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

Ladies and gentlemen, thank you for standing by, and welcome to the 9-month report for 2020 conference call. [Operator Instructions] I also must advise that this call is being recorded today, Thursday, the 1st of October 2020. And without any further delay, I would now like to hand over the call to your first speaker today, CEO, Helena Helmersson. Thank you. Please go ahead.

Hi, everyone, and thank you for joining us today. Welcome to the telephone conference about the H&M group's 9 months and third quarter results 2020. With me today is our CFO, Adam Karlsson; and Head of Investor Relations, Nils Vinge. I will start with a short summary of the third quarter and our focus going forward, and then we will be happy to answer your questions. You will find the 9-month report on h&mgroup.com (sic) [ hmgroup.com ] Investor Relations. Our recovery is going better than expected. This is the result of much appreciated collections and our rapid and decisive actions to counter the negative impact of COVID-19, which is still affecting us. Our online growth remains strong and profitable and temporarily closed stores continued to gradually reopen. With more full price sales than expected and strict cost control, we returned to profit already in the third quarter. Our teams around the world have done an amazing job. And although the challenges are far from over, we believe that the worst is behind us and that we are well placed to come out of the crisis stronger. We will continue our agenda of sustainable, profitable transformation centered around the customer. COVID has fast tracked many of the changes we saw happening in the market already before the outbreak, and this means that our focus will be on digitalization and omnichannel, speed and flexibility and on sustainability and resilience. More and more people have started to shop online during the pandemic. Our customers are showing us clearly that they value a convenient and inspiring experience for stores and online interact and strengthen each other. The substantial investments that we made in recent years have been very important for our recovery. Now we are speeding up our transformation work further in order to meet our customers' expectations. This includes digital investments, store portfolio optimization and channel integration. To ensure that our offerings are relevant to customers and to improve availability in all channels, speed and flexibility will be even more important in the future, particularly in the supply chain. COVID-19 has also highlighted the importance of sustainability. Demand for good value, sustainable products is expected to grow in the wake of the pandemic. Our customer offering is well positioned for this and H&M wants to make it possible for everyone to look and feel good. We will continuously improve the assortment to make sure we offer our customers the best combination of fashion, quality, price and sustainability. Our drive to become circular and climate-positive is an important part of our sustainability work. It will enable us to gradually increase the share of sustainable and renewable materials, and it will also benefit the development of new revenue streams. Together with our accelerated transformation work, this will help build resilience and contribute to long-term profitability -- profitable growth for the H&M group. Thank you very much for listening, and now we are happy to take your questions.

[Operator Instructions] So our first question is from the line of Daniel Schmidt from Danske Bank.

Yes. A couple of questions from me. Helena, when you state that the worst is behind us and that you are coming out of the crisis stronger, does that sort of implicitly mean that you feel that you could be back on the trajectory that you were recording before COVID-19 as you go into 2021? That's the first question.

The results of all the work we have done, and that we saw in the beginning of the year and also in the end of last year, clearly shows that we had a momentum. And this is, of course, one of the parts that has helped us to recover more quickly now. And this is also the path that we are going back to. And with all the learnings from the pandemic, we also see that we can accelerate some parts of our agenda going forward. What exactly will happen, of course, is very unpredictable also for us when it comes to, for example, footfall and the different scenarios related to the pandemic. But we do see that how we have worked and try to stay flexible with, for example, cost control and also other parts of the agenda, has definitely strengthened us for the future.

All right. And then sort of jumping on to your guidance when it comes to net closings of stores next year, you're saying 250. Could you give or shed some more light on sort of what regions? And do you foresee any extra costs associated to this? And your ability to capture sales from these closing stores, sort of looking back in history, what's your track record?

It's correct that we see a net closure of 250 stores, we believe, for next year. We clearly see that customers want to meet us in both channels and in different channels. So our agenda to continue to integrate the channels going forward is really, really clear to us. Part of that is obviously to optimize then the store network, and we will continuously then develop our stores as we have always done and how that will look like the years to come is something that we work with continuously. At the same time, of course, we work on growing digitally and in our online channels. But again, back to the importance of integrating the channels.

And is it fair to believe that many of these 250 stores are close to loss-making or loss-making today that you plan to close during '21?

As Helena says Daniel, the changing customer behavior obviously shifts the ability to earn money in some of the stores. So we're looking from it market-by-market and assessing how do we optimize the store network in the best possible way to ensure that we, from an omni perspective, both can drive top line and profitability. So of course, profitability on location level is part of that assessment.

And typically, we don't close the most profitable stores.

Our next question is from the line of Fredrik Ivarsson from ABG.

A couple of questions from me as well. Starting with cost control, you mentioned that, Helena, and how that has sort of accelerated throughout the pandemic, and I'm curious how to think about maybe short-term Q4, but also looking into the coming years. Have you reached a lower level medium-term, than you previously sort of thought that you could reach? That's my first question.

When looking at what we have done during the crisis, of course, we see that we can be quite flexible with a big part of our costs. Part of this is us being very decisive and acting fast in the crisis, which, of course, we have learned a lot from also moving forward. And part of this is related to more crisis -- our crisis agenda and actions such as, for example, closing the fitting rooms, which is, of course, nothing that we would do if we were not in a crisis.

Right. Okay. Second question, Helena. You mentioned the importance of speed and flexibility quite a few times. Does this imply a significantly higher degree of proximity sourcing going forward?

Speed and flexibility will definitely be more important going forward. If looking at the whole supply chain, of course, we want to make sure that the work we do is integrated, meaning from the ID of a product, of -- or of an assortment until it reaches the customers. So it more has to do than with how we set up the network when it comes to, for example, distribution centers and obviously, how we change our processes also related to tech. So it's more about that agenda that we think will be of great importance for speed and flexibility going forward.

That's clear. And last question, not too much related to Q4. But on Treadler that you launched quite a few months ago, and you've been live for a while, just curious to hear about your initial learnings and how that has been received. And also what your expectations on that investment is for the midterm?

No, it's still quite early days, but Treadler is a very interesting initiative where we open up our supply chain and offer services to other companies that also want to -- or have the vision to make their supply chain more sustainable. So, so far, we're still learning a lot in discussions with potential customers and also trying to update that offer going forward. So yes, we see progress, but it's quite early days to draw any kind of final conclusions. But we are, of course, very excited to see where this could lead us since we have such a long experience from working with our supply chain.

The next question is from the line of Chiara Battistini from JPMorgan.

First one would be on your gross margin into Q4. I was just wondering if you could explain us why the cost of markdown in Q4 should be actually be higher than in Q3, especially given that then the impact from black -- from Cyber Monday will fall into the Q -- well, you are not comping against that. Is it that reason? And also I was expecting to see actually negative external factors impacting Q4, given ForEx. Why are you actually guiding for neutral impact on -- from external factors? The second question, coming back to the net closures in 2021. Can you tell us a bit more about the kind of locations you're closing? Where they are? And in what markets they will be concentrated? And also what kind of average store size you're closing? And what will that do to the average store size of the group post closure? And finally, I was wondering, on your loyalty scheme, how many members do you have now on the program? And can you talk a bit more about how you're capitalizing on this program in terms of interaction with the consumer, maybe thinking about the product pipeline and overall, indeed, engaging with the consumer from that?

Thank you, Chiara. That was a lot of questions. To make it easier for the listeners and for us, could you please take it one by one next time? But I remember the first line -- the first question was the gross margin and markdowns, right? So that's...

Yes, thank you. Sorry about that. Yes.

Okay. Our assessment of the situation and then also, as reported, is the markdown pressure was less than previously anticipated for third quarter. But also looking from a sequential point of view, fourth quarter is a lot less markdown. The level -- markdown level is a lot lower in quarter 4. So we believe that we will have an overall slightly heightened level of markdowns throughout the quarter, but still far down below the activity we had in the third quarter. So our best assessment at this point is that it will proportionately increase more in fourth quarter, but sequentially come down.

And then when it comes to store closures and store optimization, this is something we do market by market, of course. And to your specific question of closures, I think the most -- highest number of closures will be mainly in the U.S. and Europe. And when it comes to openings, it's -- the most prioritized will be Russia, Japan, South Korea and Eastern Europe.

When it comes to members and the loyalty program with the H&M brand, we now have around 90 million members. For us, this is a great way to interact with customers in -- on a deeper level, meaning that we can build more relationships and also see and make sure that we engage with customers so that they constantly also come back to us. So, of course, we are happy to see that the number has increased to around 90 million.

If I just may follow-up on 2 of my questions. Just on the external factors impacting Q4. So you would confirm that the effect is actually neutral to gross margin in Q4?

As always, there are a lot of different factors influencing the gross margin. We're just referring to the external factors, the market value, so to speak. And we look at primarily the currency, the U.S. dollar is gradually helping us going forward. And that's why for Q4, the best assessment is that if you take all these together, we assess that it will be pretty neutral for our purchases for the fourth quarter.

Okay. Perfect. And the second follow-up question is on the average store size of the closures. Should we expect an increase in the average store size of the group stores on average, post closures? Or are you actually closing also large stores?

I think going back to I think what Adam said before, it's not the size, as such, we look at each store always in a holistic view when we do the store optimization, looking at online, looking at brands, looking at stores. And then the decision might differ a lot from store to store. So it's not about size, it's more about how the store fits in the total picture.

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

Yes. Firstly, I'd like to ask about the current trading, minus 5% in September. That's a fairly solid number given the store closures you still have. And my impression of this is that the market is still down by around 10% or maybe more. So this suggests outperformance by you. And I'm just curious if you agree with this. If you can elaborate a bit on what you see the drivers here? Do you see much stronger new collections? Is online sales a major driver? That's my first question.

Right. So we do see that the collections are very well received and that the team -- teams have done a fantastic job when it comes to listen to the customers and creating the new assortment. Then we also see the benefit of thinking omni. With omni then, I mean integrating the channels and trying to meet the customers where they choose to meet us. That means, of course, growing online. It means optimizing the store network and it means to continue the agenda on that integration.

Okay. And second question is going back on the cost structure. I'm just curious, if you compare the cost outlook for 2021 compared to 2019, so kind of stripping out the COVID-19 impact, do you see a potential for tangibly lower costs in 2021? And not just for -- related to store closures, but kind of on a comparable basis. Are you in a better position in terms of costs? Is there a lot of negotiation power here in terms of rental agreements, et cetera?

Our agreements with the landlords give us a lot of flexibility to continue that dialogue. So we continuously have dialogues with our partners. And that is partly why we have managed the cost reductions for third quarter, and that will continue going forward as well. But as Helena mentioned, the third quarter is a consequence of decisive early actions that also affected third quarter. It's a combination of really sort of short term here now, crisis mitigation actions. But also we're learning a lot of things. We're pushing boundaries in partly how we work and testing new ways of working. So it's a big combination of questions, but I think a huge asset is the flexibility we have in our cost structures related to rent, and that's something we will continue to work with.

The next question is from the line of Adam Cochrane from Citi.

Two questions, if I may. The first question is, can you give us a slight description around the profitability by channel? With the growth in online sales that you've seen, can you explain how that impacts the level of online profitability on a stand-alone basis? And then clearly, the total level that you think about the omnichannel -- I suppose I really want to get a feeling of how, with higher volumes, has that improved your level of online profitability?

Okay, Adam. As we've discussed many times, this is a combination of having the -- both the online and the physical stores, and it's difficult to take one from the other -- against the other, so to speak. So I think again to Helena's point here, that the secret here is that we have the integrated -- and are developing integration even more. So the omni is really what the customers want, and we see that the channels actually help and strengthen and complement each other. But if you try to break it out, of course, when stores are closed, profitability in the store channel was very low in Q2 and Q3, whereas in online, it was pretty good, given this high volumes and where the customers could continue to shop and increase their shopping in online channel.

Is there a scenario where, if the online penetration remains high, that your online profitability would remain high? And some of the actions you've taken on the store cost base, are any of those, whether it's moving to variable leases or whether it's changing working practices, that your store profitability can cope with a lower level of absolute sales going forward, but your online profitability remains higher than it was?

Of course.

Okay. Got it. In terms of that permanent reduction in store cost base from working practices, are you able to give any idea of things that you've done which maybe reduces the number of hours needed in the stores? Then they're doing online orders from store. What are we doing with the store cost base in terms of describing that?

As mentioned, partly is sort of adjusting here and now. It's everything from number of deliveries to stores, that reduces handling cost. We're looking into how to work with tagging stores, stores tagging, alarms and so forth, to sort of take away some administrative work in the stores and so forth. It's a wide range here, but we're trying many things and testing many things. And this situation during the spring and the summer has really put some force behind those tests. And we're learning as we go here. But those are sort of examples of practical aspects of what we've been doing.

Okay. And final question was really around that very impressive 90 million members of your H&M Club. How -- with the data that you have on those customers, when you've put them in markets where, obviously, the stores were shut, they may have shopped online, how are those members where you've got data on, how are they trending once the stores are reopened? Are they still increasing their online shop? Are they going back to store? Can you just give us an idea of, with the data that you've got, how the customers are behaving in markets as conditions are changing, please?

I guess what is becoming even more clear to us is that customers, they don't want to meet us in one channel. They sometimes want to meet us online. They sometimes want to go to a store. They could order something online that they want to pick up in store or they might -- they might want to find something online that they can then go to a store and find their size. So just to give a few examples, it becomes clearer and clearer when looking at the data that we can, through our loyalty program, interact and engage with customers in new and very interesting ways. And it becomes even clearer that customers want to meet us in both channels.

Has their behavior changed at all throughout this period? Obviously, you've got some of the -- 50 million of these customers, you've had from before COVID. You've gone through COVID. Have you noticed any structural change in their behavior? Or is it that they're just continuing the trends of shopping more online or multichannel that you saw before? They haven't changed throughout the period of COVID and then stores reopening?

Yes. What we see overall in our customer base is that more customers have entered the online channel for the first time. So we do see that more customers have kind of been introduced to the channel in a different way and faster than we have seen before.

The next question is from the line of Aneesha Sherman from Bernstein.

I have 2 questions, please. First one is again on the 250 store closures next year. Can you talk about the corresponding changes in the store support organization that you're making or planning to make? Are you making any major changes to that organization in conjunction with the closing of stores?

Practically, we are looking into how to best support the stores, obviously, that we run. And with the consolidation, the store portfolio and the footprint will look slightly different. And of course, we need to find new ways of working to support those stores in the best possible way. So we look at this from a totality point of view. But no sort of here and now assessment of how that may affect.

Okay. And then my -- sorry, go ahead. My second question is, you've spoken for a few years about the AI that you were building and the various improvements that we'll have across the business. Can you shed some light on the progress of that project, especially now under leadership of your new CTO, please?

Well, AI is definitely one great tool for us to stay really customer-focused and also that is helping us to become more fast and flexible. So for example, in our supply chain, that is a great tool for us to also forecast demand. And I would say, to some extent, we use AI in different parts of our value chain to both kind of improve the hit rate when it comes to collections and what customer wants and for us to become faster.

Next question is from the line of Rebecca McClellan from Santander.

I have a couple of questions, please. Firstly, the 350 shops that you're expecting to close in 2021, what percentage of sales does that represent?

We are -- yes, it's difficult to say now with the stores being closed now during this year. But it's obviously, as Nils said a little bit said here as well, we're not closing the most profitable stores and we're not closing the biggest stores from a turnover perspective. So we assessed that there would be a lesser impact on turnover and profit from a number perspective.

Okay. And secondly, just you're talking about sort of the importance of integration, et cetera. Your online returns in-store is available in 16 markets; Click and Collect, 14, which compares to 15 and 12 this time last year. So is there not sort of like a sort of an increased motivation to get that more broadly sort of spread out across the market?

Yes, all of these initiatives that is about integrating the channel is an agenda that we really actively want to work with going forward. Of course, some initiatives during the crisis, we had to slow down for a while. But going forward, this is of utmost important to continue.

And what sort of stops the sort of automatic rollout of online in-store, for example?

Well, it's very much related to the platform transformation we're doing and that we're taking step by step and rolling out. So customers can sort of enjoy the full omni package that we are having in some markets. So that is a little bit the connection so -- to the technical backbone.

Next question is from the line of Richard Chamberlain from RBC.

I just had a couple of questions, please. I -- first of all, could you comment on how much the temporary rent reliefs were in the third quarter? And what we should expect for Q4 in terms of rent relief and government support?

The absolute majority of the rent reductions are based on our flexible agreements with the landlord. So it's the absolute majority is the turnover-based rents that has contributed to cost savings here. But of course, we have had also dialogues with some landlords during second quarter that has affected the start of third quarter. But the absolute majority is the flexible rent setup.

Okay. So the amount of sort of rental holidays, if you like then, that's pretty small, is it, for H&M in the quarter?

Yes. And as a totality, it also is now trickling down. So it's a lot less impacted by that in third quarter. But for some markets, we do have -- for U.K., for example, we have the business rates relief, and that will continue throughout the fourth quarter. So there are variations from market to market, but the majority is the flexible rent setup we do have.

Yes. And presumably, the majority of the government support furlough -- the government support will fall away in the fourth quarter?

Yes, exactly.

Okay. Okay. Okay. I just have another question, please, just in terms -- on the subject of speed to market, which you've commented on already. But I wondered, are you seeing much faster times of sourcing product coming from Asia. And is that being driven by strong online demand? So you are seeing a material reduction in the number of weeks that it's taking supply to get from Asia to your markets?

Well, for the industry, as a whole, the speed of flexibility will just become more and more important. So what we clearly see is changes in processes to kind of tighten some of the time lines in, for example, decision-making, that is also kind of enabling shorter overall lead times than from ID to customer, if that makes sense.

Our next question is from the line of Simon Irwin from Crédit Suisse.

I'll try and make it quick. Can you just talk a little bit about the timing of when you pay turnover-based rents. Are they accounted for in the quarter relating to the sales? Or is there any kind of lagging element to those payments? And can you just talk also a little bit more about some of the programs that are going through. Obviously, there are kind of quite a few big programs over the last few years, which have been kind of rolling off, I'm thinking particularly some of the IT and accounting and things. Is that helping the OpEx? Or are they now being replaced by other ones, bearing in mind the -- Helena's comments around the speeding up digital?

First question regarding the turnover rents. Previously, we have paid them in advance. But now due to the situation, we have adjusted that because of the uncertainty with the turnover. So there is a slight lagging effect there to the first question. Secondly, we see that we are able now to work smart in many parts of the business. It's hard to quantify the impact of it. But of course, simple examples, that's how now we use digital ways of meeting and not traveling and so forth. So it's impacting us in many areas. Difficult to quantify the total impact, so to say.

Okay. Next question is from the line of Anne Critchlow from Societe Generale.

My question -- my first question is about the different concepts. Are there any big differences in how they've performed through the pandemic? Did you have any surprises there?

Not sure if you mean the different brands we have in our portfolio or different concepts. But overall, we would say that during the crisis, as we spoke about in quarter 2, we have seen an increased demand on more basic need products overall and that we can more or less see in all brands.

Okay. And then my second question is about the store closures. Do you see this as a one-off program for 2021? Or should we pencil in a similar number of store closures in the outer years?

So this is kind of a living agenda. We continuously develop our store network. Obviously, we believe a lot in also physical stores going forward, and we see that, that is what the customers tell us. They want to meet us in physical stores and online. So continuously, we work with this development agenda. And difficult to then give numbers after 2021 and onwards. So we'll get back to that later on. But again, back to the importance of integrating the channels, which would be key.

And also flexibility so that we can adjust accordingly as we go.

Okay. Next question is from the line again of Daniel Schmidt.

Yes, just a follow-up from me. You have an extraordinary sort of impairment charge of close to SEK 500 million. Could you shed some more light on what that exactly refers to when it comes to development projects?

We have, as we did during the spring and the summer, I reviewed sort of everything top to toe in the company, and then we have also put some extra light on both the ongoing development project, but also previous development project. And this is a consequence of that review, and it's also connected to what I spoke about before, the transition into new platforms and so forth. When we assess it, and we're getting into the more modern data and tech infrastructure, we then saw the opportunity to do this impairment test and the provision through third quarter.

But has it really been accentuated by COVID-19? Is that sort of a right way to put it? Or has COVID-19 anything to do with it?

It's more that we've put extra light on everything we do. So it's more in that part of the process that we really reviewed everything we do and work with. So it's more connected to the full assessment of everything we have done and are currently doing to ensure we mitigate the effects of the COVID-19.

And the sort of the data breach fine that you took, EUR 35 million, that's done and dusted. Is there any sort of more consequences coming from that in the coming quarters?

So when it comes to that, we just got it. So we have a provision for it, and we are now reviewing that decision.

Could it be sort of less? Or it could be reversed? Or is that what you're referring to? Or are you in any way sort of reviewing how you're going to go forward? Because you took the provision in Q3, right?

Yes. We took the provision in Q3. Difficult to comment on the question, lower or higher. But we have gotten their decision, and this is now under our review.

Okay. Okay. And then just a final question on return rates. Many of your peers are saying that they're seeing sort of significantly lower return rates online since COVID-19 sort of broke out. Have you seen a similar pattern?

We do see that, and it's also connected to the previous question regarding what we have sold. So we believe it's a lot related to what products and the basket mix and connected to more basics and what Helena said, the need product, then lower return rates may follow as a consequence of that. But of course, that will shift over time when demand sort of normalizes. So -- but we see a here and now reduction in returns.

Have you seen it shifting already, if you look at the past sort of couple of months more to a normalized return rate?

As Helena said, the quarter 3 is still -- we see the high -- the relatively higher demand in the need product category. So as long as that sort of sustains, there will be a slight sort of shift of mix when it comes to returns which is, from a return rate point of view, favorable. Yes.

Our next question is from the line again of Chiara Battistini.

Sorry, just a very quick one on the impairment charge. I was just wondering, is this all allocated in OpEx, the SEK 486 million? Or is it partly in the gross margin? And if so, can you please give us the split between the 2, the reallocation of the charge, please?

Yes, the SEK 486 million is under selling and -- SG&A.

Okay. So nothing in the COGS?

Yes, there are some in the COGS as well. That's always -- as Adam said, we do impairment test continuously. So yes, there are always something in the COGS as well. But that's not as material.

Our next question is from the line of Andreas Lundberg from SEB.

Could you give us some update on your supply chain? I know you opened a few new warehouses, some pure online, some store and online-related, Milton Keynes, Germany, Madrid and so forth. What's the status there? How are they performing? And are you still running as a double facilities in some places?

We are continuing the agenda when it comes to integrating the channels, as we have discussed a lot today. That also means that we are continuing to develop our supply chain accordingly, and distribution centers is one part of that. One example where we have kind of merged channels so that the different channel store and online that we can kind of merge the availability is Milton Keynes. The -- so far what we have seen is good results on that which kind of makes us very confident that our agenda, when it comes to availability and again, merging the channels, is definitely the way to go forward.

But are you still having some of the old warehouses that you eventually plan to close open? Or have they been closed?

We -- I mean the journey of integrating channels and doing that also when it comes to distribution centers, is constantly under development. So we will definitely take more measures to kind of merge the different channels going forward, which is the agenda is about the physical distribution centers. But maybe even more importantly, also about the technical platform that will make this happen.

Okay. The next question is from the line of Charlie Muir-Sands from Exane.

My first question, sorry, just going back to Simon Irwin's question earlier, I just wanted to clarify. You said previously, you used to pay your rents in advance. Now there is a lag. I just wanted to check, from a P&L perspective, though, are you accruing as you go? Or is there a lag now in that?

No, there's no lag from -- the costs are taken when they occur, so to say. So it's only a cash flow perspective.

Great. Second question relates to specifically United States. It was one of your weaker top 10 markets in Q3. You also called it out as a market that might be a focus for store closures in the year ahead, even though you have, let's say, substantially fewer stores in the U.S. than you do in -- across Europe. Is there something in particular that's happening in the U.S. which is making you more aggressive in the transformation of your footprint there?

We've seen that coming into the quarter, we globally had 20% or so stores closed. And now when we exit the quarter, we have 3% closed. But the U.S. is still the market where we have the highest share of stores, both closed and also affected from limited trading hours and so forth. So that is reflected in the results for the quarter. We can also see that different parts of the U.S., and we are very present in -- on the coast, and that has also affected selling in the U.S. proportionally more than in other markets where we are more sort of densely populated throughout the market. So other than that, there's no sort of big shift, but rather a temporary lag that when it comes to the effects of COVID affecting us more in the U.S. than in other markets.

Very clear. And my final question is, it would be very helpful to give us an early glimpse on your thoughts for 2021 with respect to store openings and closures. I just wondered, with respect to CapEx, which this year, you cut your original budget quite significantly down to, I think, SEK 5 billion was the last figure you gave for Q2. Do you think that you'll need to play a little bit of catch-up when you go into 2021? Or is something close to SEK 5 billion a run rate which the business can sustain?

No. We believe that this is a suppressed level that we -- now with a little bit more visibility, we'll start to assess. And we believe that as we get sort of more solid ground under our feet, we will start to see where we can start investing again towards more normalized levels.

And would more normalized level be in line with depreciation? Or do you think a little bit below that?

But we haven't fully set, but we are believing that 2019 is probably a good sort of benchmark to relate to 2019 levels rather than 2020.

[Operator Instructions] So our next question is from the line of Rebecca McClellan.

Yes. Just a follow-up from me, please. Can you talk about the composition of your inventory? How much of sort of spring/summer you're still carrying forward? And also for autumn/winter, is -- are you budgeting towards sort of minus 5% constant currency? Or what sort of levels -- is there some sort of stress in terms of having inventory, if your budgets were more conservative than that?

To start with the inventory composition, we spoke about it after the second quarter that this is one of the key questions for us to sort out, how do we keep a relevant assortment and offering to the customers when we have pulled back on buying. And as Helena mentioned, the teams have done a tremendous work, reworking the offering to really match the demand from the customers. So sort of the technical worry we had before the summer is not as big anymore, even though we naturally, with so many stores closed, have a slightly inflated level of spring garments. But as we can see now, we are able to shift those out without having to take too much discount. So we are pleased with the composition as it sits right now. And I forgot your second question. Sorry.

Oh I was just -- I was talking about for autumn/winter, I was asking whether the sort of the minus 5% constant currency was the level around which you were actually budgeting for or?

No. We -- I think also Nils mentioned it, that now when the number of affected stores is constantly fluctuating, we believe that we are having a conservative approach to the autumn here. And believing that if stores can continue to open and customers can come, we can do better. But we are also respectful for the situation that it fluctuates. And right now, actually, we have more stores closed than we did a week ago. So we don't -- we didn't dare to make any sharp prognosis for fourth quarter.

Next question is from the line of Chiara Battistini.

Sorry, last one for me. On the -- maybe, on the current trading, on the minus 5% for September, I was wondering, would you be able to give us a bit more color on where you're actually seeing such an improvement regionally. And also is it coming through both online and off-line? Or is it really off-line starting to recover as the stores have been reopening and consumers are feeling a bit more comfortable coming back to the stores?

Chiara, as you can see on the update, market by market, the big difference is from market to market due to differences in different markets and how the COVID is affecting. And that is, of course, still the case. And I'd just like to remind everyone that we're still not out of the crisis. We're still in it, even though we hope that most of it is behind us. So there are big differences also now in these numbers from market to market, even within Europe, there are big differences. And between online and stores, obviously, the -- as we've spoken about many times now, and Helena said as well the online continues to do very well, of course. But the importance of the omnichannel is really the thing here that we see that when customers can shop in both channels, they are happy.

Next question is from the line of Magnus Råman from Kepler.

Yes. I just want to come back to the online returns question here. You mentioned the higher share of basic items pushing down the return rates. Could it also relate to a demography change? You mentioned that new customer groups, perhaps older customers, have also been introduced to the online channel, driven by COVID-19, and they might potentially be low returners. So do you see such effect as well that might be more sticky?

It's probably also included in the shift we do. So there are a lot of elements affecting. But the big driver of this is the sort of need product versus the want product, and that we see the increased demand throughout this period on sort of need products, both the basics, as Helena mentioned, but also kids wear and so forth, that are less prone to be returned.

Right. And then just a follow-up also on markdowns. Your markdown increase in Q3 was much smaller than you initially anticipated at the beginning of the quarter. And now you expect an increase in Q4, 1 to 1.5 percentage points. Is it -- I mean given that the price environment or the ability to do full price sales in Q3 turned out more favorable than you expected, have you sort of included that better market environment in your projections for markdown increase in Q4 or not?

Yes. We do have, but it's just to give our fairest and best assessment of how we will act now during the quarter. And as I mentioned before, fourth quarter as well as second quarter are less of markdown quarter. So that's why the proportionate effect gets bigger here, but it's from a lower absolute level. So it's to give some kind of indication of how we believe the need of activation will look. So it's not a dramatic increase in absolute number, but just the relative goes up quite a bit for fourth quarter, as we, last year, went down a lot. So...

Well, the reason I asked also is that, even if it's a smaller markdown quarter in general, if you make a stack comparison like with multiyear stack markdown increase and decrease in Q4s, you still arrive at a quite soft comparison also on a flat comparison to Q4s, so to speak, just as is the case with Q3s.

Yes, but you're right. But as Adam said, we need to be cautious here. We're still not out of the crisis, just to remind everyone about that. So I think it's better to have a cautious view. And yes, we still have, as Helena said, spring garments that we -- and the level is still higher than we want to get to in the longer term.

Our next question is from the line of Peter Testa from One Investments.

Two questions, please. Maybe just continuing from that point on the gross margin. Is -- do you have visibility over that because largely, you've carried out the remaining spring/summer inventory move in September as you prepared the fall/winter?

Say again. Repeat the question, please.

Do you have stronger visibility over that markdown because you may have carried out the remaining -- moving of the spring/summer inventory you mentioned before in September, as you prepared the collection for the fall/winter?

We're constantly reviewing sort of the commercial plan and how that will look throughout the autumn there, and that's reflected then in our assessment on the markdown levels. So it's both what we see and what we believe going forward, connected to the commercial agenda.

We definitely have a better visibility now compared to where we stood 3 months ago when we were in -- really in the middle of the crisis.

On that note, yes, of course.

Yes, yes, yes. Okay. And the other question is just on expenses. I mean you have obviously the 400 of furlough going, as you said. And the turnover rents will move with sales. Is there anything else about expenses in Q3 that will, say, short-term measures that may unwind -- sorry, Q2 may unwind now and -- excuse me, Q3 unwind now in Q4?

No. And we also know now that when stores are opening, of course, and we want to offer the customer the full sort of experience, we will remove some of the extreme measures, as Helena mentioned, and we closed fitting rooms and so forth. There are some components of this that we believe will be sort of phased out as we move into a little bit more normalized setup of the stores and operations.

But also, as Helena said, we now start to accelerate things. And of course we need people and resources to make that happen. So that's what we gradually now are accelerating the business again.

Yes. That's right.

And as you enter a normal environment, things like marketing initiatives and people and so on, will they start to become more representative of what you would have seen in the prior years -- this time of the year?

Yes.

No more further questions. Please continue.

So thank you all very much then for participating today, and we wish you all the best.

So that does conclude our conference for today. Thank you all for participating. You may all disconnect.