H & M Hennes & Mauritz AB (publ)

Karl-Johan Persson – Chief Executive Officer Nils Vinge – Head of Investor Relations Jyrki Tervonen – Chief Financial Officer

Charlie Muir-Sands – Deutsche Bank London Anne Critchlow – SG London Rebecca McClellan – Santander London Chiara Battistini – JPMorgan Simon Irwin – Crédit Suisse London Niklas Ekman – Carnegie Stockholm Adam Cochrane – UBS London Andreas Inderst – Macquarie London Richard Chamberlain – RBC Capital Markets Nick Fhärm – SEB Equity Research Geoff Lowery – Redburn London Charles Allen – Bloomberg Intelligence London

Hi, everyone. Thank you all for joining us here today.

You are very welcome to this telephone conference on the occasion of the H&M Group’s nine-month and third quarter results for 2017. With me is our CFO, Jyrki Tervonen; and our Head of Investor Relations, Nils Vinge.

I will start with a short introduction, then Nils will take us through the financial details. Then I will continue with the information about some important development areas for the H&M Group and our future.

And after that, we’ll be happy to answer your questions. You will find the slides to this telephone conference on hm.com.

So I will start with our sales and some words about the markets. In the third quarter, sales, including VAT, increased by 5% to SEK 59.4 billion.

In local currencies, sales grew by 4%. And as we all know, fashion retail is going through a big shift, with increased digitalization and rapidly changing customer behavior where more and more shopping is moving online.

And like most companies, we see this in our business as well. Our online sales continued to develop very well.

Growth is fast and profitable. And in some established markets, online already represent 25% to 30% of sales.

Even though we have good online growth, it did not fully compensate for the decline in footfall to stores in several of our establish markets. And therefore, total sales so far this year have not reached our targets.

And this, we are, of course, not happy with, and one consequence being that we entered – and this also being that we entered the third quarter with inventory levels that were too high. But thanks to a more aggressive summer clearance, we managed to improve the inventory situation, and this contributed to a good start for our autumn collections, even though we see some slowdown in sales towards the end of September.

But as always, sales should be seen over a whole season. Looking at our other brands, COS, & Other Stories, Monki, Weekday and H&M Home, sales have continued to develop very well this year.

And in the third quarter, we also launched a new brand, ARKET, that has been very well-received, and more about that in a while. But now I will hand over to you, Nils.

Thank you, Karl-Johan. Looking at some profit numbers.

Gross profit was SEK 26.4 billion in the third quarter, more or less in line with last year. This corresponded to a gross margin of 51.4% compared to 54% in the third quarter last year.

Due to our more aggressive summer clearance, markdown costs increased by 280 basis points as a share of sales. Looking at the market condition for external factors, such as capacity, transport costs, salaries among suppliers, currencies and raw material prices, it was slightly negative during the purchasing period for the third quarter compared to the corresponding period the year before.

And for the purchases made and we’re doing for the fourth quarter ‘17, the overall market situation for the external factors is also considered to be slightly negative. But as the U.S.

dollar weakens, purchasing conditions become more favorable. And for the first time in a couple of years now, we now have a tailwind when it comes to sourcing currencies.

Looking at selling and administrative costs. Cost control in the group remains very good.

In the third quarter, SG&A increased by 6% to SEK 21.4 billion. The handling of substantially larger clearance volumes increased store hours, which made SG&A increase somewhat more than sales.

And for the nine-month period, SG&A increased by 8% in SEK and 6% in local currency. For the third quarter, profit after financial items was SEK 5 billion.

And in the nine-month period, profit after financial items amounted to SEK 15.9 billion compared to SEK 16.6 billion last year. Net profit was SEK 3.8 billion in the third quarter, equaling earnings per share of SEK 2.32 compared to SEK 2.91 last year.

And looking at some key data. Stock-in-trade on the 31st of August amounted to SEK 33.6 billion, an increase of 8% in SEK, but currency adjusted, the increase was 4%.

And cash flow from current operations was SEK 16.2 billion compared to SEK 17.6 billion. Investments in terms of CapEx totaled SEK 8.6 billion compared to SEK 9.3 billion last year.

And liquid funds amounted to SEK 9.7 billion compared to SEK 8.7 billion. Return on equity was 33.3% rolling 12 months.

And now back to you, Karl-Johan.

Thank you. We have a portfolio of several strong brands, each with their own unique customer offering and global appeal and with great potential for future growth.

The most important work – part of our work ahead is, of course, to continue developing the assortment of each brand. But we are also focusing on the following important areas: one is seamless shopping; then also to develop and broaden the assortment – develop the online store and broaden the assortment online; how to expand and optimize the store portfolio; our product development and supply chain; and our new brands.

Let me explain a little bit more about these areas and to start with seamless shopping. We have an omni-channel strategy, meaning that we are integrating our stores and digital platforms in order to create a seamless shopping experience across our channels.

And after many years of investing in infrastructure, we are now able to implement a lot of good things for our customers. We are rolling out and improving omni-features, such as click & collect, scan & buy, online returns in stores, mobile payments and many other services.

Looking ahead, we estimate that online sales of the H&M Group will grow by at least 25% per year. And based on the potential we see, we will broaden our online assortment considerably in the coming years.

In parallel, we continue to develop the functions and capabilities of our online store, and this includes, for example, navigation, improved checkout and personalization. And we also see that our digital features, such as image recognition, #HM Gallery and My Style, are being well-received by customers.

To really make shopping more convenient for our customers, we are putting a lot of work also into improving delivery services. We are improving standard deliveries.

We are introducing next-day deliveries in more markets. We are testing same-day deliveries, testing 1-hour deliveries and also time-slot deliveries, which we have rolled out in some markets.

In parallel to developing our online stores, we are also testing new visual expressions and digital solutions to create a more inspiring and seamless experience in our physical stores. In a growing and rapidly changing market, we see many opportunities for future expansion.

Our plans include expanding digitally as well as through new stores and by – but also by optimizing our store portfolio. We will also expand with new brands and concepts as well as to new markets.

This year alone, we are opening eight new online markets, which means that we would be in 43 H&M online markets by the year-end. And expansion will continue to more markets next year, including the launch of H&M online in India.

And further ahead, we plan to offer online shopping in all our store markets and in other markets too. Our focus for opening new stores is in new markets and growth markets where we continue to see growth potential.

So far this year, H&M has successfully entered four new markets, and that is in Kazakhstan, Colombia, Iceland and, most recently, Vietnam. All these openings have been very well-received.

And in Vietnam, for example, more than 4,000 customers lined up for the opening in Ho Chi Minh City, and the store has had a very good development so far. In our more established markets, we are working even more actively to optimize our store portfolio through renegotiations, rebuilds, relocations, adjustments of store space and store closures.

In total, we plan for around 90 store closures, which will give a net addition of 385 new stores for the H&M Group in 2017. The H&M Group has grown quickly, and the world around us has become increasingly complex compared to a few years ago.

And as a consequence, we must continue to change our internal processes to become faster, more flexible and more efficient. And therefore, we continue to invest in new technology such as advanced analytics.

Advanced analytics and other tools will enable us to improve in areas such as quantification, allocation of products, pricing, design and personalized communication. Digitalization will also speed up our buying, allow us to shorter lead times and connected to that, increased precision in our assortment planning.

As a result, we see potential to reduce the inventory level going forward. And the effects, however, won’t come overnight as this work will bear fruit gradually.

An important part of our growth strategy is to build global brands. The H&M Group has, with our most recent addition, ARKET, now eight brands.

Each brand has its own unique identity, is growing strongly and has great potential for the future. With ARKET launched late August and online in 18 European markets and with its first store on Regent Street in London, followed by stores in Copenhagen, Brussels and a second store in London, and we are very pleased with the response, and customer reception has exceeded our high expectations.

And already next year, we are planning for the launch of yet another brand. With that and before we move over to the Q&A session, some words to sum up.

With all the initiatives that we are carrying out at a fast pace, we are in a good position to capitalize on the opportunities created by the shift our industry is going through. And in February next year, we will arrange a Capital Markets Day where you will meet more people from our teams, get a closer look on the various parts of our business.

And we are very much looking forward to telling you more about our initiatives and how we will strengthen our position going forward. And we hope that this opportunity will leave you with the same positive view on the future as we have.

Thank you. And now we’re happy to take your questions.

Good morning, gentlemen. I have four questions, but I will give them one at a time, and they’re all linked, so I hope you’ll forgive me.

The first one is, you have further lowered your gross store opening guidance for the year by about another 25 stores. I wondered whether you could say whether that’s phasing or whether you’ve taken a more cautious view on one market or another?

And the second related piece is whether you could remind us or revise us on your CapEx guidance for the year and whether that has changed as a result. And thirdly, when we talk about specific countries, it looks like your China sales performance has been particularly weak.

Has that been a component in tempering your expansion plans?

Yes. Well, when it comes to growth on new stores, as I explained earlier, we still have a strong belief in expanding with physical stores.

The new stores that we are opening are doing well, profitable, good payoff times and good conditions. So we will continue to expand the physical stores, but the main focus will be on new markets and growth markets.

In more established markets, especially now with the shift going on in the industry, which is quicker than I think most people anticipated, we have to be even more disciplined with the expansion and also to work more actively with the existing store portfolio in some of the existing markets. So we will work, as I said, very actively with the existing portfolio when it comes to renegotiations, closures, relocations and rebuilds and so on.

So we have still a strong belief, but we have adjusted somewhat during the year. Yes, do you want to take CapEx?

Yes, CapEx, the CapEx guidance is in line with what we said in connection with the Q2 conference call. So for the year 2017, it’s somewhere around SEK 13.5 billion.

And when it comes to China, we have almost 500 stores in China. It’s a huge country, more than 1 billion people living in China, an economy that’s growing, so most is still ahead of us.

But the performance, as we have a strong belief in the country also with physical stores, but the performance during the year has not met the goals that we set up before the year. But we know what to do and we will improve that.

What in particular do you think has not performed well in China? Is it the price points, for example?

We’re looking into various parts. I don’t want to go into all the things for competitive reasons, but we know what to do.

I think the market in China in general also has had a challenging time. So we see the development of – the shift to online is also clearly visible in China as well.

But we know that there are things that we could have done differently as well. The good part is that we know what to do.

It’s not a major thing, and that takes a long time to correct, but we are correcting it.

Thanks very much. Good morning, everyone.

I’ve got two questions. My first question is about all the various things you’ve been testing, for example, same-day delivery, that kind of thing.

Would you consider launching a subscription service, for example, pay EUR 20 and get next-day delivery free all year, that sort of offer?

Absolutely, we are testing a lot of things, and that’s one of the things we are testing as well.

Okay. And then the second question would be, if you offered free delivery, free standard delivery and free returns in all markets, would you be able to make the same margin online that you make in the stores at the moment?

I don’t want – we are investing a lot in many initiatives connected to our online business. I don’t want to go into all the details and all the things that we have in our plans for competitive reasons.

We have very healthy margins today in our online business, and we will have so going forward as well. But exactly what kind of improvements we make for the customers for the coming year, we keep for ourselves.

Sorry, we can’t say more about that now.

Yes. Good morning, can you hear me?

Yes.

Yes. Hi there.

Good morning. Just a couple of questions.

Firstly, in terms of your net openings, 385 versus your previous guidance. So are you sort of compensating for the fewer stores by perhaps opening larger stores, so it’s basically there’s going to be a reducing of space contribution going forward?

You mean for 2018 and beyond?

Yes. I mean, is there some way, because you’re opening larger stores, so therefore, your space numbers don’t really change as much as your opening numbers?

I think it will be a combination. Some stores will be extended; some stores, we will adjust to a smaller size; some stores, we will close; and some stores, we will move.

So it’s a combination of that...

So your overall space isn’t compensating for the change in the number of openings?

No.

No, I think – yes, Rebecca, if I may add, I think space contribution for the stores will fade or we will not increase as much. But on the other hand, we see the shift going to the online will take a bigger part.

That’s what we see.

Yes. And my second question, please, is just in terms of inventory budgeting.

You’ve obviously got your inventory pile down. I’m assuming that the budgeting – you’re still sort of budgeting for a positive season now.

Are you having a tighter budgeting for the fewer stores, et cetera? Can you just talk to us about that?

Yes. If we look at the inventory level now, it dropped by 4% in currency adjusted terms.

And in relation to the sales trend, it’s at a healthier level compared to the same period last year. Also, when we look at the commitments that we have now, it’s down by double digits compared to the same period last year.

And as we have explained before, we are working a lot with our supply chain and internal buying processes to make sure that we are more flexible, that we can shorten the lead time by a lot. So that isolated will mean that we see – means that we see great opportunities to come down in leaner inventory levels.

But again, it depends on many, many different factors. But we see good opportunities there.

So did you say that commitment was down double-digit levels? Is that right?

Yes, exactly, which means that we have more open to buy and more flexibility in the season.

Okay. Thank you.

Good morning. Thank you very much for taking my question.

The first question I have is a follow-up on the inventory position you have. Are you still envisaging more promotional activity further going into Q4 to take it down further?

And the second question I have is, you have mentioned that you are going to have FX tailwind for the first time in a couple of years now in next year. Are you planning to bring back the...

Can you repeat the second question? Sorry, I’ve missed...

Yes, sorry. You have mentioned that you’re going to have now into next year FX tailwind for the first time in a couple of years.

And I was wondering whether you’re planning to reinvest part of those back in the business, either in pricing or in quality with suppliers? Or we should expect those to come through next year?

Okay. When it comes to inventory levels again, we are at the healthier position this quarter compared to the same quarter last year.

Exactly how we will – still more than two months to go in the fourth quarter and too early to say anything about reductions in the quarter. When it comes to – we normally comment on five big external factors that will affect – that affects the gross margin.

It’s the currency, it’s raw materials, it’s transports, wages and capacity. And those combined, if you look at those isolated, they will have a positive effect on the buys that we were doing for quarter 1.

And – but exactly how then the gross margin is affected by other things as well, how we decide to act in many areas and exactly what we decide to do, we want to – again, for competitive reasons, we will not elaborate so much on that.

Thank you very much. And just to doublecheck and just to confirm, so you are not commenting on whether there’s going to be ongoing promotional activity into Q4 still and incremental?

No, it’s too early to say anything about reductions or price activities in quarter four.

Okay. Thank you very much.

Yes. Thank you.

Good morning, gentlemen. Just coming back on the inventory position, you talk about being able to run the business off a lower level of inventory going forwards.

You have historically run the business off around 100 days of COGS, and we’re now somewhere in the region of 120, 130. Do you think it’s realistic to get back to 100 days or less in the foreseeable future?

Hello, can you hear me?

Yes, I can hear you.

Right. Gentlemen, can you hear me now?

Can you hear us now?

Yes. I can hear now.

Yes.

Okay. We lost you after a couple of seconds, so please repeat your questions.

All right, let’s start again, shall we? So historically, you’ve run your business off around 100 days of COGS.

And now this year, you’ve been at 120, 130 level. Do you think you can get back to a level of 100 or less in the foreseeable future?

Yes. With all the initiatives that we have done and that we are doing connected to – I mean, we have reviewed the whole supply chain, how many distribution centers, the location of them, what to have for stores, what to have for online, what’s to be multichannel and so on, automatization of the distribution centers, RFID initiatives, investments in advanced analytics, the change in the internal buying processes and so on.

So we have a lot of initiatives connected to ensuring right products at the right of time in the right place. And all those combined, I’m convinced that we will come down at better inventory levels in relation to sales.

What the level is, it’s hard to say, but we believe that we can improve a lot from the levels that we’re seeing now.

Okay. And have you considered any more aggressive ways of getting the inventory position normalized, i.e., cutting out labels, pulping product or whatever, simply in order to get to – into a better position going into, say, spring/summer 2018?

I mean, we are always evaluating how to do it in a good way. We’re talking big steps now during quarter 3.

That was all worthwhile. We hope a big one because we went into the quarter with too high levels.

Now we are at the healthier positions, and then all the initiatives that I mentioned will gradually help us to improve the inventory levels. Then of course, it depends a lot on the selling as well.

And we have a positive view on ‘18, but we have to be humble as well. It’s a challenging market, and we haven’t – although we have grown, we haven’t really established these levels that we set up for 2017.

But we definitely believe that we will come down in inventory levels in relation to sales.

Okay. And without asking for too much information ahead of the Capital Markets Day, do you think you need to accelerate your CapEx on infrastructure around the business in terms of IT, logistics, et cetera, in a meaningful way going forward?

Or do you think you can carry out the existing changes at current levels?

I mean, look, at this time, we’re not commenting on total CapEx. That, we have to come back to.

But in those areas, we will continue to invest a lot in the prioritized development areas that I mentioned before. And a lot of that is connected to the digitalization, the online store, the broadening of the assortment and so on.

We are in a good position today. And with all the initiatives, I believe that we will be very, very well-positioned for the shift in the industry.

But at the same time, as we are taking a lot of initiatives and costs for that, I believe that we will have a strong financial result during 2018. And we are aiming for the ambitious goals that we have set up, of course, but we do different scenarios as well.

And even with more modest sales growth during the year, in line with what we have seen during 2017 where we believe we can do better than some, but even with that, we believe that we can have a healthy profit growth in 2018.

Great. Thank you very much.

Thank you, yes. I was wondering about the start of Q4 here, if you could in any way quantify the sales development.

I had expected that you would comment on the sales trend up until the results that you’ve usually done. And if you don’t want to quantify the exact number, I’m curious if you’ve seen any tangible improvement compared to the trend that we’ve seen year-to-date with growth rates of 4% to 5%?

Well, now we don’t release the monthly figures, and it’s – so we won’t comment on the monthly figures. But we said that we had a good start to the sales of autumn garments, and we had a good start in September.

And then, as we said, that we want to be transparent as well about the last three or two weeks that we see a somewhat slower development. But I mean, we’re talking about weeks here, so one shouldn’t really draw too much conclusions from two good weeks or 1.5 weeks of somewhat slower selling.

So we will comment on the quarter after the quarter.

Okay. I was just curious then about your comment that you should look at the sales overseas rather than individual months.

But of course, September, you’re facing very easy comparisons, and you had a very cold weather, particularly in the beginning of the month. And I mean, you’re facing much stronger comparisons in October, November.

So what makes you optimistic that you could see sales improving in the remaining two months of the quarter?

We’ll see. We’ll comment on the quarter when the quarter has ended.

So far this year, we haven’t reached the levels that we set for ourselves, although we are growing. It is a challenging environment.

But at the same time, we believe in the collections that the teams have developed for our brands. But let’s comment on quarter four when it’s done, the quarter.

Okay, that’s fair enough. I’m also curious about your opening plans for 2018 because I think you signaled after Q2 that you were looking at a same fairly high pace, but a little bit slower in absolute numbers compared to 2017.

Is that a view that you are reiterating, meaning that’s closer to 385 that you’re looking at for this year? Or do you see a more tangible slowdown in store rollout next year?

We haven’t set the exact numbers for ‘18, so it’s too early to say anything for that. We will, as I said before, have – the focus on new stores will be on new markets and growth markets.

And in existing markets, we will work very actively with the renegotiations, rebuilds, closures and moves of stores. So that’s the strategy.

And then we will have a big focus on continuing to broaden the assortment online and to expand with online stores. We have a very healthy online business, and it’s growing a lot.

And we see fantastic opportunities to continue to develop there as well. But we also believe in physical stores, as we said earlier.

Okay. And finally from my end, can you comment a little bit on the geographical split in the quarter?

When I look at your numbers, it looks like you had a bit of a slowdown in the Nordics and Northern Europe where you previously had good sales. China seems to continue to be weak, while the U.S.

sales have improved a little bit. Is this in line with the trend that you were seeing?

Yes, you see the numbers, so that’s right. It varies a lot from quarter-to-quarter.

But where we have seen the – where it’s been most challenging is really throughout the year, and also ‘16 is in many, many big markets for us in Central Europe. And also, the U.S.

market, although a little bit better in the third quarter, has been – it’s challenging for the whole market and especially connected to this shift. Fashion retail is growing, but it is more that the mass is moving online and as we see in the foot traffic to a lot of malls in many markets all over the world.

Okay. Thank you very much.

Hi, good morning. A couple of questions.

Firstly, on the composition of the stock. Have you managed to clear through all of the prior season garments during Q3, so the inventory you’ve got at the moment is all – or by and large current season stock?

Would you be able to quantify some of what you’ve maybe done in the quarter to give us some confidence that you’ve cleared through all of the old stock? And then secondly, how did you go about clearing the stock?

Was there an impact on sales growth in the quarter? Or do you manage to clear it through channels that meant that there wasn’t such an important loss of sales within your existing store estate?

Yes. Again, if we comment on the inventory levels, it’s not the healthier level, as I said, in relation to the sales trend.

The composition is good. It’s a lot of current stock.

It’s – compared to the same period last year, it’s slightly better composition. And then the commitments are down double digits, meaning that we have more flexibility to buy in-season.

When it comes to markdowns in quarter 3, we took bigger markdowns. That was planned, and we believed that it affected the selling also.

And of course, it costs extra to handle the amount of business that we sold. But it was – we thought it was the best solution.

Indeed, it was the best solution, and it sets us up in a better position for the future.

So in terms of that composition, would you be able to quantify what proportion of – usually, it’s slightly better. I was hoping with that much clearance, it would be a lot better.

Yes. I mean, it’s – we had a markdown last year also, so it’s at a good level.

We are satisfied with the composition that we have at the moment. So yes, looks good.

Okay. And the final one.

In terms of that open to buy that you’re talking about, is that a big change from where you were at this point last year? And what is the lead times on that open-to-buy product?

How quickly can you get it into store?

Well, it depends on what type of products. We have a big flexibility today, and we have worked a lot to shorten the lead times considerably from the year before.

So it’s not – we’re not there yet where we want to be in terms of getting all the benefits from all the initiatives that we have done, but we’re definitely improving.

Yes. And when you ask about the commitment at the same time last year, I can’t remember, I think it was more or less up 10% compared to 2015.

So now we are double digits down in the commitment. And last year, in the same situation, in Q3, the commitment was up almost 10%.

What I don’t understand, if you haven’t managed to reduce the lead times significantly yet, how can you leave the product open to buy and still get into stores in the same fashion? Did you not have to have a shorter lead time in order to lead open to buy for a later date?

We have shortened the lead times.

That’s exactly why we can have not more open-to-buys.

Okay. But you just got more to go here?

Yes, yes, yes.

That’s what I meant. Maybe I wasn’t clear.

We have a lot of improvements ahead of us, but we are gradually rolling out improvements in some of the investments that we have taken, but also the changes to the internal buying processes. But we have shortened lead times, and that’s why we have been more – why we have more flexibility and more higher open to buy this season.

Okay. Thank you.

Yes, hello everyone. Just a question.

I didn’t have the impression that you had one month of more than 10% sales, FX adjusted this year, including the current month. Is that correct, given you have a guidance of 10% at least in the medium term of annual growth?

Just wondering, your comment earlier when you indicated that you had a good start into September, but not yet at the level you would like to be. Maybe you can elaborate on that one.

Well, it’s right. If you look, we have our growth goal is 10% to 15%, so it’s an ambitious goal that we have communicated and set for ourselves.

So far this year, we are up by 7% in Swedish krona and 4% in local currency, so not near the goal we set up, although we are growing. So we’re not satisfied with that.

But we also have to acknowledge the fact that this is a very challenging market in many big markets for H&M. And – but then again, we know that we should have done better in some areas as well, and we have to be self-critical and learn from that and improve.

Yes, okay. And coming back to the previous questions on speed to market, can you elaborate a bit more?

I still miss kind of quantification how fast you can be at this stage, how relevant the in-season flexibility is and what your medium-term target is? Maybe you can give us a bit more snippets.

Well, I think it’s difficult to quantify. But again, it’s down to the things that I mentioned.

We are reviewing and changing many parts in the logistic network. We are present in 60-plus markets today, and we are selling in many – we are selling in physical stores and online stores.

And we have to make sure that we have a logistic network that is well setup for that. So we’re looking for the amount of the logistical hubs, the size of them, the location of them.

Automatization will help to improve to speed up the supply chain. And then we are changing our internal buying processes, so we’re changing that.

We’re stepping up production capabilities across the world to make sure that we can shorten lead times. And then we are investing a lot in advanced analytics.

That will mean that we can quantify with much more – much better precision and also allocate with much better precision. So all these things in combination will mean big improvements when it comes to better precision, more flexibility and speedier buying.

Where we will end up, it’s very hard to say, but we know it will improve.

Okay. And then a question on gross margins.

Markdowns – I mean, gross margin was down 260 basis points, markdown is 280. You also said that you had a slight headwind from FX and input costs.

So what was the positive in the third quarter?

Well, as you know, there are a lot of different factors driving the gross margin. And as you say, if you adjust for the markdowns, it was 20 bps or something, that’s pretty much in line with last year.

But it’s true that, I mean, if you look at the currencies at trade, it was slightly negative. But then, of course, it’s also how we negotiate and how we manage and, of course, how we design the products and the market, et cetera.

Okay. And you mentioned you are still working on broadening your assortment for the online offering.

How is it today compared to the physical store offering, maybe you can elaborate here as well, and what your targets are?

It’s roughly in line with the physical stores. Then obviously, the physical stores vary a lot in size.

We have some parts of the assortment that is only available online, and we have some parts of the assortment only available in the physical stores. But where we see the big growth in broadening the assortment will be online.

So we will broaden the assortment by quite a lot over the coming years online and for all brands.

Does it mean you will have more products online overall than offline?

Yes.

Okay, okay. Good.

Thank you.

Thanks very much. Good morning.

A couple of questions, please. I just wondered if you could comment on – or give us an update on your thoughts on RFID, potential development of RFID for H&M, likely benefits when that could be rolled out to the – across the estate, that’s the first question.

Yes. We have something that we have piloted now during the year with good results.

So we see good sales development in those stores. And we are – we’ll roll a global rollout during 2018.

We will not have all stores with RFID in 2018, but many stores, it will be rolled out to, and then the rollout will continue during 2019. It will help us to ensure that we have good size availability in stores.

It will also lead that we can – and at the same time, have less articles, less spaces in the stores, raising the quality of the stores. And it will also help in the whole supply chain, connected back to what we spoke about earlier, ensuring that we can have a leaner inventory level.

So RFID is one of the initiatives or one of the things we have invested into to make sure that we improve. So yes, one out of many very exciting things.

Okay. And just going back to the performance in China.

I wonder if you could just comment on the, specifically, on the online performance of H&M recently, whether you think you’re losing share, obviously not being on Tmall or another one of the big e-commerce platforms. And is that an opportunity going forward to develop the online offer much more?

Yes. We have an online store for H&M in China.

Online sales in total is developing nicely. But China is a special market.

Although it is doing well, it’s not – China online sales is dominated by a few players, as we all know. We are – it’s something that we are evaluating to team up or partner with some players or one or several players in China.

So we are evaluating.

Okay. All right, thanks very much.

Thanks operator, and good morning to you all. My first question is also relating to the inventory composition.

If we assume, as you’ve stated now repeatedly, that you’ve actually cleared inventories, and you say that the composition is better compared to where it were a year ago, I’m just still curious how – since inventory to sales levels are basically unchanged, does that imply that you’ve actually bought stock to be at the same level to generate a positive like-for-like towards your targets of maybe 2% to 3%, just as optimistic as you sort of always done? Is that the interpretation?

Is that why stock-in-trade is not down quite frankly?

Perhaps, you’ll care to look at it in the bigger context and then where we come from. If you look at the inventory development in the previous quarters, we were up 28% or something previously.

And gradually, we have taken it down. And of course, the markdowns activities had helped us come to a healthier level.

But we also, as Karl-Johan said, we’re not the one to be long. We still have huge opportunities here.

But it’s a good start. And also, don’t forget that it’s a snapshot of the amount of time at the end of August, and this is before the big season starts.

And of course, there’s a lot of outdoor garment, et cetera, with high ASP included in that. So the mix is healthy.

And most important, of course, [indiscernible] is the commitment. There is a huge difference compared to last year where we had a much higher commitment.

And now it’s in the other direction, and this is just the start. And this is the first really concrete results from all the work we’re doing when it comes to shortening the lead times, improving the logistics, supply chain, et cetera.

Yes, I appreciate that. But nevertheless, have you bought stocks in order with your – in line with your plans of growing like-for-likes to the tune of 2% to 3% as you always do?

Is that sort of still the underlying assumptions going forward?

We – I think there is a confusion here. We said we always plan for growth.

But that doesn’t mean that we always buy for growth because we have – this is a continuous process going on. And of course, with a more – the interesting thing with a much more open to buy is that the products – that’s why you can add in-season, and you don’t need to get stuck with products that you didn’t sell over the season.

That would surprise me because, I mean, you have, what, now eight consecutive quarters with negative like-for-likes. And you repeatedly stated the concerns from the online transition, what have you, and would just be surprising to see buying the same amount of stocks considering that outlook.

Can I also ask you, finally, on the U.S. dollar, which will be a main margin driver for the entire sector next year.

My question would be, what are your plans? Do you expect to be able to keep that gain in your own margins?

Or do you think that there are reasons to believe that because of the competitive situation of industry going into next year as well, some of that will have to be passed through to customers or someone else in the value chain, please?

Sorry, Nicklas, can you repeat that question?

Sure. Sorry.

So the U.S. dollar, I would assume, will be a main margin driver for you and for the sector as a whole in 2018.

Do you expect to be able to maintain that gain in your margins? Or do you expect, because of the competitive situation in the marketplace, that you would have to share some of that gain with your value chain or your customers, please?

Yes. It’s a little bit like the question earlier.

These external factors are favorable, which, of course, is good, then the gross margin depends on a lot of other things. Obviously, we look and work for efficiency gains in our sourcing and then the supply chain and in our work as well.

So that could be one factor also. And then we always look to improve for our customers also.

So it’s – I mean, it’s a combination of many things, and we don’t want to comment on the exact levels for competitive reasons.

And – yes, sure. And if the margin continues to go down, what would be sort of the base case if you have to choose between cutting dividends or gearing off the balance sheet to maintain your payout at the end of this year, please?

As I said earlier, when we look at 2018 and beyond, we are – we still have the ambitious goals. We believe that we can reach it, but we have to be humble, knowing that we haven’t reached it this year.

So we do different scenarios. And as I said earlier, even with more modest sales growth that we are likely would have this year, we believe that we can have a healthy profit development during 2018, whilst also investing a lot to transform the business in a good way to take advantage of all the opportunities that comes with the shift towards the digitalization.

And just verifying now, just because I’m not sure I got your answer previously, Karl-Johan. But are you saying that you have sort of passed the CapEx peak?

The SEK 13.5 billion guidance for this year in terms of CapEx, is that pretty much where you expect to be next year? Or would it be sort of slightly lower or slightly higher?

I’m sorry, I know you answered the question before, but I missed it.

We answered it – yes or no, we didn’t really answer on the total level because we haven’t set it yet. We haven’t set and finalized the plans when it comes to the amount of stores to open, rebuilds, all the investments that we’re making in the prioritized development areas.

But we have, over a number of years, invested a lot in setting a good infrastructure. Now we are rolling out more customer-facing initiatives, which is good.

And the high growth, in relation to sales that we have seen over the last years, we have passed. So it will be at lower levels year-on-year increase.

Thank you for the answer. Thank you very much.

That’s all for me.

Yes, hi team. Just one question, please.

When you look at the wide range of sales performance by country, is there any temptation on your part to change the range more by country to localized product and prices more to try and tap into local trends? Or do you think a broadly global collection is still the right strategy for H&M?

Yes. We are – we still believe in the global collection.

Most of the things will be a global assortment, but it’s also one thing that we are evaluating to become even more locally relevant. And then the assortment is one part, and there can be other initiatives as well connected to our communication and so on and so on.

But we are definitely looking into the assortment also.

Perfect. And can I just have one quick follow-up?

Can you talk to us about the performance of your franchise business because it looks to have slowed quite markedly, and I was just keen to understand why that was?

Yes. The majority of the other franchise business is based in Middle East.

Same thing there, it’s been a challenging year for those markets. And I think a lot is connected to the economy and oil prices and so on.

But in relation to the general market development, we have performed well. Yes, that’s all I can say now.

And I can also add that – and if you break it down, in markets like Indonesia and Thailand, we actually have been doing better.

Okay. So it is a Middle East issue rather than a franchise global issue?

Yes.

Yes.

Yes, we have – I mean, the partners that we are working with are doing a great job. We have a very close collaboration running the stores and the business in a good way.

But the performance so far has not been up to the goals that we set.

Thanks very much.

Yes, hi. Just a couple more questions from me, please.

Firstly, in terms of your – the internal initiatives in sourcing. Are they putting any pressure on averaging cost of sourcing?

And are you prepared to take that pressure and improve your full price sales prospects?

Yes. When we look at the sourcing, it’s a combination of several things.

Of course, it’s not only about shortening lead times. We look at a combination of prices, quality of the production, the sustainability we look at as well and also to optimize the lead times.

So we want to improve in all areas. But the shortening lead time is not only connected to how we transport the garments or where we source from.

It’s also a lot connected to changing our internal buying processes to use a lot of digitalization, all the advantages that comes from new technologies and so on. So there are many things that can shorten lead times, but also where we source from and how we transport the garments.

Okay. And secondly, do you see any major differences in profitability of the online business by geography, so the U.S.

versus Europe?

Well, there are slight differences, of course, as we see with the physical stores as well, depending on the different factors. But in total, our online business for all the brands are really profitable and in line with the physical stores.

So – which is nice as we are investing a lot in the physical – or in the online stores going forward as well.

Okay. Thank you.

Hello, hi, sorry. Just one very quick follow-up question, on your OpEx, that continued to be very well tight.

And I actually estimate that OpEx per store are still down year-on-year. And you’ve mentioned in your release also that there has been a step-up in variable cost because you were working through the clearances.

So I was wondering, can you talk a little bit more on where – in which areas you are containing your cost so much? And how sustainable is that going forward?

And also, how you see your OpEx progressing as we go into end of year and next year, please?

Yes, well, when it comes to OpEx, we have a very good cost control. In this third quarter, it increased more than the top line.

And the reason, as we say in the report, it’s due to the big volumes connected to the summer sales. So we needed to add handling hours both in the stores and at our replenishment warehouses.

But going forward, we are convinced that we are continuing to have a very good control over the OpEx. So that’s not an area where we are too worried.

But you – at the same time, you don’t see any area that requires further investments from an OpEx perspective?

Yes, for sure, there are areas, but most of those investments can also be beneficial for the efficiency in the stores in the future. So I think when we are investing in new technology, RFID, sales checkout, et cetera, so that could also help the efficiency in the stores.

Perfect, understood, thank you.

Yes. Thanks for taking the question.

My question is, you mentioned the commitment last year was up significantly. So how many quarters have you now had a lower commitment for stock than the sales outturn?

Well, this is the first quarter, really, where we a see lower commitment and the first real change in the initiatives and the things we have spoken about to come down to a leaner inventory level.

So essentially, the stock has been building quarter-by-quarter over the last two years. Is that right?

Yes, it has been building. But also, I mean, it’s connected to the – to us not reaching the sales levels that we have – that we set up for ourselves.

And then we have gradually worked a lot on improving the supply chain and internal buying processes, and now we’re starting to see the results of that. And gradual improvements, we hope to see going forward as well.

And just on the OpEx is, do you think there will be another quarter where you will have higher volumes for clearance and where you need to have higher OpEx to account for that?

I mean, again, it’s too early to say. We have a bit more than two months to go, and we don’t want to give a prognosis for markdowns.

We will – fourth quarter, we will comment on that. Sorry about that.

Yes, no, I mean, I meant really, would you be expecting to do another accelerated clearance in the first quarter of next year?

No. I mean, it depends on a lot of things.

But we hope that we will have good development and that, that won’t be necessary. We believe that this big summer clearance during the summer was a – it was a one-off.

And now we have done a lot of improvements in the buying processes and so on. So I definitely hope we won’t need that.

Thank you.

Yes. One final question from me.

If you’re doing a lot of work with regards to sourcing internal work, talking to partners, et cetera, has there been a change within the business internally if you decided that you need to speed these bits up? And how are you managing the risk of doing all of these things at a faster pace maybe than you have done historically?

Is there a danger that you’re taking on too much at one time?

Well, it’s definitely a change. Otherwise, I mean, we are working a lot on it.

The H&M Group’s world is much more complex today compared to 5, 10 years ago, with the online sales taking a big, big part of the selling and a big part of our focus. And we are present in many markets, varying a lot in geographies, buying power and climate and so on.

So – and we need to be – we need to speed up. We need to be more flexible.

We need to become more efficient, so that’s why we do all the changes. We feel that we can control the change and the high pace in a good way.

But obviously, we need good cost control over the whole process as well, so we don’t do the wrong things in the process. But we believe that we can have a high pace and good quality in the transformation.

Have you sort of had to hire people in order to manage this additional transformation compared to where you were before? Or is it your internal people, you just whipped them a bit harder to make the changes?

There’s no whipping, but we have very talented people within the group and that we have – I mean, certain areas, we are investing a bit more in, and then we can move some people internally and sometimes, we need to recruit and then we recruit. And if we need some specialist competence that we don’t have internally, we partner up with the experts that are out there in the world.

So it’s a combination, but mostly, of course, our own colleagues are working on the initiatives. And in certain cases, we have worked with some experts in different fields.

And Adam, you asked about the risks. Of course, there are risks connected to change, but I think a bigger risk would be not to make these changes.

Yes. Okay, thank you.

Good morning, from Frankfurt. Can you hear me?

Yes.

I would like to know if you could give us some information on the new brand that you’ve mentioned. You’re going to start it next year.

We would like to know what target group are you aiming at with that brand. And the second question, how many stores do you plan to close in Europe in the next time and especially in Germany?

Sorry, those are two questions that we can’t answer. We will soon release more information about the brand or information about the brand that we will launch next year.

The only thing I can tell you now is that it feels good, very exciting. We believe it will be successful.

I guess we can tell you, as I said, that we have opened four stores so far. One store will open in Germany during the autumn.

We had a very good start there. And many more stores will open during the coming years for ARKET, and also, of course, to continue to develop online.

When it comes to store closures in Germany, we haven’t set our expansion and optimization plans for next year. But Germany, as all other markets, we will look into – I mean, optimizing the portfolio to renegotiate, extend, close it if that’s necessary, rebuild.

So it’s a combination of various things.

Okay. Thank you very much.

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