested capital to be equal or even better than H&M once you gain some economies of scales, some leverage?

Nils Vinge

Okay. Your first question, primarily the COS & Other Stories was very successful during the year. And we planned to open in at least three to four new markets for COS this year including the U.S. So we’re very happy to open the first store in Soho and also the online launch of the COS in the U.S. And regarding Stories and we are looking at lot of new opportunities and new markets, but unfortunately, we can’t tell you so much in more details, but high ambitions. And number of stores will hopefully be at least as many as this year for both COS and Stories. When it comes to profitability, we don’t disclose, I am sorry, we don’t disclose profitability or other profitability metrics per format or per country for comparative reasons.

Richard Jaffe - Stifel Nicolaus

Understandable, but the behavior suggests some optimism I guess, if that could be…

Nils Vinge

We are always optimist, but also with the respect.

Richard Jaffe - Stifel Nicolaus

Very good, thank you.

Operator

And your next question comes from Nicklas Fharm. Please go ahead and announcing the company name.

Nicklas Fharm - SEB Equities

Hey guys, good afternoon. This is Nick Fharm with SEB Equities. I was just going to ask you one question at a time, but two questions. Firstly, could you just educate me a bit on what type of costs are actually involved in setting up the French online business?

Nils Vinge

Yes. As I said, we are very ambitious as we are investing a lot and of course starting with the infrastructure on to platform systems etcetera. And we have logistic set up, we have the customer support we have distribution partners etcetera, etcetera, we have payment structure; it’s a long, long list.

Nicklas Fharm - SEB Equities

Out of the major parts of those costs that you seem need to take, I would assume that some platform costs have already been taken because your focus has been adopting your business, your online business to be able to launch most recently in the U.S. market; is that correct?

Nils Vinge

Of course, we have been investing and spending a lot of money into online and IT platform for last couple of years, and we continue to do so. And of course that is to use some of those new investments that we've made, absolutely. But the platform, if you talk about platform specifics in the U.S., we are using part of that platform, but also part will be totally new for these four markets on the line.

Nicklas Fharm - SEB Equities

Fantastic. Can I ask you if the -- which part of the remaining cost that you, that you need to take specifically for the new market would be the larger cost items, would it be for example filling up the customer support operation or would it be the logistic side or what would be so the main portion in terms of new OpEx?

Jyrki Tervonen

Yeah, without going into each components, but still as Nils said, we have to take still investments in the system development. And even though we have the same, more or less the same platform for these new countries to come up, we have to still adopt a lot of things to each market due to legislative things and to custom behavior et cetera. And of course, distribution centers; it’s a big part of the investment and customer support as well. So aggregated, it’s a big investment. But of course in this case, if we will also gain the revenue much quicker than we have done now for some years, but we have been in a development phase. So now, we will get the revenue side as well when we are open in France.

Nicklas Fharm - SEB Equities

Perfect. Final question, would one of the four main online markets that you are set to open in 2014 be located in say Asia like China?

Nils Vinge

I think you asked that question this morning. So, we will come back to that when we have more information.

Nicklas Fharm - SEB Equities

Thank you very much, guys.

Nils Vinge

Thank you. I have some information before we go to the next, we got some information about Time Square. The store we opened there was open on the 14th of November and it’s 42,000 square foot or 4,000 square meter.

Operator

And the next question comes from Jamie Merriman. Please go ahead announcing the company name.

Jamie Merriman - Stanford Bernstein

Hi there, thank you, it’s Stanford Bernstein. My question is about the online and the systems integration that you talked about briefly in Q3 needs to happen in the U.S. and specifically about integrating the store platform with the online systems and that you can support returns in store. And I was just wondering if you could give us an update on where you stand there and also whether that’s something that will need to be developed when you go into France and the other markets that you will launch on in 2014.

Nils Vinge

Yes. We -- I am sorry, can’t give you much of an update more than of course we are working in these areas. But it’s always our prioritization because now rolling out online in four new markets is of course huge and very ambition move -- ambitious move. And there are lots of things that we want to improve as well as expand. So, I am sorry, I can’t give you any more details about when it will conclude so to speak but it’s going to be gradual launch of course as much as new markets but also improve functions et cetera.

Jamie Merriman - Stanford Bernstein

Okay. And is that something that you anticipate, will you be able to process returns in store in new markets or is that a bit of specific issue to the U.S. or is it something that the whole platform will have to evolve over time?

Nils Vinge

Sorry, I can't give you more details about the launches, about the details. But we will come back to you as soon as we have more detail.

Jamie Merriman - Stanford Bernstein

Okay.

Operator

And your next question comes from Paul Rossington. Please go ahead announcing the company name.

Paul Rossington - HSBC

Good afternoon. This Paul Rossington of HSBC.

Nils Vinge

Hi

Jyrki Tervonen

Hi.

Paul Rossington - HSBC

Just to do with some comments on Bloomberg earlier on today about you’re changing some of your sourcing perhaps looking at Africa potential markets. I appreciate China is still a major, or the Far East is still a major hub for your sourcing but is this likely to see perhaps move to high proportion of sourcing in countries in closer proximity to some of your key markets, is that a strategic agenda to shortening the lead times to market at all?

Nils Vinge

This is nothing dramatic whatsoever. We are continuously looking at the sourcing just as we look at everything else in terms of trying to improve things efficiency, looking at new markets and new ways to produce et cetera. And as we grow our retail operations, I mean it's not secret, we will open in South Africa, sort of natural of course to look at sourcing and proximity. But nevertheless, we need to always look at capacity growth. And it seems we have very ambitious plans for many years to come. So it's not about moving capacity from Asia to Africa, I think it's more about building even more capacity.

Paul Rossington - HSBC

Thank you.

Operator

And your next question comes from Geoff Ruddell. Please go ahead announcing the company name.

Geoff Ruddell - Morgan Stanley

Yeah. Good afternoon, Morgan Stanley. Just a question about your cash tax payments. I noticed that your cash tax payment this year was less than half of your cash tax payment last year. I was wondering what the reason for that was and also what we should expect in terms of the difference between P&L tax charges and cash tax charges this year?

Jyrki Tervonen

Yeah. Cash tax payment is less than last year; it’s simply that we have made less preliminary tax payments during the year, that’s a simple answer. And the second question was?

Geoff Ruddell - Morgan Stanley

Just how should we expect the relationship between the cash tax payments and the P&L, and you’ve obviously given us guidance for the P&L charge for tax this year. How should we think about the cash tax payments relative to that P&L charge?

Jyrki Tervonen

Yeah. I think it will be no major changes. The tax rate for 2014 will most probably be between 23% and 24%. And then the tax payments of course we are making preliminary tax payments during the year and that can vary from year-to-year.

Geoff Ruddell - Morgan Stanley

But I mean, because you had a low payment last year you should be seeing a big payment this year?

Jyrki Tervonen

No, it’s no correlation because now we will add payments in December, January. We have tax liability due to that in the balance sheet and then we will pay back in December, January. And then of course we are estimating in Sweden what the profits will be and the tax authorities will send us preliminary tax payments for 2014.

Geoff Ruddell - Morgan Stanley

Okay, thank you. And then just one follow-up if I may, you’re capitalizing, last year I think you started capitalizing expenses. As I read the account, am I right in thinking you haven’t yet started to amortize those?

Jyrki Tervonen

For the major part, we haven’t started to depreciate. This year I think SEK14 million was the depreciation collected through these capitalized assets that we have in the balance sheet. But as quick as we are taking them induce, we started to depreciate them. And I think this IT investment if capitalized, we will depreciate them during 10 years.

Geoff Ruddell - Morgan Stanley

Okay, that’s great. Thank you very much.

Operator

(Operator Instructions). And we have a follow-up question from Anne Critchlow. Please go ahead.

Anne Critchlow - SocGen

Thanks. You’ve given us the store numbers, the cost and [stories] and an idea of how many stores you will put down this year. Could you do the same piece for Monki, Weekday, Cheap Monday as a group?

Nils Vinge

Yes, of course. We see of course very interesting potential for all of them, but the expansion is not as aggressive as for cost and stories at home, but we will continue to expand. And if you take Monki for example, we opened some 20 stores in 2013 and the plan for 2014 is approximately at the same level.

Weekday is bit more cautious, it was just one opening new and one closure last year and this year I think it’s just one or two planned as well. Cheap Monday is primarily a wholesale brand and we have around 2000 customers across the globe in 35 countries and only three of our own stores. And I think we will plan to open one or two stores within Northern China, one in Paris.

Anne Critchlow - SocGen

That’s great. Thank you. And then just a quick question on the H&M incentive term and what impact that had within the gross margin in Q4, if any?

Nils Vinge

I think the 31, it was the total payment right. And also that was in OpEx and a smaller part was on OpEx, just a small part.

Anne Critchlow - SocGen

Okay.

Nils Vinge

I’m sorry, I might have said wrong. It’s mainly -- the small part was in OpEx and the rest on (inaudible).

Anne Critchlow - SocGen

So it’s not significant impact on....

Nils Vinge

No, no, no.

Anne Critchlow - SocGen

Thank you.

Operator

And your next question comes from Caroline Gulliver. Please go ahead announcing the company name.

Caroline Gulliver - Jefferies

Hi, Caroline Gulliver from Jefferies. I just have a small clarification question around the gross margin. What is not going to affect the first quarter? And I think you said that you expect it to remain stable within the (inaudible) compared to 2013. Does that mean a flat impact on gross margin or obviously there should be another negative margin impact?

Jyrki Tervonen

No, no, flat.

Caroline Gulliver - Jefferies

Flat?

Jyrki Tervonen

Neutral affect.

Nils Vinge

So for the course that's the estimates and that could change of course in both ways, but that’s the best estimate as of today. Okay?

Operator

And we have another follow-up question from Chris Chaviaras. Please go ahead.

Chris Chaviaras - Barclays

Okay. Yeah guys, one last from me on the sportswear. And I know you mentioned that you are growing the H&M stores in China so that you can accommodate sportswear and home. And, but in the existing stores that you will be putting them in, what categories are you taking out in order to put sportswear and how do you make space for sportswear in the existing stores?

Jyrki Tervonen

It depends from case-to-case. In several [cities] we have several H&M stores and there of course each country organization is looking to have the best balance with the concept in different stores. So if we don’t get more space, then of course if we want to have sports in, then we have to make, to take out something else. But in most cities we have several stores. So, this will broaden our custom offering. So that will be again gain for the customers, as well as for H&M. So, that’s done case-by-case.

Nils Vinge

It could also be that we add more space and we make refurbishment et cetera in connection to that we put in H&M store.

Chris Chaviaras - Barclays

Okay. And would you say that sportswear could be say something like 10% of the whole offering in a store or is that too much?

Nils Vinge

I don’t want to give any [niche] figures, sorry we don’t breakdown. We have lots of different concepts, but we don’t give figures, I am sorry.

Chris Chaviaras - Barclays

Okay, no problem. Thank you very much.

Nils Vinge

Thank you.

Operator

(Operator Instructions). Sir, we have no further questions at this time. Please continue.

Nils Vinge

So, thank you all very much for participating in the conference call and welcome back for the first quarter results on the 27th of March. Good bye.

Operator

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now all disconnect. Thank you.

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Source: Hennes & Mauritz's Management Discusses Q4 2013 Results - Earnings Call Transcript

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