H & M Hennes & Mauritz AB (publ) (HMB) Earnings Call Transcript & Summary

Thank you all for standing by, ladies and gentlemen. Welcome to today's 6-month report for 2020 conference call. [Operator Instructions] Please be advice this call is being recorded as well. And I would now like to hand the conference over to your speaker, your CEO, Ms. Helena Helmersson. Thank you.

Hi, everyone, and thank you for joining us today. Welcome to this telephone conference about the H&M Group's 6 months and second quarter results 2020. With me today is our CFO, Adam Karlsson; and Head of Investor Relations, Nils Vinge. After a short summary of the second quarter and current developments, we will be happy to answer your questions. And you will find the 6-month report on hmgroup.com Investor Relations. The COVID-19 pandemic continues to impact people, communities and companies around the world as we continue to gradually reopening our stores. We do it in line with authorities' decisions. The safety of our employees and customers remains our highest priority. It is encouraging to see that sales are starting to pick up, even though market conditions are still challenging, there is no question about that, our sales recovery so far has been better than we expected. We see that our assortment is being well received, just like it has been well received online throughout the pandemic. Before the outbreak, we performed strongly. It was the result of our improvements and long-term investments to meet the digital shift in fashion retail and create the best offering for our customers. This, combined with the fact that we have acted quickly to counter the negative effects of COVID-19. And that we are accelerating our transformation, convince me that we will come out of the current situation stronger. At most, around 80% of our stores were closed in the second quarter, and in the markets where stores were open, demand was significantly subdued. We had already beforehand, communicated that the quarter would be loss-making. And thanks to a range of decisive measures in areas such as rent, marketing and staffing, costs were considerably reduced. However, it was not possible in such a short time to compensate for a sales decline of 50%. The net result was minus SEK 5 billion. Thanks to rapid adjustments to product purchasing and buying plans, we managed to reduce inventory somewhat in the second quarter compared to the same time last year. However, as there is an oversupply of spring products throughout the industry and the market remains weakened. We expect markdowns in relation to sales to increase in the third quarter. We continue to adjust costs to counter the negative impact of COVID-19. Since end of April and early May, we have gradually been reopening stores as restrictions have been eased. Consumer confidence has generally been subdued to start with, but the pace at which sales are recovering varies a great deal between markets. In the period of the 1st to 24th of June, sales decreased by 25% in local currencies compared to the same period last year. During the pandemic, it has become clear how important the interaction is between digital and physical channels to meet customers' needs. When the majority of our stores were temporarily closed, we focused on redirecting product flow to our digital channels, which have remained open in all time -- all the time in nearly all our online markets. Online sales increased strongly during that period and have continued to develop very well since we began reopening the stores. We can already see that the pandemic has caused changes in customer behavior that will accelerate the digitalization of our industry. To meet this future, we will continue adapting the organization and improve our ways of working to become more flexible, fast and efficient. As we are accelerating our digital development, we continue optimizing the store portfolio and integrating the channels. Our leading sustainability work will also contribute to strengthening our position and help ensure a long-term positive development of the H&M group. Thank you very much for listening, and now we're happy to take your questions.

[Operator Instructions] The first question, it's from the line of Fredrik Ivarsson from ABG Sundal.

First one on the OpEx reductions. You obviously managed to lower SG&A by 25% in Q2. And you guide for minus 10% in Q3. My question is, should we expect part of these reductions to be rather permanent than temporary? That's my first question.

When guiding for both the second and third quarters, we give an estimate of what we believe is the short- and mid-term flexibility in our costs. So it's actually a wide range here, both from sort of the more long-term slower and less flexible cost to the really short-term actions we can take when it comes to staffing in stores and so forth. So it's a combination, but it's more related to short- and mid-term flexible costs.

And second one is on consumer behavior. And maybe if you could give some color on what your first takes from the markets that you recently opened up are? And also maybe apart from the acceleration of the migration from stores to e-commerce, how do you think that the pandemic will change brick-and-mortar retail?

Right. When we looked at customer behavior, we do see that we have increased the customer base online. And many of our customers that have been store customers are now multichannel customers, which, of course, is encouraging. Now when opening up, we do see that we gradually, of course, improve the sales, and it's a little bit better actually than we thought in our scenarios. And still, the digital channels are going really well. So going forward, of course, it's all about to meet the customer wherever they choose to go. So it's very much about the flexibility where we do believe that digitalization is kind of being accelerated and more customers will also choose to meet us in those channels. What's important when talking about online and physical stores is, of course, the integration between channels. And this is where we focus our -- and accelerate the transformation then going forward. Another change of customer behavior is the awareness around sustainability, which is also very evident where, of course, our sustainability work. Well, we hope to engage and collaborate even more with customers around that going forward.

The next question is from the line of Daniel Schmidt. This is from Danske Bank.

A couple of questions from me then. Obviously, looking at Q2 operating leverage on fixed cost in COGS was a big burden, given the drop in sales of 50%. How do you view that going into Q3? And have you done anything when it comes to the fixed cost base in COGS making it more flexible in any way compared to how it was a couple of months ago?

As I mentioned previously in the guidance, it's more related to what we short term can be flexible with them and in the same way as our SG&A. There are a variety of flexibility levels also in costs that we have under the COGS, so to say. So not a black and white answer, so to say, but it's a variety of fully flexible and then more long-term flexible costs.

Just trying to get to -- are you in any way more flexible going into the summer than what you were during the spring? Or is it about the same operating leverage that we should expect, of course, depending on the sales drop that -- the impact will differ, of course, but has there been any change? Do you see what I'm getting at?

Yes. But with sales increasing, then, of course, the negative leverage in itself will be less than. But as time evolves, we're also addressing some of the costs that might be more mid- and long-term flexible. But I think we should focus more on the negative leverage generated by hopefully higher sales levels than for the third quarter.

Yes. And then just looking at the sales performance at the start of Q3 and, of course, you have very different performance in June because June last year was very strong. Can you say anything about sort of the reopening schedule, the way you see it? Or do you have any sort of visibility on that?

Well, right now, most of the stores are open. We have 350 stores that are still closed. It's really hard to predict what will come. We see some major markets that we focus on now to open stores, hopefully. But there are also restrictions when we open stores due to the safety for staff and also for our customers with a bit of limited opening hours. So for how long that will kind of hold is really, really hard to predict. We really just try to be flexible and welcome the customers and staff back as per authorities' recommendations and try to meet the customers wherever they want. So hard to predict.

Yes. All right. I understand. One of your main competitors were out saying that they expected most of those stores to be open in key markets by the end of this month. But I guess you're also basically on that track. Okay. And then the final question is in terms of consumer behavior changing and online, there's been a few others saying that sort of return rates are coming down as more men are entering online clothing. Are you seeing in anyway a similar pattern?

We have seen a positive tendency in more customers, of course, finding us through the digital store. And throughout this quarter, we've had a strong online selling and that may then result in overall all returns. And there are differences between customer groups and customer behaviors, but we haven't sort of detected that as one of the key drivers in this quarter. So there are a lot of dynamics changing. But to that example, we haven't seen clear evidence.

The next question is from Richard Chamberlain from RBC Capital.

A question for me, please, on the purchasing outlook. I think in the statement, you're talking about the external factors improving a little bit from somewhat to slightly negative. And I just wanted to confirm, is that comment mainly to do with currency? Or are there other significant factors driving that comment?

So the majority is related to currency. And then, of course, we can predict that the underlying pressure on volumes in our purchase market is also highly volatile. So there we have some bit of uncertainty. But our guidance here is primarily due to the currency effects and somewhat -- I believe that the capacity pressure in some of our production markets will be slightly less then.

Okay. Great. And just one more, please. On the U.S. market. It's obviously been one of the more challenging markets over the last few months. And I wonder if you can give an update on recent trends, in particular, plans for store openings and closures in the U.S. market?

We're really following development, and it's right that U.S. is one of the most challenging markets when it comes to reopening. And of course, also there, we're trying to follow recommendations going forward. Today, we have 120 stores closed in the U.S. And on top of that, it's been other turbulence also regarding Black Lives Matter, of course. So hard to predict when this will change. But of course, we're hoping for reopening real soon with the necessary safety measures.

Our next question is from Nicolas Champ from Barclays.

I have 2. First of all, you -- just to your store expansion plan for this year. Could you please be a bit more specific and specify which countries and which markets you decide to close more stores, and in which countries you decide to open less stores? And the second question, is about your cost structure. Did you complete your negotiation process with landlords? I mean could you be -- please be a bit more specific about the potential upcoming savings that could arise from this renegotiation with landlords going forward? And if possible, specifies the level of proportion of flexible rates that currently represent -- now represent your rental charge, please?

Okay. For the first question when it comes to store openings and closures, it's actually we look at every market by market. But of course, as we said before, in the established markets, mainly in Europe, we see more closures than in the other new markets where we see more openings.

And on the cost structure question, the greatest part of the saving is due to the opportunities we have with a flexible and turnover based rents. So that is the main component of our rent saving, and that will, of course, continue when -- and if sales continue to be dampened. Then we had a very good dialogue with many, many landlords regarding more short-term adjustments also to the more fixed components of our rents. And that dialogue will continue. And we believe that the market is trying to get through this situation together. And we are in good dialogue, and some of these dialogues will be permanently affecting the rents. But the absolute majority of the effect is connected to our turnover based rents.

We will take our next question, it's from Simon Irwin from Crédit Suisse.

So in rough terms, your COGS are down about SEK 16 billion on where you might have originally expected them to be in the quarter, and yet your inventory only went up by about SEK 3 billion. So can you talk a little bit about kind of how you've managed to reduce your inventory levels so fast, given that presumably, you only started planning around inventory reductions in March? And whether this reflects total commitment or just inventory on the balance sheet, i.e., I mean are there commitments, which you've slowed down in terms of kind of taking delivery a bit later?

We have, as Helena mentioned, really, really worked on the flexibility and took decisive measures already when we saw indications of this situation in early spring. So we are very pleased with the effects that we've gotten, and that's also a very close collaboration with our [ suppliers ]. The internal teams have worked super hard in mitigating the negative effects, adjusting purchase plans and ensuring that we are in a healthy position in going into quarter 3. There has been some limited disruptions in the supply chain, particularly Bangladesh and India. These are now resolved. So we don't expect a big backlog into third quarter.

Right. And can you just talk a little bit about the kind of composition of inventory and how you're kind of trading it through? I mean, do you think you cloud -- and you will trade through most of your spring/summer inventory through this summer and clear it in sales? Or would you expect to be holding some of it through to next -- to spring next year?

We divided into a couple of different buckets. The majority, and here, we also guide for it in the report that we will most likely need to take more reductions throughout quarter 3 to reduce the levels of spring garments. So we ensure a strong composition into the autumn. But then we also have had the opportunity to spare some garments that are more long term that we believe that we don't have to activate throughout the summer, but rather bring these more -- or actually less seasonal garments out to our stores and the online channel throughout the autumn. So there are a number of different activities ongoing, but the majority is that we, of course, with the flexibility, reduce purchasing and then we will activate slightly more than last year throughout the summer here to improve and get into the autumn in -- with a good stock composition.

Great. And just one final question. Can you tell us what was your exit rate in China? Are you now back in positive territory?

Sorry. Say again.

What is the exit rate for China? You gave us the overall quarterly sales for China in the report. But are you now back trading positive year-on-year in China?

We're not fully back yet, but there are some markets where we're actually doing better than last year. But China is still not back fully, of course, day by day or week by week, but not the overall future is still below last year in China.

Our next question is from the line of Niklas Ekman. This is from Carnegie.

Can I ask you a bit how you've been planning for autumn collections, given your comments that sales are performing better than you have so on? How quickly can you adjust? And in terms of sourcing, just to have a well-balanced inventory for this autumn if sales are now truly recovering?

Right. Of course, we need to buy with a different kind of speed for a bigger part of the assortment now than what we've done before. And we are super impressed by seeing the collaboration and also the changed way of working to get this kind of flexibility. So we do see that, of course, in this case, since it's still quite unpredictable that late decisions is really favorable for us and largely, we can manage that through working in different ways and together with our suppliers.

Okay. Great. And coming back to this cost issue going forward. If you look at costs per store in 2021, and do you expect those to be -- tend to be lower than the corresponding cost in 2019?

It is, of course, very much related to our sales predictions and -- or actually how the sales will develop. And we are working, as we always do, to try to be as efficient in how we operate the stores, but without compromising on the customer experience. So with the uncertainty of how store sales will develop, we, of course, as Helena said, in the same way as we create flexibility in buying. We also work hard to create flexibility in the cost structure to mitigate the potential effects of this situation.

Okay. And also, you mentioned here in the results that you're looking at additional financing. Could you give any indication of the size of issuing -- issuance of new bonds here? And would that replace current debt? Or are you planning to increase your debt situation?

We are changing the focus a little bit now from securing short-term liquidity into ensuring that we have a long-term plan. So what we are now creating is another tool to put in a toolbox to ensure that we have a good access to capital if needed. So it is a way to secure that we can make these judgments as we go ahead and ensure that we have the needed financial flexibility going forward. So it's not decided on when and it's not decided on levels. But this is something we will evaluate once we are active, and this program is in place.

But is it a tool to increase your debt or it's just a different balance?

It's a -- it's to widen the access to capital, so to say. So it's not to increase debt per se, but it's rather to have more tools in the toolbox.

Our next question, it's from the line of Charlie Muir-Sands.

2 for me, please. The first one is, I wonder if you could just clarify, you obviously talked about the trends remaining strong in online as the stores were reopened. I wondered if you could just clarify whether you're actually seeing the same kind of rate of growth or acceleration or perhaps a little bit of moderation in the pace of growth as the stores reopen in the online channel. And then the second one is, would it be possible to give an indication as to how much government support was provided to your cost base in the second quarter? And whether you anticipate a similar scale or perhaps a bit less in the third quarter?

Trends online, we talked about a little bit before. And we are encouraged by seeing that even though when the physical stores are reopening, we still see good selling in the online channel, which is, of course, really good. And again, we see that we have increased our customer base and that quite many of our customers that used to be customer in our physical store is now multichannel customers. Again, instead of only focusing on the growth in 1 channel, we think flexibility. That means that meeting the customers where they choose to go is really what we are focusing on. And that is why the integration and the flexibility of the channels is the most important part.

And regarding the second question, regarding the government support, we estimate that about 1/5 of the cost reduction here in second quarter can be attributed to cost reductions related to government support.

Our next question, it's from the line of Anne Critchlow.

I've got 2 questions. The first one is on the current [indiscernible]. I think you've been positively surprised. So I just wondered in which markets or regions you're now seeing [indiscernible] and where the best surprises have been? And then on the second question…

Sorry we lost you there. Could you rephrase the question, please? Because we lost you.

Sure, sorry. So regarding current trading, I wondered which markets or regions you're seeing sales growth in because I think you've had some [indiscernible]. So just wondered where they were. And then the second question is on RFID tagging. And when we went to the London store last year, I think you were going as tags in -- which had the RFID chips in tagged and not all products were tagged at that point. But I just wondered where that project was? And what's your [indiscernible] to do with RFID tagging?

Connected to the -- for the RFID, it's still an important part of the plans to ensure that we have the availability of the right garment in the right store. So that project is still in the middle of the rollout phase, and we just added China now during the spring, and we see positive effects of having the RFID tags on our product. So we're keeping the rollout plan, and we see the positive effects of it from a size, availability and customer experience point of view.

Today, we have RFID at 20 market. If I talk a little bit about the sales and what we have seen, of course, we all felt that it was really unpredictable. So we worked with several different scenarios in parallel. And it's quite hard to just pinpoint a few countries or regions because overall, we would say that when reopening the stores, we've had a slightly kind of better sales in the physical stores than we thought. However, we have to be really humble for what's going -- what's coming in the next coming weeks and months because it's still very unpredictable and it varies so much from market to market. So it's difficult to see patterns, but of course, encouraging to see the overall sales figures as we reopen.

Could you highlight any countries where you're seeing positive sales growth?

We could -- I can mention a few markets like Korea, Japan, Norway, to mention a few.

Our next question is from the line of Rebecca McClellan.

Just a couple of questions from me, please. Firstly, could you sort of develop slightly where -- what stage your cross-channel integration is? And how you want to take that? And when you hope to achieve sort of your optimal integration? And secondly, does the recent experience change your sourcing strategy, the different markets that you might be sourcing from the need for more rapid sort of lead times, et cetera?

When it comes to the channel integration, I don't know being ready -- I think this is really an ongoing work for a long time ahead. But of course, we have taken a lot of measures already. And this has been a transformation that has been going on for some time that we now accelerate further. And part of that agenda is then the customer experience. So whether you choose to go to the online store or the physical store that it should be like an integrated experience. And then we have different examples on visual search. We have find in store, we have scan and buy, click and collect, returns in store, just to mention a few projects that we are -- we've been trying out for some time in many markets and rolling out further. And the other part in the integration, which is really important and have been highlighted in this crisis is the supply chain and the importance of being flexible then between channels. And then we're happy to see that we already have done some investments, for example, the omni distribution central in [indiscernible] as to mention, one, where we can enable that. And that transformation, we will also accelerate going further.

So for the [indiscernible] distribution center, basically, it can -- it's -- it can distribute to both online and off-line, but this is a rare example no, it's only in the U.K. that you've got that capacity at present. Is that right?

We have more or less different solutions, but this has been -- it's not just about the warehouse as such. It's more about the thinking about the system behind and throughout the entire supply chain.

Also, of course, order orchestration between the parts of the network, which is crucial to be flexible. Then we had the question on sourcing market. And in this crisis, when we have been forced to kind of take flexibility to a different level. As I mentioned before, the main part and reason for us being able to take much faster decisions and kind of be faster as such is different ways of working. So I would rather highlight that than specific and major changes when it comes to the sourcing market mix.

Next question is from Michelle Wilson.

2 questions from me, please. The first one, just clarifying on the selling and admin cost guidance for Q3. Is that all volume related, the 10% year-on-year reduction in costs? And if so, what assumptions being made around sales for the quarter to get to that number? And also, you mentioned in the release this morning, the government grants that accounted for about, I think 1/5 of the dip there the drop in costs over Q2. Is the assumption that all of those government grants will drop out over Q3? Or will we still have government grants over this -- the period? And the second question, just on the store estate, as you slowed the rollout program or adapted the rollout program in 2020. But we've seen one of your major peers take a more significant restructuring in light of acceleration of channel shift driven by COVID. Is that something that's being undertaken by H&M? Is there any sort of review of the store estate going on? And -- or have you already reviewed your store state and you're comfortable with what you have?

To start with the OpEx guidance, then for or SG&A guidance for third quarter, it is our best estimate of how stores will continue to reopen and, of course, when they reopen. We are right now at 93% open. There is a big volume component into this saving. When we are open, of course, stores needs to be up and running close to what they were before. So volume is, of course, important here. But we're also prioritizing really, really hard to ensure that we do everything we can to mitigate the cost effects. So primarily opening stores reduces then the flexibility in cost. But of course, underlying, we're working very, very hard to secure that we have a strong cost structure to back this up. Second question…

Government grant.

Government grant, yes, exactly. We believe it's too early to say. The conditions are changing along the way, but we believe that the third quarter will be less impacted by government support than second quarter. So we believe that majority is now in second quarter. But as previously said, there's still uncertainty and changing conditions.

When it comes to stores, of course, we put a lot of focus on the store optimization. We did that also before we do it continuously. But in the crisis when we also see that more customers have been introduced to digital channels, this is highlighted even more. And optimization of the store portfolio, that means that some of the mature markets we would probably see more closures, while we also have newer markets where we will keep on growing. Again, I want to highlight the importance of the integration of the channels, of course, and the flexibility in that. But also, we have flexibility with the landlords when it comes to physical stores so that we could renegotiate roughly 1/4 of all the store contracts yearly.

Next question is from Andreas Lundberg.

I am Andreas Lundberg with SEB. On your supply chain, or long term from this pandemic, what do you think, what kind of changes of your geographic distribution do you foresee, if any, can complement the manufacturing or your own warehouses, et cetera?

Thank you. We touched on that a little bit before, but again, when we see the sourcing markets that is kind of continuously reworked to see how it can best put with the customer offer and the business idea and mix of price, fashion and quality and sustainability. So again, I would more highlight to work in different ways, use digital tools in different ways that can make us more flexible and fast to act on customer demand than a major kind of shift in sourcing markets.

Do you still expect that, let's say, 80% of resourcing will take place in Asia also 3 years from now?

Well, again, it's a continuous work, but we don't see a major shift.

Okay. So what areas of change do you think will be permanent for your business from this pandemic?

Then I would mention, first of all, the organization as such where we have great learnings in how to be more efficient, fast and flexible. So that's more linked to our teams, our ways of working and organizational structures. Secondly, it's obvious that this has accelerated digitalization. So to be able to meet the customers where they choose to meet us. We are quite certain that it will be really important for us to accelerate our own digital shift when it comes to competence and also when it comes to certain developments. So we're -- as you know, we've done a lot of investment in the past, and we have also reorganized that part internally to be able to kind of be more customer-focused and do more with less. So that is good. And again, the agenda on integrating the channels is, of course, linked to the digitalization. Another permanent part that we are foreseeing is around sustainability where customers are more aware of the importance of both social and environmental questions. And us being a leader in the industry when it comes to this makes us feel that we simply want to collaborate even more -- and engage even more with our customers in these questions. We want to deliver even better ourselves to make sure that we have a more resilient business. For example, you might have seen that we just launched the Higg Index as a test, where we also on a garment can show sustainability scoring.

And lastly, a quick one. From how many of your stores can customers pick up online orders as of now?

We don't have a specific number, but of course, it's something we are looking into. But that's online returns -- that's another. This is, of course, a very important opportunity, having the integrated model with the stores and online where stores will serve as a logistic hub, so to speak. So you can pick up products and -- pick in stores and returning stores and so on. But we don't have a specific number at the moment.

Our next question, it's from the line of [ Caroline Weinbach ].

I'm [ Caroline Weinbach ] from [indiscernible] Germany. Germany being your biggest market and you mentioning closing a lot of stores or closing more stores in established markets. Can you be, in any way, be more specific on your plans regarding store closures in Germany? And if that's not the case, then can you at least give an idea of how many stores you might be closing in established markets.

We, as Helena mentioned previously, constantly revised our plans for the store network. And throughout the last couple of months here, we've seen that this dynamic is just changing even quicker with a lot of active rent renegotiation change in the landscape and also the customer behavior shifting. So it's a little bit too early to say anything about '21 and onwards. But of course, we need to ensure that we have a store network that is linked to how the customer wants to meet us. But it's too early to say anything about specific countries, but continuously revising the plan.

Next question is from Adam Cochrane from Citi.

A question for me on online profitability. Given the significant increase in online sales performance over the period and to a degree that the fixed cost nature of some of the online IT costs and warehousing and things, have you seen if you were to allocate the costs to online and store. Have you seen an improvement in online profitability over this period? And with that, as you sort of mentioned collected store with stores being -- have you seen any change in behavior in terms of customers being delivered to home rather than to the store? And does this have any difference in cost profile for H&M?

In the same way that obviously, the store profitability has been negatively affected by the volume decreasing, we can see the opposite in a positive way for the online channel that increased volumes over time will increase profitability. But on a general level, we see this as a totality when we look at our profitability development. But all in all, of course, volumes comes with scale and with scale comes efficiency. So we've seen a positive trend when it comes to efficiency and the profitability in the online channel throughout this period.

And would you expect as stores reopen, the -- that increase in online profitability, assuming all of those online sales don't reverse, but there's no real reason why that online profitability shouldn't stay at higher levels. And then on the store base profitability as you see volumes come back and as you see rental renegotiations and things, the -- it should have a positive impact on the overall group profitability, everything else being equal?

Yes, I agree.

Okay. In terms of the home delivery versus collected store, are you seeing any different trends in online, the impact? How the profitability profile might evolve?

Say again. Please repeat the question, sorry.

So I'm assuming that when a customer picks an order up at store, it's slightly more profitable for you than if you deliver it to their home, given the 80 million H&M club members probably get some degree of free delivery that you have to bear the cost of. Whereas if they go into your store, it's generally a more profitable metric for a retailer. As the stores have been shut, and as they're reopening, are you seeing the growth of -- or recovery in the number of orders being picked up from store as the stores reopen? Or is it a permanent change that people say, you know what, getting it to home is better than going into store?

We try to be -- and this is also very market-specific regarding how customers are used to and want to pick up their parcels. But obviously, last mile deliveries is quite a substantial part of the cost connected to our online business. So we believe that if we can integrate, as Helena said, the experiences, we have a positive upside in in having deliveries to stores and welcoming the customers to that experience as well. So we see picking up parcels in-store as something positive going forward.

Our next question it's from the line of Chiara Battistini.

Sorry, actually, my questions have already been answered. Maybe if I can have a follow-up question on your COGS and the fixed component of it. I'm sorry if I missed it, but could you actually clarify how much of your cost of goods sold is fixed? So that we can think about this also in the upcoming quarter.

First of all, may I clarify, they're not fixed as such. But of course, in a quarter like this with a sudden drop of 50%, of course, most costs are pretty fixed in the very short term. But I would -- I mean we have a sizable organization connected to buying, sourcing, shipping, IT and all of that connected to the COGS, which is a great asset for us. And of course, that's a way for us to ensure that we can control the products and make sure that they are sustainable produced from an environmental and social perspective, and also from an efficiency perspective. So typically, this is a great asset. But of course, in a point like this, it becomes -- it gives a pure mathematical deleverage on the gross margin. But we don't -- we prefer not to give exactly the size of it. But indirectly, of course, you can back out that it's pretty sizable.

Nils. And we should expect, of course, to a lower -- lesser extent or we should still expect a drag from this in Q3 then on top of the markdown cost?

Of course, but sequentially from Q2, of course, hopefully, we should see an improvement.

Our next question it's from line of Geoff Ruddell.

Just one quick question, please. A quarter ago, you were flagging that you expected to make a loss in Q2. You haven't made any comments at the moment. So can we assume you're expecting to make a profit in Q3?

We have sort of gone from one type of uncertainty when we looked in the second quarter, it was regarding how long should this lock time -- lockdown last. And now we have some more answers on that side. But obviously, we go into another type of uncertainty, how will customers respond, how will government ease restrictions and so forth. And what I'm alluding to is that the profitability estimates are so much depending on the top line. And we don't dare to do that within the precision right now then. So difficult to say. It's all about how now the trading will develop. And we've indicated parts of June now. And of course, we will hope that this will continue in a positive direction, but still with high uncertainty.

So you're not sure yet whether you'll make a profit in Q3?

We dare not to give any estimates here. We focus on ensuring that colleagues and customers are safe, that we follow the regulations, and then I believe that we have a strong offer. So we do our best to ensure that the trading improves as we look into the summer.

Our next question and it's from Niklas Ekman.

Just a quick follow-up, if I may. I'm curious about markdowns overall in the industry. Have you seen any dramatic changes in how your competitors have behaved? Are seeing a lot of peers struggling with markdowns? Or does that seem to have been balanced in the way that you have managed your inventory?

It's hard to compare with others, but obviously, there will be a lot of commercial activities and that we see already now when it comes to -- coming to a place where we have a better mix when it comes to composition of stock, that goes for us and obviously, also for others. So we just focused on getting to a better mix through great and creative kind of commercial activities in all channels.

And we have -- the next question it's from Magnus Råman.

Just wanted to come back to the prospects ahead of the autumn/winter seasons. You mentioned here being careful in the sourcing, making later decisions, et cetera, and perhaps we could expect similar competitors to act in a similar fashion. At the same time, we see now a rapid pickup in demand. You mentioned here that sales in reopened stores have been coming in above your expectation. So I'm just thinking, will this make for a picture of -- ahead of the autumn/winter season when it comes to balance supply demand being much more favorable than one we see to the summer?

The most dramatic effects that we took or the actions we took were related to summer and the more seasonal garments. So we believe that the purchase adjustments will sort of ease out throughout the autumn. And we have had a very big focus on ensuring the best possible composition here with a lot of uncertainty when it comes to absolute levels. But we are confident that the autumn will bring improved composition week-by-week and month-by-month into the end of the autumn.

Right. And then on online and online delivery. We saw that one of your key competitors ran delivery from closed stores of the [ spin ] here and they've been reporting very strong online sales numbers. So I guess that has been a way to be able to meet very strong demand that's been in the marketplace during the special circumstances. But just wanted to ask what your plans are in terms of online deliveries? Do you see a potential to deliver out of stores? Or do you see that efficiency and profitability is best at delivering sort of -- dedicated from online fulfillment centers?

Well, we are looking at kind of different ways to meet customer demand and, of course, focus a lot on availability. And of course, also delivery time. And the mix of speed and cost kind of mix to that. So I would say we have different tools in how to do that, but big investments have gone into the availability part of the roll and will be accelerated also going forward.

And then regarding -- go on.

Yes. Yes, go ahead, Nils.

Regarding your specific question about pick up -- pick from stores, as I said previously, that's, of course, something that we look into. And we are trying, but that should be seen in the whole picture whereas Helena said, availability is key, but of course, a balance of cost and efficiency.

All right. And just finally, maybe on the online deliveries. Well, actually, I think I had it shorter in terms of those time.

And there are no further questions now, sir.

Thank you all very much for participating in this conference call, and we just wish you all a very good day.

Thank you. That concludes our conference for today. You may all disconnect. Thank you all for participating.