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Edited Transcript of HM B.ST earnings conference call or presentation 3-Oct-19 7:00am GMT

Q3 2019 H & M Hennes & Mauritz AB Earnings Call

Stockholm Oct 15, 2019 (Thomson StreetEvents) -- Edited Transcript of H & M Hennes & Mauritz AB earnings conference call or presentation Thursday, October 3, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jyrki Tervonen

H & M Hennes & Mauritz AB (publ) - CFO

* Karl-Johan Persson

H & M Hennes & Mauritz AB (publ) - CEO, President & MD

* Nils Vinge

H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise

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Conference Call Participants

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* Anne Critchlow

Societe Generale Cross Asset Research - Equity Analyst

* Charlie Muir-Sands

Exane BNP Paribas, Research Division - Research Analyst

* Daniel Schmidt

Danske Bank Markets Equity Research - Research Analyst

* Fredrik Ivarsson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* James Robert Grzinic

Jefferies LLC, Research Division - Equity Analyst

* Miguel Medina

JB Capital Markets, Sociedad de Valores, S.A., Research Division - Research Analyst

* Nicklas Fhärm

SEB, Research Division - Country Head of Sweden Research & Analyst

* Niklas Ekman

Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst

* Rebecca Anne McClellan

Grupo Santander, Research Division - Equity Analyst

* Richard B. Chamberlain

RBC Capital Markets, LLC, Research Division - MD of Consumer Retail

* Simon William George Irwin

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's 9-month report for 2019. (Operator Instructions) I would like to advise you that the conference is being recorded today on Thursday, the 3rd of October 2019.

I would now like to hand the conference over to your speaker today, Karl-Johan Persson, CEO. Please go ahead, sir.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [2]

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Hi, everyone. Thank you for joining us today. I'm very pleased to welcome you all to this conference call about H&M Group's third quarter and 9-month results for 2019. With me today is our CFO, Jyrki Tervonen; and our Head of Investor Relations, Nils Vinge. You will find the 9-month reports on hmgroup.com, Investor Relations. And before we start Q&A session, I will give a short summary about the quarter and current developments.

We continue transforming our business to meet customers' ever-increasing expectations. Well-received summer collections and increased market share clearly shows the customers are appreciating our efforts. The positive development of more full-price sales and reduced markdowns continued in the third quarter, contributing to an increase of 26% in operating profit.

Looking at sales numbers in the quarter. Total sales increased by 12% in Swedish krona and 8% in local currencies. Growth was driven by both physical stores and online, and we had a very strong increase in online sales of 30% in Swedish krona and 25% in local currencies.

Customer focus is our highest priority, and activity levels related to our transformation work remain high throughout the H&M group. We continue driving change through our strategic focus areas, and we have gone through these before, but these are the -- these are to create the best customer offering for all our brands, which includes investments in the assortment, in physical stores, our online stores and the integration of stores and online. It is to make sure that we have a fast, efficient and flexible product flow, to make sure -- or to secure a stable and scalable infrastructure, our tech foundation and to add growth by expanding through physical stores, online stores and digital marketplaces.

So to summarize, we see that our ongoing transformation work is clearly having effect. The new season has also got off to a promising start with a positive reception for our early autumn collections. Sales in local currencies increased by 8% in September.

Looking ahead, we remain humbled considering the rapid shift in the fashion retail world and the challenges it brings. Our transformation work will therefore continue at a fast pace in all parts of the company, included continued upgrades in the supply chain. We are convinced that this will contribute to positive development for the H&M group for many years to come.

Thank you. And now we are happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Charlie Muir-Sands from Exane BNP Paribas.

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Charlie Muir-Sands, Exane BNP Paribas, Research Division - Research Analyst [2]

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I've got 2, please, to focus on. The first is related to markdown. You clearly overachieved against your ambition for Q3. You haven't given any indication in the statement on Q4. I wondered if you can elaborate on whether you think there's still much or substantial markdown opportunity to come in, in the fourth quarter or indeed into the next financial year.

And then secondly, just on the operating cost side, it's great to see you delivering some operating cost leverage, but you clearly made reference to your ongoing transformation work. I just wonder whether you envisage a time when we might start to see some of those cost-related transformation perhaps coming back out or getting leveraged more substantially.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [3]

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Yes, thank you. If we talk about the markdowns, we have seen an improvement through the year, which is good and in line with our expectations, and it's showing, I mean, results from the work that we do. Over time, we believe there's good potential to continue to improve with all the initiatives we have related to the supply chain work, improved collections and a lot of other things. The big potential lies in the bigger reduction quarters, quarter 1 and quarter 3. And then for quarter 4, I think it's too early to say; good start in September, but we still have October and November to go. So over time, we believe in further improvements, biggest potential in quarter 1 and quarter 3.

When it comes to the OpEx, we have a good cost control, but at the same time, we're having high activity level. It's necessary to secure a long-term development for the company. And we believe we will have a -- or we will have a continued high activity level going forward, so roughly at the same level for quarter 4 and at the high level for next year as well, but we don't know what -- exactly what level.

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Operator [4]

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Your next question comes from Daniel Schmidt from Danske Bank.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [5]

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Another question on the gross margin. When you reported Q4 last year, you incurred extra costs related to the implementation on your logistic systems and also a negative year-end effect and the upcoming transitional logistic systems in Germany of SEK 560 million, which most of that related to COGS. Are you seeing any extra costs sort of repeating itself also going into this Q4? Or how should we view those extra costs?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [6]

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Yes. Thank you. There are many, many factors, as you know, affecting the gross margin. Normally, we comment on these big external factors, currency being a big one, especially now. And these external factors, currency, raw material prices, transport prices, capacity and salaries are roughly at the same level as they were for purchases made for Q3, at the same level then for purchases made for Q4. And then as you said, we had some extraordinary costs last year that we communicated, so year-on-year compared to 2017, they stood out. But this year, we have a higher activity level or planned activity level, so roughly at the same level as the year before.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [7]

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All right. Could you say anything -- when you talk about sort of transformation and extra costs and sort of a high level going forward as well, could you say anything about the sort of where we are in terms of maturity in many of these projects concerning AI or logistics or tech, which have been driving costs a lot? Are we sort of halfway through? Or is there any way to quantify for us where we are in those stages?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [8]

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I think it's very hard then for us. Of course, we have a plan for the coming years, but the activity level will remain high. And I think these are planned activities, really good activities, necessary activities that will help the company for many years to come, and I don't think that will stop. Some of the extra activities for last year were non-planned. We had to put in extra resources to tackle some of the issues that we had with the implementation of the new systems, but there we have made improvements. We're seeing efficiency gains. And then at the same time, we're investing in new things. So I know it's long answer, but it's hard to say to give an exact level or timing.

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Daniel Schmidt, Danske Bank Markets Equity Research - Research Analyst [9]

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You did comment in connection with the Q2 call, you said that sort of SG&A costs are elevated, but looking sort of into the future, they will come down in terms of sort of year-on-year growth. Now it sounds like it's a little bit more sort of postponed into the future.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [10]

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Well, I think there is potential that they will come down, but the activity level will remain high. And what I'm saying, I think it's hard to give an exact timing. We have tried to do that before, but there's so much uncertainty, and I think to give an exact date on when things will happen is hard. I think there is potential that they will come down in relation to sales, yes.

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Operator [11]

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Your next question comes from Fredrik Ivarsson from ABG.

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Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [12]

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Two questions from me as well. Firstly, you are replacing the logistics systems in China during the end of this quarter. Just curious whether we should expect any significant extraordinary costs due to this like we did last year in Europe and the U.S.

And second question is on Germany. You're now live with the new online platform in that country as well. That was the last country that you did. And I'm curious to hear what you have seen in terms of improving the services there, i.e., have you -- or are you where you want to be in terms of deliveries, also the return policies and everything that comes with the new platform?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [13]

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Yes. When it comes to the first question, China, I mean we did Spain successfully, which helps in our confidence that we will transition China in a good way, so hopefully, that will go well. And we are putting in extra resources to secure a good transition, so some extra costs are related to that preparation work. But we are confident that we will do it in a good way.

And when it comes to the new platform in Germany, we're happy that we did the transition. Obviously, that will give the customers a lot of benefits now and also over time. So that's a good, stable and -- a good, stable platform that we can build from, and then we will add new good things for customers over time. So we're seeing some improvements already.

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Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [14]

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A quick follow-up on that one. So you're not really where you want to be in Germany yet?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [15]

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No. In -- not in any market. I mean, because we have a lot of activities that will give improvement for the customers over time, so we see a lot of potential to improve. And also, when we launch a new platform, new logistics systems, things are not perfect from day 1. It's often a so-called J-curve, and that we can see in Germany as well. In the beginning, we had some problems with deliveries, delivery times, delivery accuracy, but that's improving and getting up to a much better level, but we can improve from this level as well.

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Operator [16]

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Your next question comes from Rebecca McClellan from Santander.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [17]

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Could you please tell us, of the sort of constant currency sales growth you've had in 3Q and in September, what the boost to that is of the improved full-price sales?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [18]

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Sorry, can you -- we didn't hear you that well. Can you repeat the question?

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [19]

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Of your constant currency sales growth in 3Q and in September, what contribution comes from the full-price sales improvements?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [20]

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Sorry, go ahead, Nils.

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Nils Vinge, H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise [21]

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Well, as you know, we don't quantify it. But I mean, clearly, there has been, as we state again, continuously improved full-price sales and less markdowns, but we don't comment on the mix. Sorry.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [22]

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And that's a similar dynamic in September than in 3Q?

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Nils Vinge, H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise [23]

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No, not really because we don't want to comment on markdowns in Q4 yet. It's too early.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [24]

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Q3 is bigger reduction quarter as well.

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Operator [25]

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Your next question comes from Simon Irwin from Crédit Suisse.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [26]

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Congratulations on a great quarter. A couple of questions for you. Firstly, can you just talk a bit about price investments? It was this time last year with autumn/winter that you signaled an increase in price investment. Has that annualized? And should we kind of think about that not continuing? Or will that continue through autumn/winter?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [27]

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We -- maybe a vague answer, but it's -- we will continue to invest in the customer offering, I mean, improved quality, improved prices. Some of those investments will come from our efficiency gains that we pass on to customers, and sometimes, it will be affecting the margins. So I think, yes, it can be a combination. So we will continue to invest. And the most important thing for us is to look at our business idea to have the best combination of fashion, quality, price and sustainability, and then we have to benchmark us against the customers' expectations and us against our competitors in every market and follow that. So over time, we will continue to invest.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [28]

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Okay. And just in terms of overall stores, as now you're adding -- still adding reasonable number of stores but reducing a lot, and the net number is a pretty small number, it's quite hard to ascertain the change in space for your business. Can you give us a sense about the relative size of stores being closed relative to the size of stores being opened?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [29]

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It's -- I mean, our whole work with the portfolio -- the store optimization of the portfolio includes, I mean, rightsizing stores, so some stores we are making smaller, some we are making bigger. Stores we close can actually be a mix of bigger stores and average-sized stores, smaller stores, so it's hard to say a difference between those and ones that we have and the ones that we open.

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Jyrki Tervonen, H & M Hennes & Mauritz AB (publ) - CFO [30]

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But roughly, so far, the closing of new stores in average, they are more or less the same size. But as Karl-Johan said, it could differ on expanding markets. We open flagship stores still and closing down smaller. But roughly, in space, it's the same.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [31]

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Yes.

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Nils Vinge, H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise [32]

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And it's not so much size that matters, Simon, it's more about the profitability and how it fits in, in the total picture.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [33]

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And also the square meter selling, we're expanding more in emerging markets and closing down stores in more established markets, as Jyrki said.

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Operator [34]

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Your next question comes from Anne Critchlow from SG.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [35]

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We've been reading quite a bit in the press about H&M's lease negotiations in the U.K. I'm just wondering if that could lower -- if there's lower rents, could next year have a noticeable impact on the cost line from our perspective in the modeling?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [36]

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We have quite -- we have a big possibility. A lot of stores comes up for renegotiation next year. And then in many markets, we believe the rent levels are too high given what's happening in the retail market. So I mean, that's one of the reasons why we are a bit more cautious when it comes to opening new stores, why we have revised goals. And yes, so we believe rents should come down in many markets.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [37]

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And should we see that in the operating cost line? Will it have a noticeable impact from our perspective in modeling?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [38]

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Yes. It's hard to give an exact figure, but we believe there's potential and the rents should come down. And yes, rents would be part of -- yes, great.

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Operator [39]

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Your next question comes from Nicklas Fhärm from SEB.

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Nicklas Fhärm, SEB, Research Division - Country Head of Sweden Research & Analyst [40]

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I was just wondering if you could give us some idea of the magnitude of the price investments in gross margins in this quarter given that the share of markdown impact was actually higher than you initially thought, please.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [41]

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Sorry, we don't go into details on our exact investments. What we normally comment on are these 5 big external factors, and they had a big negative effect on purchases made for the third quarter.

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Nicklas Fhärm, SEB, Research Division - Country Head of Sweden Research & Analyst [42]

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Would you care to give us some hinge of the number of net new store openings that you plan for 2020 at this stage?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [43]

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Sorry, we're in the preparation, we're setting goals for 2020, so that's not finalized yet. So we will get back to that later.

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Nicklas Fhärm, SEB, Research Division - Country Head of Sweden Research & Analyst [44]

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Yes. Sure. And final question, if I may. About 1.5 years ago, you set an inventory target at the Capital Markets Day, I'm referring to, and obviously, a lot of things have happened since then. And I'm sure you have been contemplating how the sector has really been changing. And I was just wondering, do you think you can give us some update on sort of a new ballpark number for where you think inventory should be on a more normalized level where you are now 1 year ahead?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [45]

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We haven't changed that. We believe it's possible to go down that level that we've set during the Capital Markets Day in the range of 12% to 14% in relation to sales. We believe in further improvements in stock levels, but the hard time is put -- it's hard to put a time line on it. And so all the work that we have, a lot of the activities will help us achieve that, so we still have a belief in that.

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Nicklas Fhärm, SEB, Research Division - Country Head of Sweden Research & Analyst [46]

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Okay. That's very clear. One final small question. There's a quite strong cash flow in the period, and one of the points sticking out perhaps is, of course, the change in current receivables, in working cap, and I was just wondering if you could touch on that briefly, please.

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Jyrki Tervonen, H & M Hennes & Mauritz AB (publ) - CFO [47]

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Yes. I think when looking at the group cash flow statement, I really think, as you mentioned, we have a quite strong improvement in free cash flow. I think it's up SEK 3.5 billion compared to last year. But trying to look into each row in the cash flow statement, it's very hard because there are so much currency effects affecting the rows. But in general, we are working hard with the working capital. And stock-in-trade, as we have mentioned earlier, is a big potential to release working capital. So we are comfortable that we are in the right direction. And the most important thing is that we start to deliver on top line and profitability but also to start to generate cash flow. So we think it's the first sign that we are in the right direction.

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Operator [48]

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Your next question comes from James Grzinic from Jefferies.

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [49]

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I had 2 quick ones, really. The first one, perhaps to try and put into better context the reception of this autumn/winter range, can you perhaps clarify what the comps looked like in September, October, November last year?

And my second one was around club membership. Can you perhaps update us on what that membership total is at now and whether you have changed some of the conditions, inducements, offers in some market that come with the membership sign-up?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [50]

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Yes. Good reception of the collections then for September. It's only a month. It's very hard to draw conclusions from a month. We're meeting, if I remember correctly, plus -- I think it's plus 6 in local currencies for the quarter last year. September was a bit weaker, so we will see. But I think it's a sign again that the work that we do, customers are appreciating that and the collections that we have had in the stores and online so far.

When it comes to -- what's your second question around the number of members in the loyalty?

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [51]

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Yes. In the club, what's the total now and whether you're changing some of the mechanics for some of the services offered with the membership?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [52]

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Yes, we're introducing new features all the time for members, and we have had a good growth. We went into the year with 30 million. I think we stand at just above 50 million today, so good growth. And customers are appreciating the club, so we hope to see further growth in that over the year.

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Operator [53]

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Your next question comes from Niklas Ekman from Carnegie.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [54]

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Yes. Just a quick follow-up then on September. Is there any tangible weather effect that's worth mentioning? I know in June, you had a very significant weather effect. Was there anything similar you've seen here in September?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [55]

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Yes, I think looking at our -- it varies from market to market, but many big markets for us had a positive weather effect especially in the first half of September, a bit weaker in the final week of September. So that's what I mean it's only a month, and it can change quickly, so we'll see. But when we look at all the markets, we still see that we take market shares, that we do well, and the customers are appreciating our collections.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [56]

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Okay. Great. And also on inventory, can you just comment a little bit on the difference here between inventory being down 1% in local currency and up 9% in SEK? I think when you look at the currency translation effect, they are significantly smaller than 10%, so how come you have such a big discrepancy between SEK and local currency?

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Jyrki Tervonen, H & M Hennes & Mauritz AB (publ) - CFO [57]

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Yes. As you mentioned, it's a combination of translation effects. The Swedish krona is depreciating against our portfolio of currencies, but there are also some accounting transactional effects, which is causing quite big currency effect. And it's connected to that we hold 50%, 60% of our stock in GBC AB, a Swedish company, in Swedish krona, so that will give a quite big effect as the Swedish krona has really depreciated against the U.S. dollar.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [58]

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Okay. And then coming back to OpEx growth, I'm trying to understand here the acceleration in OpEx growth. Obviously, if you look at store expansion, has slowed quite considerably from over 6% 1 year ago to under 3%. Comparisons, you had very strong OpEx growth last year, so I'm trying to understand why OpEx growth is continuing to accelerate when you're slowing stores and facing easy comps.

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Jyrki Tervonen, H & M Hennes & Mauritz AB (publ) - CFO [59]

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Yes. It's different things, but most, it's connected to the high activity level that we have had for several quarters, and that will continue for the quarters to come. So that's correct that, of course, the stores side is not expanding as earlier, but we are expanding with online quite heavily both when it comes to our newer brands but also with the H&M brand. So it's not only about the physical stores, it's also online growth that is increasing from year-to-year.

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Niklas Ekman, Carnegie Investment Bank AB, Research Division - Head of Consumer Discretionary & Staples and Financial Analyst [60]

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And in the past couple of quarters, you've had a lot of costs related to this transition of your logistics systems. Is that something that is still weighing a lot on costs? And is there a lot of these costs that are kind of temporary in nature? Or should we expect OpEx growth to remain at a quite elevated level for the next year or 2?

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Nils Vinge, H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise [61]

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Yes. Two questions in one there. As Karl-Johan already said, yes, we are still -- we still have a very high activity level throughout the company, and that affects both COGS and OpEx. But it's good, things we're doing as we see, and we see that they give results, so we continue, of course. When it comes to COGS, yes, we had some one-offs last year, but this year, we are -- it's again very high activity level. We are preparing for the transition in China, as we talked about. And we also have the big move in the U.K., where we're moving into big, new automated logistics center.

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Operator [62]

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Your next question comes from Miguel Medina from JB Capital.

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Miguel Medina, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Research Analyst [63]

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type="A" />

Just one question. It's regarding the sales evolution in the Spanish market. If I look at the data for the first half, it's fairly constant at 7%, 8% growth in local currency; and then in Q3, it's just 1%. I was wondering if this is -- because there was less sales activity -- discounts in Q3, or the macro slowdown in Spain or a combination of both. Just to see whether there was any specific reason for the performance in Q3.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [64]

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Yes. Sales activities -- less sales is one reason, so the performance in Spain is according to the plan that we have. And then if I'm not mistaken, I believe we're meeting a bit higher comps also in quarter 3 in Spain compared to earlier quarters in the year, so yes, it's according to our plan.

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Operator [65]

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Your next question comes from Richard Chamberlain from RBC Capital Markets.

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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [66]

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A couple of things, please, I'm interested in. On inventory, I wondered if you can comment on the inventory reduction in Q3, to what extent it was driven by any particular areas? For instance, in the U.S., I think you had an inventory backlog last year in the D.C. and New Jersey. I'm just trying to get a sense of how much that inventory improvement is one-off or more of an underlying trend.

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Nils Vinge, H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise [67]

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No, this is -- this should not be a one-off. This is part of the transformation, the improvements that we are doing. And we expect the improvements of the inventory to continue.

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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [68]

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Okay. And then my other one was just on the high activity level that you mentioned in the statement. You say that you are doing some more work on the supply chain. Wonder if you can just give us a bit more color on where you are with that and talk about the upgrades that you're making and potential impact on gross margin in the fourth quarter if you can.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [69]

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Yes. Those -- we have listed some activities in the report, but those are only a few of the many that we have, and the supply chain activities is just one area. But as Nils mentioned before, one part is preparing for the China transition, so a lot of preparation work going into that. And then we also we have the big new warehouse in the U.K. [As Nils pointed to this,] fully automated, big, we believe, will generate, I mean, great things for us as a company. But obviously, a lot of investments and a lot of cost goes into that as well. So those are only 2 examples within the supply chain work, and the supply chain is only one area within the total activity portfolio.

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Jyrki Tervonen, H & M Hennes & Mauritz AB (publ) - CFO [70]

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And one have to remember also we're, for instance, in the U.K. opening up Milton Keynes. At the same time, we have to run the old warehouses at the same time. So we have double cost during quite a long, long time, so that's, of course, a kind of one-off during second quarter.

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Richard B. Chamberlain, RBC Capital Markets, LLC, Research Division - MD of Consumer Retail [71]

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Okay. So one-off cost, yes. And will that U.K. warehouse be the first mall-integrated warehouse that H&M has that can serve online and stores?

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Nils Vinge, H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise [72]

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Yes, we are on this journey, and we have more -- we have -- gradually, we are going more omni also in the supply chain, yes.

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Operator [73]

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Your next question comes from Anne Critchlow from SG.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [74]

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Just a follow-up from me, please, on store refurbishments. I know that you had a new program of store renewals. I'm just wondering if that's accelerated and whether we need to consider any disruption to trading in stores.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [75]

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So we have a program, the look of the store, formats of the store, rebuilding stores in different versions. So we have a program for that and a plan for it. And we will see some more refurbishments in the next year. So we're confident with the plan that we have and that it will generate good results.

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Anne Critchlow, Societe Generale Cross Asset Research - Equity Analyst [76]

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Okay. And do you think there will be disruption due to areas of the store being closed while that work goes on?

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [77]

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Yes, obviously, when rebuilding a store, there are some disruptions to that, but that's in the plan, the refurbishment time, how much that will cost. But we also see a big upside, of course, from the stores, selling-wise, profit-wise. So everything is in the calculation.

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Operator [78]

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Your next question comes from Simon Irwin from Crédit Suisse.

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Simon William George Irwin, Crédit Suisse AG, Research Division - Director [79]

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Just a quick follow-up on tax. I know that generally, 4Q, the tax rate tends to bring full year level down. How should we think about overall tax rate this year?

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Jyrki Tervonen, H & M Hennes & Mauritz AB (publ) - CFO [80]

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Yes. Normally, we are using 23% in Q1, Q2 and Q3. And then the final calculations, it's done in connection with Q4. We still believe that the tax rate will be between 22% and 23% when we end the year.

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Operator [81]

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(Operator Instructions) And your next question comes from Rebecca McClellan from Santander.

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Rebecca Anne McClellan, Grupo Santander, Research Division - Equity Analyst [82]

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Yes. Just a quick one on inventory. Can you sort of give us an idea as to how integrated inventory is across the 2 channels? And against your goal of 12% to 14% over the medium term, how much of that is related to improved inventory integration?

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Nils Vinge, H & M Hennes & Mauritz AB (publ) - Head of IR/Franchise [83]

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Yes. As we've been speaking many times before, virtually, of course, it's integrated. But basically, it could be split for various reasons. And in this phase where we are right now when we are still expanding online, new markets or expanding online, the share of sales in online is slightly higher than for the stores. But over time, that should normalize.

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Operator [84]

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Thank you. There are no further questions at this time. (Operator Instructions) We have no further questions, so I would like to hand you back to your host for closing remarks. Please go ahead.

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Karl-Johan Persson, H & M Hennes & Mauritz AB (publ) - CEO, President & MD [85]

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

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Operator [86]

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That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.