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

Good day, and thank you for standing by. Welcome to the 6-month report for 2021. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Helena Helmersson, CEO. Please go ahead.

Hi, everyone, and thank you all for joining us today. Welcome to this telephone conference about the H&M Group's 6 months results 2021. With me today is our CFO, Adam Karlsson; and Head of Investor Relations, Nils Vinge. I will start with a short summary of the second quarter, followed by current developments. And after that, we will be happy to answer your questions. You will find the 6-month report on hmgroup.com Investor Relations. Even though the pandemic continued to have a big impact also in our second quarter with closed stores and reduced footfall, we managed to deliver a solid result and further strengthened the financial position of the group. We can clearly see that customers appreciate our offering when they have the opportunity to shop. As markets are gradually being opened up, store sales have picked up, while at the same time online sales have continued to perform very well. Our much appreciated collections combined with our ongoing transformation are all contributing to a strong recovery. In the current quarter-to-date, we are almost back at pre-COVID levels despite continued restrictions and a very strong comparison base from 2019. I am so proud of all our colleague's commitment and drive during this challenging period. We have shown resilience by being flexible and taking action fast. The crisis has made us even stronger as a company, and the lessons we have learned will not only enable us to be even faster and more resilient in the event of new sudden headwinds, they will also enable us to grasp new opportunities even better. Our digital initiatives are continuing along with our store optimization. Customers both want to see, feel and try on the garments in real life and use digital channels to explore fashion, be inspired and shop. We are continuing the integration of our sales channels to offer customers a smooth and inspiring experience. Our core is to give our customers unbeatable value with the best combination of fashion, quality and price in a sustainable way. Our transformation continues at full speed in order to meet customers' ever-increasing expectations and to strengthen our competitiveness further. We are developing the existing business and brands as well as creating new complementary revenue streams. Continued good cost control and a robust financial position give us a solid foundation, which together with our ongoing transformation will ensure a continued sustainable and profitable growth for the H&M Group as we leave the pandemic behind us. Thank you very much for listening, and we are now happy to take your questions.

[Operator Instructions] Your first question comes from the line of Magnus Råman of Kepler Cheuvreux.

Yes. My first question relates to supply disturbances in effect from rising freight costs. If you could perhaps elaborate a little bit what do you see currently and the potential effects going forward here?

Yes. We spoke about it in the previous quarter. We are seeing some disturbances in the overall supply chain. They are not material and not affecting the top line. If we look ahead then, we are not unaffected by some of the cost increases, but we see that have really strong plans to mitigate them. So we see them as nonmaterial, but still existing and something that we actively manage looking ahead.

All right. So I read you that the pricing environment is rather favorable as you see it.

There are many components to it, and we have currencies working in our favor currently and then other aspects working against us. So we are confident that we can manage the situation without sort of major impact.

Great. And then on the current trading, where implicitly sales growth in the second half of June was perhaps somewhere around 15%, 20% up compared to the 35% you reported for the first half. You alluded here to continued restrictions and reduced footfall and so on in the report. But is it also fair to say that you met gradually more challenging comparisons in June, given the recovery already in June last year?

Yes. If you look at the comparable figures, both last year, as you probably saw the curve in the annual report, you will see that the comparable figures are really high and same also with 2019. So overall, if we just look at how the third quarter has started, we see this as a clear sign on a strong recovery on well-appreciated collections and products, and definitely also a sign that the channels are strengthening each other now when most of the stores are open, though with some restrictions then affecting, of course, still some footfall.

That's helpful. And then just finally, another sort of supply disruption question here, but the recent lockdown talks regarding Bangladesh. I believe that -- or that is your most important sourcing destination. I guess it's clearly more important than China even. So can you -- do you have anything to say here of how you regard this affecting you?

Yes. We're following the situation, of course, closely and we've gotten used to handle situations like this also throughout, well, more than a year now. So factories, ports, transport is not included in the restrictions and the lockdown in Bangladesh. So right now, we can manage this in a good way, but also looking back at previous restrictions and lockdowns in Bangladesh, but also in other production markets. We have been able to be flexible and manage it well together with our close partners. So we do think we will manage also this time.

Your next question comes from the line of Daniel Schmidt of Danske Bank.

Yes. Maybe 1 or 2 questions from me then. In looking at sort of the fact that you're now back to almost '19 levels and pre-pandemic levels on sales, you were not the CEO back then. But the former CEO said 2 years ago in Q2 report in '19 that the reversal of markdowns, medium term should go on for quite some time, and we should basically get back to historical levels and maybe beyond that given the investments that you've done in terms of RFID and automization of warehouses and so on. Do you think that's still valid to start with?

Yes, we absolutely think so. We have a strong plan and a lot of enablers in place. Now we are obviously actively managing the situation that we and the rest of the world are in. But the long-term trajectory and ambition is absolutely still there.

Yes. All right. And then maybe just moving on to rental agreements. I think you wrote in the Q2 report that implicitly you're renegotiating at a bit faster pace. If I remember correctly, it was 1 quarter of all stores being renegotiated last year, and it's 1/3 this year. And could you say something about sort of where rents have been heading over the past 6 months compared to last year? And what you see ahead of you in the second half of this year?

I think you sort of spotted one of the biggest effects of last year and all of the renegotiations. One is, obviously, the flexibility in the terms and the other one is also that we, together with our partners have ended up in a more sales-related turnover-based rent setup. So I think both flexibility when it comes to the lease term, but also that we -- when we expect recovery, now we'll obviously share the upside with our landlords, but also manage the risk together with a more turnover-based rent setup.

Yes. And then thirdly, on sort of comments on dividend. You're right that it's sort of high likelihood of a dividend during your term and you're also right that you haven't received any Swedish government support since the end of March. Is that the key deciding factor in terms of lead time from government support to when you're allowed to distribute cash? Or is there any other sort of government supports out there that we need to consider?

Overall, I would say that government support, we have taken as we have needed it. And of course, that varies a lot in the different markets since restrictions have been looking a little bit different over the past months and weeks. But then looking at our financial position, we do consider that is strong. As you know, the dividend part is all according to the assessment from the Board. But we do see very good prospects for a cash dividend to happen then later during autumn. But the level and the timing for that is all up to the Board, when we can also review the situation and the consequences of the pandemic, which we are still in.

Yes. But I just wonder from a legal perspective, is there any other sort of government authorities like Tillväxtverket in Sweden, which is requiring 6-month lead time? Is there any others that you need to do that sort of considering such a decision in other markets where you receive government support? Or is it the Swedish one?

Tillväxtverket is sort of the governing body for our Swedish company, and that is where the mother company is based. So Tillväxtverket is the regulatory body, so to say, and that is the enabler or hinder, so to say, to pay dividends.

Your next question comes from the line of Adam Cochrane of Deutsche Bank.

A couple of questions. Firstly, have you got any comments on China? And how their performance has trended through, through the quarter and then maybe into your June number? And how you've sort of reacted to the business to the conditions there? Secondly, on OpEx.

Adam, please 1 question at a time, please. So let Helena answer.

Sure.

Okay. I can go with that question. In the report, you see the numbers for China. We're still in a complex situation. And other than that, I would kindly refer to our statement that we gave last time, from the 31st of March. So I hope for your understanding on that.

Yes. I was just sort of hoping some comments made from some other companies that trends were improving throughout the quarters, month by month. Would you be able to give any indication directionally?

No. I'm sorry. We refer to the previous statement and also what you can see then in this report.

Next question, please. No, Adam has another question.

[Operator Instructions]

Reductions, how much of -- what proportion of your leases are now variable in terms of -- as a proportion of your total lease rent roll?

I would say the majority has a big component from variable in the contracts. But of course, in many cases, there is a minimum or taxes that you have to consider. But it's definitely a very -- a majority of the contracts now.

So as we think about your sales recovering, you're managing to achieve, hopefully, cheaper rents on some. But as your sales recover, you'll get some of the variable components coming back. So is the total lease charge going to be dependent on those 2 factors as you look forward to the rest of this year and into next year?

You're right. Of course, that's the part of the construction that as revenues increase, again, of course, rents will also increase. But hopefully, our share of sales, that could still improve.

Okay. And on the last one. Inventory was down 1% in local FX. Is that in line with as you're expecting, given the sales performance in the quarter? Or is there anything within your inventory where you're building up stock for expectations of higher sales, et cetera? Is that the number that you were looking for?

We see a very positive development, both on the total stock level but also the composition, and it's shown by obviously a strong sales recovery and also sort of during challenging times, well-managed reduction level. So we feel confident both with the level and the composition of the stock. Then obviously, as I mentioned before, the long-term ambition is to continue to work along the lines we did already in 2019 and early 2020. But here now, we are pleased with the level and the composition.

Your next question comes from Rebecca McClellan of Santander.

Yes. Could you please give a bit more granularity, sort of, behind your statement vis-a-vis ongoing continued lower stock levels driven by more efficient supply chain and further integration of the sales channels? What are you referring to in terms of supply chain efficiencies? And where do you think the integration can go to of the sales channels versus where it is now?

The inventory level and how we manage it? It's a truly end-to-end process that we manage in all aspects, everything from obviously planning, designing, quantifying the assortment to how we set up the logistics network. And what we do within that is to enable sort of later decisions of where to sell and how to distribute the products. And it's all depending how quickly we can respond to how consumers shift where they want to buy with us. So it's a responsiveness that we're building up to be able to meet the customer demand as it's moving quicker and quicker between the channels. A lot driven by the restrictions, but also going forward that we see that customers will continue to shop in both channels, and we need to be responsive to allocating the garments to meet that demand.

Adding to that, also integrating then, obviously, tech and AI in the supply chain processes is making us more fast, of course, and also efficient both when doing product development, but actually throughout the end-to-end supply chain process.

Your next question comes from Rosie Shepard of Retail Week.

I just wanted to have a little bit more color around the complementary revenue streams you're mentioning, is it things like you have Its a park and Sellpy and things like that?

Yes. So both within the different brands, like H&M, like Monki, like Weekday, et cetera, we are trying out new kind of complemented revenue streams to meet more of customer demands. Resell being 1 example. And also what you mentioned that we're trying out new business ventures, such as Its a park. We have singular society with subscription. Those kind of new businesses where we are exploring, which is really interesting. And of course, as you saw in the report, also really happy to see some of these scaling, for example, when it comes to expansion of Sellpy, which is a very interesting partnership that we have.

Okay. And you're also exploring more kind of platforms and things like that as well?

Yes, we are. That's true. Its a park is one of those examples of a new platform model we are trying.

More with third party platforms. You've mentioned something about ZALORA and things like that?

Yes. So we are also working, of course, in partnerships. So we have different regional strategies, all of them trying to find the best channels combined where we can meet our customers. So ZALORA is 1 partnership that you can read about in the report of this quarter.

Your next question comes from the line of Georgina Johanan of JPMorgan.

It was really just a follow-up on June trading, please. I appreciate that trading is probably extremely volatile at the moment. But if I'm right in my calculations, it implies the exit rate in June was negative high single digit. And whilst I appreciate that the quarter overall in 2019 was strong the comp has eased, I think, through June, if I'm not incorrect. So I just wondered if you could help us understand that shape. Is it about trading volatility? Is it about a particular pattern in a particular geography? Yes, any kind of color would be just really helpful, please.

As I said before, when looking at the beginning of this quarter, we definitely see this as a strong sign of recovery and well-appreciated collections, a good mix in our assortments. If you look at -- as always, there's combined factors if you take kind of week by week. So if you look at weather, for example, you have seen cold weather in some of the countries in Europe during the past week. So it's really a combination of, of course, how restrictions are being lifted, weather, et cetera. But most of all it is, of course, comparable high figures, both if you look at 2020 and 2019. Not sure if that answered your question.

Is the -- was the comparative similar for the whole of June then as it was for the start of June, please? I'm just trying to understand if on an underlying basis, there was actually a deterioration or not.

I think one good description is what we referred is the diagram in the full year report, where you could see that was a very, very rapid recovery early quarter 3 last year and compared to quarter 2, where we had half selling loss then and a lot less difficult time during the third quarter, and that was a week-by-week recovery. So I think that will give some flavor to this discussion to look at that. And hopefully, that can guide you on a -- at least on a pattern and a weekly trend basis.

Your next question comes from the line of Charlie Muir-Sands of Exane BNP Paribas.

I've got 2. The first is you've reported that you've released SEK 6 billion of net working capital year-to-date out of the SEK 10 billion target plan. I just wondered if you could provide a figure as to how much of that has been delivered through reverse factoring?

Not sure, but is the effect that we see from the supply chain financing program and the combined efforts that we have together with the suppliers of making our payments term more towards industry standard and supporting with agreements with banks to enable the suppliers to finance themselves in a good way.

Understood. Okay. So the material is that. And then my second question is a big picture question for Helena, in particular. You referred to being establishing a good position to return to sustainable growth after recovery. Obviously, historically, pre-pandemic, the company for many years, used to talk about targeting 10% to 15% growth, albeit that was historically heavily driven by your net store expansion, which at least at the moment is not clearly part of the business plan. I just wonder what you think could be a sensible midterm target growth rate after recovery?

Well, of course, now when we do believe that gradually we're leaving the pandemic behind us, we can gear up for growth again. And even though short term is still pretty unpredictable how much, which is why it's really difficult to give you such a midterm number. But of course, we see great potentials also for growth moving forward. And then I would say we see potential both within our core, if we just look at now how the channels are strengthening each other and how customers want to sometimes go to physical stores to feel and try out garments and do some shopping and how that interlinks with digital channels that has been growing so fast during the pandemic. We are in a strong position, and we also definitely see that the channels strengthen each other. And that means that we have a potential for growth looking at these channels altogether. And on top of that, we have then a complementary revenue streams that is really exciting, where we also see potential for growth. So we definitely look forward to getting on that growth journey again after such a turbulent time.

Your next question comes from the line of Anne Critchlow of Societe General.

I wonder if you could talk a bit, please, about the cost of sustainable materials compared to the equivalent standard of materials? And whether you think inflationary pressures are maybe building there as everybody is looking now for these sustainable materials? And could perhaps inflation in these materials offset the progress you hope to make on markdowns in the coming years? What are your thoughts on all that, please?

If you look at cost of sustainable materials, we have such an experience of doing that. We have invested in that for so many years. And of course, our guiding story is our customers, meaning the combination of price, fashion, quality and sustainability. We are such a big player, meaning that we can also invest in those new materials in early days. And the focus right now, if you look at new initiatives is, of course, textile-to-textile recycling and through circularity and that is also the partnerships and the investments that we do. The materials that we have worked with for a long time, those -- I mean it's about supply and demand, right? So we can help of also increasing the demand, and that will also gradually have a consequence that -- on the costing. So I would say that when we try out new sustainable materials, we will have to invest, and we always try to be guided by our business idea from a customer point of view in those investments.

Okay. I just wonder if you could follow-up and give us an idea about how high the inflation is in these types of materials at the moment? For example, sustainable cotton that you've been -- I know you're at 100%. But what sort of inflation are you seeing there?

It varies from material to material. But as we mentioned, we do see a temporary increase in the cotton prices and the sustainable cotton prices. But we believe that throughout the autumn, the situation will normalize and we manage the situation on a day-to-day basis in a good way. So we see the effects, but have strong plans to manage the situation throughout the autumn.

[Operator Instructions] Your next question comes from Fredrik Ivarsson at ABG Sundal Collier.

I want to talk a little bit about the U.S. market. Obviously, that's sort of boosted by the packages consumer get. I think most of them hit bank accounts in March. So I'm curious to hear what you've seen throughout the last months? Has the U.S. sort of weakened over the last, well, April, May, June? Or what are you seeing in that market? That's my first question.

If we look at U.S., we see a really strong recovery. And as you are aware, we have also seen that restrictions were lifted pretty early if you compare to some of the other markets where we are present. And we also know that the economy has been boosted in many ways, which is also looking at the market as a whole. And if you follow the industry, you do see a big increase. On top of that, looking at our own operations. We have a really strong team in place. They have been driving an impressive agenda to also do the recovery in the best way possible, and we clearly see that the customers appreciate both the experience and the customer offer, which looks really promising for the near future.

Okay. So it's not like April was materially stronger than June, for instance, if we compare it to 2019 figures?

No, I think this is -- again, you shouldn't look at it week by week or month by month. We see a very strong recovery in the U.S., as Helena said, and we are back on plus compared to '19.

Okay. Fair enough. And another question on the Higg Sustainability Index. I think you went live a month ago. So curious to hear what your initial takeaways from that has been? And what sort of reception have you seen from your customers in that perspective?

This is a really interesting pilot. A bit hard to draw major conclusions, but we do see a big interest. This index is showing sustainability on the material. So it's really good for us to explore the customer engagement around this. So I would say we're still learning, but so far a positive response from our customers on an engagement level.

And a short follow-up on that. Has any of your peers or competitors initiated that index as well?

We are one of the first, but not alone. I don't have in my mind right now exactly how many. There's a few brands who were part of the pilot, and we're one of them.

[Operator Instructions] Your next question comes from Nicolas Champ of Barclays.

Yes. I have three. The first one is about China. I think you said in March that around 20 stores were closed. Could you update on this number? Has it changed since March?

We have around 10 stores closed at the moment out of, as you can see, around 500 stores.

Okay. Second question is also, again, Stockholm because you closed down a net roughly 100 stores since the start of the year. You -- I think you guided towards a net decrease of your store portfolio of around 250, so you are slightly late. Could you confirm you are still target to close down this 250 stores net for the fiscal year?

We are, I mean, continuously revising the situation, obviously. We are fairly close to half of what we guided for, but we monitor this. And there's so much happening in the market, both the positive, of course, of customers returning, but also new opportunities. So we will continuously update when we have information that, that sort of as a big difference to what we previously discussed. But we'll probably get back to it in quarter 3 again. But as of now, we are following our plan and continuously working with assessing the situation as we continue to open stores and -- or reopen stores and gradually getting out the COVID situation.

Okay. Is it possible to have a bit more granularity regarding the geographic breakdown of this store closure? Since the start of the year, I think you closed a gross number of 155 stores. I mean in which regions, more particularly, please?

You have it very clearly on Page 18 and 19 in the report country by country.

Okay. So last question is about your plan to free up SEK 10 billion of working capital. So you already completed SEK 6 billion since the start to the year. Don't you consider that your SEK 10 billion target is not overly cautious, I would say? No need to update this figure.

No. Yes, it's depending on -- we do it market by market, and we've been working through some of the bigger markets so far. So we still believe that the SEK 10 billion is a valid guidance for the full year, and it's a little bit depending on what market is onboarded when.

Your next question comes from Charlie Muir-Sands of Exane BNP Paribas.

One quick follow-up question. I think at Q1, you guided full year CapEx was likely to be around SEK 7 billion to SEK 8 billion. I just wondered if that's still the number you're looking at?

It is on a rolling 12 basis. We believe that we will probably end up in the lower part of the interval, but more to be seen as a delaying also based on that second quarter was more affected by COVID than we potentially previously anticipated. So lower end of that spectrum and potentially slightly delayed a little bit more into 2022.

[Operator Instructions] Your next question comes from Paul Rossington of HSBC.

Apologies, I was late to the call. Could you just comment on the gross margins? I think markdown was perhaps slightly higher, but underlying was still better than the market was going for or the achieved gross margin than you were going for. You may have commented on that already, I apologize, but if you could comment on the gross margin improvement, that would be great.

Yes. What -- could you specify what you're curious about? Because, I mean we gave you the markdowns recovery, which was around 300 bps, so almost back to '19 levels. And then, of course, we have unwinded the deleverage we saw from the semi-fixed cost in the COGS. So -- and then regarding external factors, of course, we were helped by the dollar. Other than that, we haven't commented anything. But is there anything specific you're curious about, Paul?

I was just wondering if there is perhaps any benefit from mix on a category level, for example, or anything that makes it outside of the actual markdown process?

Sorry, I didn't hear your question.

No, but it is -- if you talk about the big component is what Nils said and obviously the markdown and then the lesser negative deleverage compared to 2020, then we are closing in on 2019 levels then as sales recover. So these are the major effects.

[Operator Instructions] Your next question comes from Andreas Lundberg of SEB.

Yes. You mentioned that the unwinding of the fixed costs as a gross margin driver. Would you say that the fixed costs are the same in absolute levels as last year? This is my first question.

I would say, it's actually slightly higher due to our investments in tech and also the online growth with part of that ends up in the COGS.

Okay. That's good. And also on the big geographical mix changes here year-on-year, would you say that, that has been a positive or a negative for your group profitability?

It goes both. Yes, it's difficult to say. We obviously see that the U.S. has taken a big share now with the quick recovery and then we have other markets having a more slow recovery. So it's -- we haven't specified the profitability impact on the sales part.

Okay. But let's say, if you have the other way around if the big markets in Europe had a big growth rates will the profitability to be higher or lower than what you reported?

I see where you're getting at. But sorry, we don't give the mix effect. Sorry, Andreas.

Okay. And lastly, can you give us some update on the Treadler initiative, what has happened since you launched that a year ago or so?

Well, we're still working a lot with the business plans within Treadler. Of course, having a lot of discussions also with external partners or potential partners. But we have also refined -- as you always do when you start something new, refined the whole business plan and the whole offering, but it's still about us opening up our supply chain and selling certain services then to other actors in a belief that, that will also make the whole industry more sustainable since we have such a long experience in working with our partners on making sure that, that is the direction for the future.

Do you have any contracts as of now?

Yes.

Your next question comes from Richard Chamberlain of RBC.

Yes. A couple of follow-up questions, please, on the margin outlook. First of all, could you just comment on the overall industry pricing environment? We are seeing quite a few chains struggling. I guess there's a -- it seems to be a bit of a polarization in performance in the sector. How do you see the overall industry pricing environment? And could that be helpful for gross margin in the second half?

Well, again, as we said last time, of course, after such an extreme situation like this, with imbalances in supply and demand, there will be volatility in the wake of the pandemic so this is very much expected. But again, we have a long experience. I think we've proven that we can navigate through this in a good way, and we don't see any drama in this going forward. And I think we have a big advantage of our big global scale, our efficiency, our speed and our long-term relationships that we have with our partners.

So okay, Nils. And my second one is on the impact from continued strong online and home delivery sales. Is that having a positive effect on the gross margin structurally, but also raising OpEx expenses? I appreciate that obviously the business is getting a lot more integrated these days. But how is the impact of much stronger online sales during the pandemic impacting the gross and operating margins?

Yes. Again, I think it's important to see the integrated business model of the omni. And again, the customers clearly show us that they appreciate to shop in both channels, and we see that the channels they complement and strengthen each other. That's number one. And if you break it down per channel, again, obviously, in a year like this, it's -- the online channel has been very profitable, whereas the store channel has been less profitable you see what I mean. But as things normalize again, we should see more normality. But I think the mix that we have is very good for profitability and for growth, but most important for our customers.

[Operator Instructions] There are no further questions coming through on the line. Please continue.

Okay. Then we say thank you all very much for participating in the conference call, and we wish you all a very nice summer.

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