Hennes & Mauritz's (HNNMY) Q1 2017 Results - Earnings Call Transcript

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Hennes & Mauritz AB (ADR) (OTCPK:HNNMY) Q1 2017 Earnings Conference Call March 30, 2017 4:00 AM ET

Executives

Jyrki Tervonen - CFO

Nils Vinge - Head of IR

Analysts

Adam Cochrane - UBS Investment Bank

Andreas Inderst - Macquarie Research

Anne Critchlow - Societe Generale

Cedric Lecasble - Raymond James

Charlie Muir-Sands - Deutsche Bank

Chiara Battistini - J. P. Morgan

Geoffrey Ruddell - Morgan Stanley

Michelle Wilson - Berenberg

Nicklas Fhärm - SEB

Niklas Ekman - Carnegie Investment Bank

Paul Rossington - HSBC

Richard Chamberlain - RBC Capital Markets

Simon Irwin - Crédit Suisse

Janice Kew - Bloomberg News

Nils Vinge

Good morning, everyone, and welcome to the Q&A session in conjunction with our Q1 report, which was published today at 8:00 Central European Time. With me today, I have our CFO, Jyrki Tervonen. And after a brief introduction, we will be happy to take your questions.

As you all know, retail is going through a period of rapid transformation where customer behavior and expectations are changing fast as a result of growing digitalization. This is an accelerating development, which brings many challenges but also opportunities. We have a clear omni-channel strategy in which we are integrating the digital and physical worlds in order to offer customers a more seamless shopping experience.

In parallel, we're optimizing our store portfolio, and we're developing a new visual look for our H&M stores. At the same time, we are investing in our supply chain such as a new logistics solutions, which -- with greater levels of automation but also in optimizing our lead times. In the changes we are making, advanced analytics will provide important support for decision-making. This improvement will take effect gradually and involves our opportunities to achieve good performance going forward.

Looking at the first quarter, market conditions remain very tough for fashion retail in general in many of our large markets, in Central and Southern Europe as well as in the U.S., and this was also reflected in our sales. In other markets, however, sales developed well, including Sweden and the other Scandinavian markets, Eastern Europe, Turkey, Russia, China and Japan. Our brands COS, & Other Stories, Monki, Weekday and H&M Home continued to develop very well, and we have continued strong and profitable online growth for all the brands within the H&M Group.

We currently have seven brands, each with their own unique identity. Today, we're very pleased to share with you that soon, we will launch a new exciting brand, ARKET. ARKET will offer a broad yet selective range of essentials for men, women and children as well as selected assortment for the home. Most ARKET stores will also include a café based on the New Nordic Kitchen and its vision of quality ingredients and healthy living. The first store will open in London and online in 18 European markets in early autumn '17, followed by stores in Brussels, Copenhagen and Munich.

This was the short introduction, and now for the Q&A session. [Operator Instructions] So moderator, please go ahead.

Question-and-Answer Session

Operator

Thank you. Your first question comes from the line of Cedric Lecasble from Raymond James Paris. Please ask your question.

Cedric Lecasble

Actually, I have a question on the gross margin. What are the site expansion with gross margin despite the negative impact of the markdown? What markdown impact do you expect in Q2? I'm sorry -- there's been a noise here. Sorry about that. And the second question, if I may, would be about supply chain initiatives to reduce lead times. Could you maybe help us understanding what are the main measures you are taking today? Thank you very much.

Jyrki Tervonen

Yes. It's a very bad noise in the background. Could you turn off your mobile maybe?

Cedric Lecasble

No, it's an alarm in the office. It just ended. I'm sorry about that. Bad luck.

Jyrki Tervonen

Okay. When it comes to markdowns in Q1, it's more or less in line what we expected and what we communicated in connection with the Q1 report. So 30 basis points -- I think we guided or anticipated 50 basis points higher as a percentage of sales compared to Q1 last year. When it comes to Q2 and markdown levels, it's far too early to give any guidance with that because we still have April and May, big important months, ahead of us. What we can say is that the stock in trade is higher than we planned for and bucket competition is good. And so it's very important that we will have a good performance on the top line during April and May and also depending on what the markdown activities is in the market in general. So that will be decisive when it comes to the reduction in products in Q2.

Cedric Lecasble

Got you. But how did you manage the slight improvement in Q1? What were the drivers for -- the positive drivers in Q1?

Jyrki Tervonen

When it comes to the gross margin, there are so many different components affecting the underlying gross margin, but we -- as we always said, we are working with the sourcing environment and always trying to find efficiencies and are making a good deal over there, of course, and they're also always looking to be cost of offering on each market. But one shouldn't draw into big -- overanalyzing the Q1, but when it -- to the gross margin. As we said, it -- so many components affecting it, and -- but we did apply to all. Essentially amid the situation that we have done in past year, 2016, when it was really big win when the U.S. dollar was very, very strong. But you have to remember, still in Q2, when we are buying now, the dollar is more expensive than -- when looking at the euro, more expensive than last year.

Nils Vinge

And then regarding -- and the second question was about lead times, right?

Cedric Lecasble

Yes.

Nils Vinge

As I said, we are doing a lot of investments in the supply chain with more automation, et cetera, and also working even close with some of our suppliers in order to speed up lead times even faster, and we're seeing good results.

Jyrki Tervonen

So -- and also when talking about lead times, it's -- as Nils said, it's speed buying, of course, and working even closer to the suppliers, but it's also just in time and the difference when we want to have -- just in time, we should have the ability to have just in time when we need speed. We should have -- to buy with speed. So we are looking in all kinds of buying, and we have a good sourcing and supply chain today. But as we state in the report, we feel that we can even improve it now and -- especially considering the shift that is going on in the market. So we will work very hard with that and we have a clear plan how to execute this.

Nils Vinge

And we see very interesting opportunities here because we have a strong store portfolio. We have, as you know, 4,400 stores across the globe and we meet our customers everyday, of course, with the online offering and we combined this now. This is very exciting down the fall.

Operator

The next question comes from the line of Niklas Ekman from Carnegie Stockholm. Please ask your question.

Niklas Ekman

Yes, I'd like to start by asking about the comments here in the forward where you're talking about optimism here for the remainder of 2017, and I think this is in line with comments made by the CEO in association with the Q2 and Q4 results last year where you acknowledged that you've had some problems and that you have fixed them. And I'm curious where you are on this path of improving previous problems. It would be very helpful if you could elaborate a little bit on that topic. Thank you.

Nils Vinge

Well, I wouldn't say that problems as such showed. Again, we repeat, more or less the same message that we still grow and we're doing a lot of progress. And there are, of course, many reasons we want to grow as fast as we planned to. Of course, we have external factors as we talked about and also things, of course, that we can do better. There are always things we can do better. And we've never said we had fixed them, what's too easy, but we are we have identified them. We know exactly where we're going, and the results don't come overnight, so that's the important thing.

Niklas Ekman

Okay. And obviously, you mentioned a very challenging market here. A lot of retailers now are closing stores and some are closing stores on a rather big scale. You are doing the opposite. What makes you convinced that aggressive store openings is the continued way to go, considering the rapid online migration?

Nils Vinge

Again, it's the you put some words in my mouth. I wouldn't call it aggressive. I would say it's very thought through strategy that we have, the combination. It's not just about stores or online. It's the combination, as we said many times, and the integration and the omnichannel strategy, which is very, very successful. And of course, this is something we continue to develop. And when we look at the stores, as we said, a lot of peers are closing down and leaving their stores, which of course, opens up opportunities. But we're talking about two different things here because it's mainly [Indiscernible] malls and [Indiscernible] malls and not so attractive locations that it's closing down. But we are always at the best locations and where there's still a big demand for space. And but of course, we work very tight with our landlords, and we see very interesting opportunities still to grow this omnichannel strategy.

Niklas Ekman

Okay, great. And finally, just a quick question. When you talk about significant investments in supply chain, is this a change from your message before signaling increase further increased investment? So it's pretty much in line with the guidance you've given before about CapEx and the investments in new product areas for 2017?

Jyrki Tervonen

Yes, it's included in the CapEx that we have guided for, for 2017. I think we guided for 14 million to 14.5 million, so it includes the investments connected to what you speak, et cetera.

Niklas Ekman

Excellent. Thank you very much.

Operator

The next question comes from the line of Chiara Battistini from JPMorgan London. Please ask your question.

Chiara Battistini

Actually, my questions have been asked already. I just have one last. I was wondering whether you could quantify any calendar impact from annualizing Easter last year in your March trading update please. Thank you.

Nils Vinge

Yes. It's -- Easter is always very difficult because it's just from year-to-year, as you know. And also, there's the weather impact and there is -- the spring is very difficult to analyze. I mean, it moves around from year-to-year. And if you look at our historical month numbers in March, April, May, they're very volatile. So we repeat the messages. You should see March, April and May together and also to make it more complicated. In some markets, Easter is good for training. In some markets, it's negative and then it depends on when it arrives early or late. It's difficult, even for us, to analyze it.

Chiara Battistini

Okay. But -- because I would have thought that last -- I mean, last year, I thought the message was negative on the timing, i.e. march was negatively impacted by Easter, timing being early and it's -- overall, this should be a negative impact from Easter and therefore, we should see it...

Nils Vinge

We gave more or less the same message last year. But of course, [indiscernible] March last year was disappointing. It was very -- extraordinarily cold weather throughout Europe and also I think in the U.S., which affected retail, so it's not just for us. And of course, that was [indiscernible] connected to the early Easter. But as I said, very difficult to analyze.

Operator

The next question comes from the line of Charlie Muir-Sands from Deutsche Bank London. Please ask your question.

Charlie Muir-Sands

My first question relates to your expansion outlook where, I think for the first time, you put in a paragraph alluding to optimizing the store portfolio and also indeed in the CEO's comments, making the reference to underperforming markets. As the net [indiscernible] -- I just wanted to -- yes, and at the net level, you're still talking about opening 430 stores. So I just wanted to clarify whether you're now planning on shutting more stores than previously and how that reconciles whether that's something that's been happening for some time. We just felt it's worth calling it out now.

Jyrki Tervonen

Yes. When it comes to the net openings for 2017, it's still 430 that we are planning for. But of course, we will -- it's a moving target. But more or less, that's the target for this year. But let's see, during the year, as Nils mentioned, there are also -- comes up a lot of the opportunities in this environment. But we'll come back to that in connection with the half year report where we have a much better view of the CapEx and the investments and store openings. But so far, we will still aim for that figure.

Nils Vinge

But also to clarify, of course, store optimization is something we always do. And if you look back, we always have a lot of closures. But of course, in this time, it's even more focused on it, and we've seen good results when we focus on this and we have a lot of banners. We can move around. We could add space sometimes. We could take away space. We can move stores, and this is a very interesting [indiscernible] potential. And I think Sweden is a very good example of that where last year, we opened 11 stores and closed 11, and we managed to grow top line with 7% in a very tough market.

Charlie Muir-Sands

Understood. And then my second question comes -- I think you've mentioned China in the list of companies that saw a better performance. Can you confirm whether you're now achieving positive like-for-like sales trends in China?

Nils Vinge

Yes, you're right. China was, as you see, was plus as you see was plus 20% I think. [indiscernible] in other currencies in Q1, which is good. And it had, as you know, we've talked about this for many quarters now. It was -- they were not -- it wasn't performing as we planned in regards to top line in '16, so that was a good start of the '17. But I think it's early days, and I think we shouldn't draw in it too much conclusions. We've still a lot of things that we're working on and improving. But I mean, China still is something we're very happy with the general performance and how much we have expanded in a very short time and we see some potential. But there are still things that we need to improve absolutely.

Charlie Muir-Sands

Okay. But your store openings are faster than that 19%, aren't they? So are you cannibalizing yourself, do you think or rather increment…

Nils Vinge

No, but there's always cannibalization, but when the growth -- but no, we weren't positive like-for-like territory absolutely.

Operator

Question comes from the line of Adam Cochrane from UBS London. Please ask your question.

Adam Cochrane

I've got a really simple question for you guys. Your sales performance in -- whether in Q1 or as we look into early March, has been largely disappointing, yet your stock continues to build. Your markdown was lower than you gave guidance for, yet the stock in trade is always current season of the correct quality. At what stage do you have to work on reducing that inventory file? And how are you going about -- how will you go about doing it, please?

Jyrki Tervonen

Yes. As already mentioned, the markdowns in Q1 were more or less as we had planned for. And of course, if we can't perform top line in April and May, then we have to make more aggressive markdowns, but it's far too early at this stage to have any guidance on that. And when it comes to the composition of the stock in trade, it's a lot of new spring garments in that and also, I don't know the word, fees on dress garment that we can sell, not so dependent on spring and summer. So the competition is good, but we admit that it's higher than we had planned for, and there is an obvious risk, if we don't perform in April and May, that the markdowns will be higher in Q2 than last year.

Adam Cochrane

Are you being more cautious with your buying budget for the second half compared to your sales expectations in order to reduce stock as a percentage of sales?

Jyrki Tervonen

Of course, we are always trying to balance the stock we have and the buyings that we are doing ahead. And we have a flexible model and of course, we don't want to risk the articles and -- that we don't get the new garments in. But always, we are reacting and balancing the stock we are bringing to the next period with buyings, of course. So that's the normal way we are doing it, and that we will, of course, focus on -- in the coming months as well. So of course, it's those working with the existing stock but also buying levels to make it as balanced as possible without risking any billing.

Nils Vinge

But it's all connected to what we said about this ever -- or faster changing customer behavior. That's what we said, and I said we need to become even faster in order to be even quicker reacting to the changing demands and expectation from our customers. And that's why we are pretty optimistic still about our the things we are doing and of course, also connected to the advanced analytics that we see a lot of interesting happen.

Adam Cochrane

Okay, final one. Where is all this extra stock sitting compared to a few years ago? Is it in warehouses? Is it on the shop floor? Is it on a boat? Where is all this stock actually physically sitting compared to where it was five years ago?

Nils Vinge

Yes. First of all, if you do that comparison, we're around 5% of the value is in accounting effects since we have a different method of as we talked about.

Jyrki Tervonen

It's almost 1.6 billion, 1.7 billion is if you're looking two years back. It's an effect, as Nils said, from this accounting principle change.

Nils Vinge

Yes. And then it's spread all over, I mean, in the supply chain, in the DCs, in the call offs as we say and in the stores. But maybe not only in the stores because that, we have a flexible supply chain [Indiscernible] we don't really know.

Adam Cochrane

You must be bursting through the seams rather than being flexible right now. There are a lot I think there's a big question is to how it can actually be. You're not sort of I can't work out you're going to reduce that level of stock. You have to buy less than you sell. Is that the only way that the stock can be reduced or you make a big markdown?

Nils Vinge

As I said, it's a combination, of course, always to what you bring with you. Of course, you have to handle balance the markdowns because it's and of course, you have to also look into the buying levels ahead. But that, we have to do in a balanced way because if we are cutting the buying's too much, of course, then the it might hit the top line ahead if we don't get in the new garments as quick as we want and in the right volumes. But of course, that's the normal retail environment to always find the balance with those to working with the existing stock markdown levels and also looking to the buying's ahead without risking any top line.

Adam Cochrane

And have you trialed in some markets, clearing through the stock more quickly to see what the net impact is?

Nils Vinge

Absolutely. I mean, that's one of the advantages we're having here. So many different stores are marking continuously a lot of trial tests, absolutely.

Adam Cochrane

[Indiscernible] tell me what happened, so I'll [Indiscernible].

Nils Vinge

I can tell you that we're not giving it away [Indiscernible] there's a lot of work going on. I'm really impressed by my colleagues and all the work that's going on. So that's why we feel confident about the future.

Operator

And the next question comes from the line of Simon Irwin from Credit Suisse London. Please ask your question.

Simon Irwin

And why don't you just talk about what do you think is happening to pricing in Europe this year? Obviously, there's lots of cost pressure over the past 12 months or so. Have your prices changed materially?

Nils Vinge

No, they haven't. Our price strategy remains the same but always want to have the best combination of fashion, price and quality and sustainability. But it varies from market to market as always. And then, of course, from concept to concept. And some markets are tougher. But of course, I mean, U.K. with the sterling, there's some specific challenges in the U.K. But this is an ongoing process and of course, connected to how the currency moves and competition and etcetera. So we're on it.

Simon Irwin

Okay. And you talked about input costs for 2Q. But looking further out, are you seeing any easing in terms of dollar buying conditions given relatively soft demand as we're hearing from some of your peers?

Nils Vinge

It depends. I mean, it's still -- I mean, if you just look at the external factors like currency and supply and demand capacity, [indiscernible] structure, the aggregated market conditions are still slightly negative. In this environment, of course, we always try to do our best [indiscernible] and to try to find new efficiencies and [indiscernible] scale, et cetera.

Simon Irwin

Okay. And just going back to what you were saying earlier, Nils, about being quicker to market in the future and presumably, that would mean having less inventory. I mean, roughly what kind level of inventory do you think you can aspire to? I mean, I look -- if I look at your business at the moment, inventories doubled in three years and you've gone from kind of 100 days in inventory to 130. I mean, what do you think would be a good result in, let's say, two years' time under your new model?

Nils Vinge

As Jyrki said, this is tricky because it's a balance. If you cut too much [indiscernible] you miss out, missing out the top line. So we have to be very, very cautious and careful how we do this [indiscernible] balance out. But obviously, with our experience and the benchmarks, we have clear targets of where we want to be and what we are going to achieve here.

Jyrki Tervonen

And it's, of course, all the work we are doing [indiscernible] supply chain, one is, of course, aiming to sell more with less stock. And we see our potential in that area for sure. We have a good model, but we can improve it much more in the coming years.

Nils Vinge

And then just coming back to this advanced analytics. It's very exciting because with this algorithm, et cetera, it gives us much better support to forecast the demand in a more precise way, which, of course, increases the chances of [indiscernible] stronger [indiscernible] top line and reduce the markdowns.

Simon Irwin

Okay. Since nobody's asked you about OpEx, that looks surprisingly well controlled given that my understanding is it's quite difficult to cut store hours, for example, in January, February when things are already very quiet. What have you done within the OpEx line this year to achieve that result?

Nils Vinge

Yes. We feel that we have always been good in balancing the costs when the turnover is not maybe performing as planned, but it's really -- you have to be careful that you don't start to cut costs in areas that will lead to negative effects on the core business. So it's -- of course, you can cut the fees, you can cut costs, but you have to do it in a nice way and try to find the flexibility and the actions within the organization to cut those costs that is not affecting top line. And that, I think, we have a really strong history. If people have done this over the years so many times, it's the way we are working so that's the reason why we are almost always performing good on the OpEx.

Operator

Thank you. The next question comes from the line of Andreas Inderst from Macquarie London. Please ask your question.

Andreas Inderst

Yes, it's Macquarie. I have a question on your March performance. You said earlier that we have to look more into March, April and May together. Makes sense to me. But still, I would like to know whether March sales is actually in line with your budget or below or even above? That's my first question. And then the second question is on the inventory buildup, plus 28% versus 24% FX adjusted in the previous quarter versus 7% to 8% sales growth. There is rising gap here. Now you already discussed that in earlier questions. But still, I'm wondering, how much of the inventory is still related to, let's say, winter stocks, so stuff you can't really sell in March, April? Maybe you can quantify that. And my third question relates to ARKET, your new concept. What's the medium-term potential here in terms of number of stores, maybe even sales? Maybe you can elaborate here as well.

Jyrki Tervonen

Yes, we start with the stock. As we said, we admit that the stock level is higher than we have planned for. But as I said, if the competition is good but the level is too high but it won't seem to being see some less garment. So -- but of course, in Q2, if we don't perform in April and May, we should look up the months together. If it doesn't -- if we don't perform, then it's obvious that there is a risk for higher markdown levels in order to get in the new garments in the stores. And when it comes to March figure, we had planned for a higher figure than in March. So -- but as you said, we should look at the March, April, May together.

Nils Vinge

And regarding the new brand, ARKET, right? Very exciting and we think it is important that it's both stores and online to start with, it's 18 online markets. And I think it was [ 9 ] physical markets this year in Europe. Now -- sorry, I have to correct that, but it's in Europe at least. And the number of stores, it's too early to say, but if you look at COS, we have now around more than 200 COS stores and that it's not 10 years old, that brand. & Other Stories, which is in the world, we have now 50 stores. So I think that gives you a rough idea of [indiscernible].

Andreas Inderst

Okay, that's helpful. And just a follow-up question on the composition of your inventory. So how much is winter stock of the total position? Can you quantify that?

Jyrki Tervonen

I prefer not to quantify. But of course, it's -- some parts but the composition is on the same. We have the same ratio with the new summer/spring garment in the stock-in-trade, so -- but we prefer not to quantify exactly what's winter. But as I said, it's higher than we planned and -- but we have a good way of balancing out. And as I mentioned, it's both in markdown levels but also in buyings ahead.

Operator

The next question comes from the line of Niklas Fhärm from SEB Equity Research.

Nicklas Fhärm

Could I just go back to the question on OpEx? And more specifically, you just announced you're launching a new brand this fall. And I was wondering if you could give us any idea of sort of the costs involved that you've already charged to your P&Ls. And for sort of what time period have you actually been investing to set this business up? That will be very helpful.

Nils Vinge

Yes, as we have this group we call new business at H&M that we have a lot of different and a lot of exciting things going on. And most of them, we've been talking for a while now, but at least [Indiscernible] this is one of them. And I think they've been [Indiscernible] with us for at least 1.5, 2 years, something like that. The idea came up a couple of years ago. I'm glad [Indiscernible] the organization [Indiscernible]. But to quantify [Indiscernible] because it's this is part of the long term investments we've been talking about so much.

Nicklas Fhärm

That's perfect, Nils. And I didn't expect a number either. But if you compare this sort of deep ideas and course that you're taking, are they to the similar tune of the costs you took when you launched ahead of the launch of, say, Stories or COS or something like that?

Nils Vinge

More or less, I would say [Indiscernible].

Nicklas Fhärm

Okay, okay. Then the second question, and sorry if I'm being too detailed now, but I need to [Indiscernible] understand, and it's probably going to fall back on me anyway, but to understand the March trading. If you go back a year, you had a very early Easter, 25th of March, which also happen to be sort of the pay day, you have poor weather. And at the end of the day, you reported a quite, quite negative development in comp stores last year. Obviously, this year, there's no Easter in the same week. The weather, as the short I'm looking at is telling me, it has been fairly nice. It's been the temperature normally is suggesting a slightly warmer weather in particularly in Europe. And that was also a pay day, the 24th this year, going into the same week year on year. And yet, it seems like your number of 7% is more in line with, say, the weekly polls coming out of Germany, whereas you could good have expected some sort of outperformance. So a very long question, but do you actually think, when you've done your own in house analysis, that there's anything else than sort of external factors included in the 7% number if you talk about collections and designs and whatever you have, please?

Nils Vinge

Again, look, I repeat you should look at March, April and May together. But of course, the things we are talking about, that the reason why [Indiscernible] Q1, I mean, very it's very much the same pattern going into Q2, of course. And the things we're working with all remain the same. But as I said, the results don't come overnight, obviously, a progress. And but we're going forward, we still we will continue and we have a strong belief in what we do. But it's, of course, the monthly number, it's always very difficult to [Indiscernible] around the licenses.

Nicklas Fhärm

Final quick question. You said that about 5% of the stock in trade increase in the period is due to the new accounting. Would you be so kind to give us an idea of the currency impact, please?

Nils Vinge

Yes. I said [Indiscernible] value, not the year on year increase. [Indiscernible] the question was compared to five years ago and then we compare [indiscernible] also around 5% in the value this year compared to 5 years ago. It's in the years ago [indiscernible] taken into consideration. And then [indiscernible] and then your question was -- sorry.

Nicklas Fhärm

Well, basically, I misunderstood your answer [indiscernible]

Nils Vinge

The currency. Yes, the currency. It was around 2% that was the difference in SEK and local currency.

Jyrki Tervonen

Yes, local currency, the stock in trade increased by approx 28% and in SEK, it's 30%.

Nicklas Fhärm

Yes. And is there a year-on-year increase from change in accounting, please?

Nils Vinge

Not really.

Operator

The next question is from the line of Anne Critchlow from SG London. Please ask your question.

Anne Critchlow

My first question is about how much of the increase in stock in trade is related to the rollout of online, I mean, particularly year-on-year but also maybe over the past couple of years?

Nils Vinge

Right. I don't think you could play anymore or refer to online as such. I think there are other reasons for that, as Jyrki said. I mean, we have stronger belief in top line achieved. That's the main reason. And you can't really explain it through a little bit -- not channel specific [indiscernible].

Jyrki Tervonen

But of course, they are more connected to the expansion. I don't think we will -- we are opening six new online markets in the first half year. So of course, we have to build back stock for them to be prepared when we open the store. So of course, there is an effect connected to that.

Anne Critchlow

Okay. Because it's significant in the increase in inventory year-on-year.

Jyrki Tervonen

Not so insignificant. It's quite normal business and it's a moment though I think. And whereas we start to sell, it will look -- even out.

Anne Critchlow

Thank you. That's clear. And my second question is about the ARKET price range. You say it's a broad price range above the level of H&M. But how would it compare to say Monki and COS and Stories?

Nils Vinge

Yes, I think it's more like COS and Stories.

Operator

Thank you. The next question comes from the line of Gustave Sandström from Stockholm. Please ask your question.

Unidentified Analyst

Yes this is [indiscernible] from Danske Bank. I have a question. I know you briefly touched upon it, but the Chinese growth, which you had, is -- we talked about this already last quarter, that you saw some signs of improving markets and now obviously, very strong momentum there. Could you quantify that -- how much of this is related to the online channel and offline channel? And if this is a general market improvement or is -- if there's something that you've been doing from your end that is driving this growth.

Nils Vinge

[Indiscernible] that initially brought too many conclusions. It's a possibility and we're happy for that, but it's a combination of manufacturers and we're still working hard on a lot of improvements in China, including online and the bricks-and-mortar business.

Operator

Thank you. The next question comes from the line of Geoff Ruddell from Morgan Stanley London. Please ask your question.

Geoffrey Ruddell

As I calculate it, I think you've got about SEK 6.4 billion of net cash on your balance sheet now. You could have paid a dividend of -- I guess, it's about SEK 16 billion next quarter. Would you have been able to do that if you haven't taken out the offset?

Nils Vinge

Yes. We have a -- with cash balance of SEK 8.4 billion, and I think external level's SEK 1.2 billion out of that and the dividend, the proposal from the Board of Directors in the Annual General Meeting is to pay a dividend of SEK 9.75 per share and the proposal is also that it will be paid in two installments, one in May and the second half in November. So we think it's a good proposal and it's in our plans, and we will keep on with our strategy to invest in those areas. So we have a strong financial position so we don't see any big, big issues with that.

Geoffrey Ruddell

Okay. And have you drawn on the offset during the period?

Nils Vinge

From the…?

Jyrki Tervonen

No, no, we haven't.

Operator

The next question comes from the line of Charlie Muir-Sands from Deutsche Bank London. Please ask your question.

Charlie Muir-Sands

I just have two very brief follow-up questions to topics we have already discussed. The first one, and I'm sorry to keep going on about March sales, but am I correct in understanding this should have been a positive calendar shift in the month of March and likely a negative calendar shift in April?

Nils Vinge

No, we haven't said that, we said that you see March, April and May together. It's very difficult to analyze the calendar. You can't just look at the open trading dates because of the Easter and other things. It's very complex. Sorry, I can't be clearer than that.

Charlie Muir-Sands

Okay. And then the second question relates to the operating costs and the tight control there. Were there any particular one-off reductions or savings in there, for example, around phasing of long-term costs or anything else like that, that help you manage cost growth?

Jyrki Tervonen

No, no, nothing onetimers, no.

Nils Vinge

Was cost consolative.

Operator

Thank you. The next question comes from the line of Janice Kew from Bloomberg News Johannesburg. Please ask your question.

Janice Kew

I wanted to ask a little bit more about ARKET. In the statements, it says that it'll be supported by external brands. And I was just wondering if you could comment on that. I also wanted to make sure I understood what I've read in the statement. What I've read into this in the statement was that ARKET is going to target primarily large European cities in terms of store openings. Could you clarify if that's correct?

Nils Vinge

The first question regarding external brands, that's correct. And some examples, sneakers from Veja, men's shoes from Trickers and R. M. Williams and pepper mill from Peugeot. And your second question, I didn't quite hear your -- your line was bad, sorry. Could you repeat please?

Janice Kew

Sure. I just wanted to make sure I understood correctly in terms of the cities that will be targeted for store opening. I -- it looked like they would be large European cities. Is that correct?

Nils Vinge

Yes, I think we mentioned -- to start with London and then we have Brussels, Copenhagen and Munich in '17.

Janice Kew

Sure. So is that -- would we expect more of the same in terms of future openings that the focus area is sort of Central, Southern Europe?

Nils Vinge

Yes, probably, but we will come back to that later.

Jyrki Tervonen

And also, we will open up 18 online markets, also in connection with the launch.

Janice Kew

So in terms of ARKET, I mean, what is really different about this brand? What are you how are you differentiating it?

Nils Vinge

Yes, it's the way they put it. It's the modern day market, which offers a broad range of accessories for men, and this is important. And if you compare to COS, for example, [Indiscernible] smaller part. This is very much for men, women and children and a smaller assortment for the home. It's simple, timeless and functional design. It's high quality. I think and a lot of classical garment such as [Indiscernible] trench coat, etcetera, [Indiscernible] sweater. And everything [Indiscernible] very relaxed to dress. And there will also be a cafe, as we mentioned, which is very interesting, another connection to the Nordic modern, Nordic Kitchen.

Janice Kew

Thank you. Is there time for me to just ask one follow up question on something that was asked earlier?

Nils Vinge

Absolutely.

Janice Kew

Just in terms of the optimization of the stock portfolio, I was wondering if you could comment at or detail any of these markets in terms of those [Indiscernible] performing sufficiently well, where you intend to do and rebuild or increase store space?

Nils Vinge

Well, this is something we do have in a market. And I mean, this was it has always been [Indiscernible] it's not something dramatic. But of course, it goes without saying that in lead times, with this past shift we have with from digitization, the customer [Indiscernible] expectations. We look over the small part even further, and we had a lot of opportunities here. As I said, with all the banners we have now and with our brand strength [Indiscernible] as I said, in some cases, add space, sometimes take away space or a move to a better location or better wall. So that's, again, business as usual but even more intensified and even more opportunities, I would say.

Operator

Next question comes from the line of Michelle Wilson from Berenberg London. Please ask your question.

Michelle Wilson

I just have two questions. First of all, on the advanced analytics, I understand the benefits that can give you in terms of demand forecasting. But I just wanted to understand in terms of your supply chain, does it have the flexibility to be able to actually adapt to the data that you're getting from doing that? And could you give us an indication of your average lead time from you sourcing? And then secondly, just want to understand around the revenue target. So you gave us guidance for the full year of a revenue target of 10% to 15%. Do you still think that target is achievable following Q1 results?

Nils Vinge

Right. If you start with the advanced analytics, yes, it will support and help us in various moves of the business and also including supply chain, a few algorithms, etcetera, in order to be more specific when it comes to the allocation [Indiscernible] more development to each store in a much more advanced way than in the past, tools that we've had, so to speak. So there's a lot of interesting things inside going on, which will help to support this demand. When it comes revenue target, I mean, the target remains [indiscernible] 10% to 15% growth. But of course, we have 4 months we have so far this year. It's going to be, of course, more difficult to reach it this year.

Jyrki Tervonen

But we are still aiming for it. But as Nils said, it's for sure tougher when the first quarter -- and even March was much tougher than we expected.

Michelle Wilson

Okay. And just to follow up, are you able to give your average lead time on sourcing, so from kind of designing a product to when you get it into your stores or onto your website?

Nils Vinge

Lead times is very much [indiscernible] I would say because of course, we can do very fast in some cases [indiscernible]. But in some cases, it's longer because you don't need to [indiscernible] on a basic garment, for example. So in average, but we can do very quick. But I also prefer to talk more about reaction times. So that's even more important now with the shift [indiscernible] and the online. The customers expect to get things now in real time, that's why we're very excited that we can now offer mixed [indiscernible]. So really when you click now, you get it in a matter of hours or days as a matter of fact.

Operator

Thank you. The next question comes from the line of Richard Chamberlain from RBC Capital Markets. Please ask your question.

Richard Chamberlain

Question on the strategic initiatives of H&M. I mean, clearly, sales have run a little bit below plan so far this fiscal year for a variety of reasons. But the changes you're making to your omni-channel offer and supply chain and data analytics and so on, I mean, which of those would you expect to have more impact later this fiscal year, so Q2 or second half? I mean, should we expect any of those in particular to start impacting the sales line? Or do we have to wait, you think, for next year or even longer?

Nils Vinge

As I said, things don't change overnight. I would say some of them [indiscernible] a few effects than some of them have. We announced some further -- I mean, down this year or next year. So this is a process going on. I mean the -- as I said, the digitalization is changing, not just fashion, apparel is changing and also [indiscernible].And of course, we know exactly where we're going. We're not there yet, but we are taking a lot of steps and measures in order to get there.

Richard Chamberlain

Okay. And just going back to the improved performance in China, what would you attribute that to? Is that market recovery? Or are you having more success at adapting the offer better for the smaller cities over there? Was it a combination of both?

Nils Vinge

Yes, I'll just repeat what I said before. It's a combination of many things. And clearly, last year, we didn't perform from a top line perspective as well as the plan in China. We talked about this many times and the other things we have done in order to [indiscernible] is part of that [indiscernible]. But again, still remains a lot of things, but we are -- in order to -- doing to improve. So again, those shouldn't -- got too many conclusions in just a quarter.

Richard Chamberlain

Okay, great. And just one quick -- one final one. On the revolving credit facility that you signed, I think it's on Page 8, I mean, I assume that was done on extremely favorable credit terms.

Jyrki Tervonen

Yes, that's correct. Yes, that's correct. We're not going into details. Of course, we mentioned we are you able to borrow from money market with negative rents. So that means we actually get paid for, for borrowing money. And of course, with our strong financial position, we also get good terms when it cannot comes to revolving credit facility, so we are happy with that.

Operator

The last question comes from the line of Anne Critchlow from SG London. Please ask your question.

Anne Critchlow

Thanks, hello again. I just want to check please how many markets customers can make online returns to store in now?

Nils Vinge

Let me see now with the latest Spain and Sweden and 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 or 14 markets at the moment.

Anne Critchlow

And just one final question. Do you think the core customer to H&M is getting older or has become -- has got older over the years? I think that you traditionally targeted 20-somethings, but do you think that age range is drifting up?

Nils Vinge

I think we are attracting customers from all over the age range from newborn to my father who's 94, but young at heart is the word, right? So everyone is welcome. So I don't think there is a particular change in the profile.

Anne Critchlow

Thanks very much.

Operator

Thank you. You have one final question from the line of Paul Rossington from HSBC London. Please ask your question.

Paul Rossington

Good morning gentlemen, well done on the numbers today. One quick question on the SG&A again, just a follow-up. Could you outline if there's any beneficial impact to SG&A from the churn in the store portfolio? I presume that you are negotiating lower rents on the leases that come up for new and existing markets. Is that perhaps a bigger factor in SG&A than perhaps trying to reduce staff hours, for example, or something like that?

Jyrki Tervonen

It's a combination, of course. In this environment, we have better terms when it comes to rent [indiscernible] greater combination of working with balancing out the hours in stores, looking to a lot of different costs within the organization. But as you said, for sure, also good terms when it comes to rents.

Paul Rossington

Brilliant, sorry for the boring question, thanks very much.

Operator

There are no further questions at this time.

Nils Vinge

Okay. So thank you for all your questions and for joining us today. And of course, as usual, if you have further questions, I will be available during the day, and we wish you all a good day. Goodbye.

Operator

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

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