H & M Hennes & Mauritz AB (publ)

Thank you, and good morning, everyone. I am Joseph Ahlberg, and I'm Head of Investor Relations.

Today, we will present our 9-month report for 2024. We start with the presentation of the third quarter by our CEO, Daniel Erver.

After that, our CFO, Adam Karlsson, together with Daniel and myself, will answer your questions. After the press conference, there will be individual interviews with the media as usual.

Please, Daniel, go ahead.

Thank you, Joseph, and a warm good morning to everyone. To summarize the third quarter, we continue to create conditions for sales growth while maintaining good cost control.

The cold weather in many of our important European markets resulted in weak sales in the beginning of the quarter. Sales recovered in July and August with a positive sales trend that continued to be strengthened during September.

We estimate sales in September to increase with 11%. Despite a challenging start, we summarized the quarter with sales in local currencies in line with last year.

Increased costs from external factors have negatively impacted our operating profit. The main factor was currency translation effects.

This -- regarding these effects, the operating margin in the third quarter was comparable with last year despite a significant increase in marketing costs in the quarter. We continue to review the initiatives that do not strengthen the H&M brand, and we have prioritized those which contribute to each brand's long-term sales and profitability.

As a part of this, we have decided to discontinue Afound within portfolio brands. In parallel to this, we also continue to optimize the H&M Group's store portfolio.

For 2024, around 100 new stores are planned to open and around 200 stores are going to be closed, meaning a net reduction of approximately 100 stores. We expect a close to neutral impact on sales in the fourth quarter as a net effect of openings and closures.

Consumers have still faced lower purchasing powers. Together with the external factors such as currencies, this has impacted our sales revenues and purchasing costs more negatively than we expected.

At present, we estimate that this year's operating margin will be lower than 10%. We are working hard to strengthen our sales and in that way, get closer to our long-term margin target.

So our first priority is growing our sales and to create profitability through good cost control. Therefore, we have made major long-term investments in the third quarter to further strengthen the product offering, the shopping experience and the H&M brand.

During the second half of the year, we have started to raise the bar with high ambitions, and we already now see positive indications from our investments in the H&M brand. The first autumn collections have been very well received by our customers in September, representing the best of H&M, great fashion and good quality at the best price in a sustainable way.

The autumn campaign includes many exciting collaborations and unique events. One of the world's most popular artist, Charli XCX, is the face of the campaign, supported by both global and local artists such as Jamie XX and models like Lila Moss and events in several fashion capital cities.

We have also upgraded a number of physical stores with enhanced customer experience in key cities like London, New York, Stockholm, Paris, Milan, Berlin, Munich and Hamburg. The new store formats have been very well received by our customers, and we could see long queues outside the stores on the opening days.

And not the least, we have given our digital store and the app, an elevated look across several markets in Europe and in the U.S. This rollout -- and this rollout, we will continue to drive during next year to more markets.

The share of customers visiting us who decide to shop is increasing in both channels. We also see a strong impact in social media with many positive comments, a high engagement from influencer collaborations and a heavy increase of share of search on H&M-related topics.

Today, we are launching another exciting collection, the H&M Studio, underlying our focus to strong products and creativity. It's available both in our stores and online from today.

Similarly, the Atelier collection for men is launching on the 3rd of October. When we summarize the third quarter, the situation in the world around us remains uncertain and households continue to have a high cost of living.

As always, our highest priority is to make sure that we offer the best value for money in each market. We also maintain a high pace in the work to strengthen our customer offering, and we deprioritize the things that do not strengthen our brands or contribute our sales and profitability.

Finally, we continue to raise the bar. 2024 is the year when we are laying the foundation for future growth.

We are strengthening the H&M brand by investing in products, shopping experience and in marketing. The investments we have made in marketing in the third quarter are reaching our customers since September.

The marketing investments will continue during the rest of the year and have already started to give positive signs. This has contributed -- strong starts that we see in September.

I am confident that the efforts we have started to take is taking us in the right direction and that our plan will contribute to increased sales and profitability over time. Thank you for listening.

You are now welcome to ask questions. I will hand you back to Joseph.

Thank you, Daniel. [Operator Instructions] And I hand back to the operator to facilitate.

Maybe a couple of questions from me. And I started -- maybe start with sort of trying to clear out the impact of the different factors on operating expenses in the quarter.

You do mention that there was around SEK 550 million that was related to winding-down cost of Afound and also elevated marketing costs. Is it fair to say that at least 60% of that, I think, you're right, the majority is related to marketing costs and the rest is Afound?

And then on top of that, you're also right that if you add back the negative impact of FX, you also basically had the same EBIT margin as last year. Does that entail that you had a negative impact on FX of around SEK 500 million in the quarter, just to get some clarification on that?

Adam here. Yes, you are right.

It's -- the majority comes from the marketing of the SEK 550 million we mentioned. And we assess the currency effect to be above what you mentioned -- somewhat above the SEK 500 million that you mentioned and it can be even effect on the transition effects.

Okay. And if you look into -- if you consider that, and look into the coming quarter, and also consider the fact that I do you think that you've had some deviation or largening of the gap between the euro and the dollar, which must have been a bit positive to you guys as of late, at least, do you still come to the same conclusion when it comes to Q4?

Is there any difference in terms of the FX impact as we go forward?

Adam here again. We see sort of the basket of external factors affecting us has moved slightly more favorable, but that's more forward-looking than the coming quarters.

So currencies on the purchasing side are slightly more favorable than we thought a quarter ago. But still, we have the elevated material prices and the freight prices working against us for the coming quarters.

But what you mentioned could possibly be visible later on further down the road, but not around the corner.

Perhaps to build on that answer. This is Joseph.

So when it comes to the gross margin outlook, it's obviously important with the stronger euro compared to the U.S. dollar.

However, when it comes to the currency translation effect, which we saw impacted us very negatively in this past quarter, that is more connected to the strengthening of the Swedish krona to the basket of currencies that we are exposed to, with minimum ARPU markets that we operate in.

But if you combine the 2, you don't see a big difference in near term. But if you look into 2025, there might be a slight positive change?

It's difficult, of course, to predict. But as Joseph said, there will be -- an effect continues if the SEK remains on this level compared to the euro of the strengthening of the SEK in coming quarter.

Okay. And then just to further clarify, and you do mention that you will continue to push marketing and you're starting to see an effect of that on top line.

Just to get some understanding on the level of increased marketing is the -- what we saw in Q3, is that a good proxy for the coming quarters? And in addition to that, given the strong sort of September that you've seen, why are you guiding for higher impact when it comes to markdowns?

So this is Daniel. When we look at the fourth quarter, we will continue -- based on the receipts that we have seen in the first steps in the third quarter of the investments and the increased ambition level and the September outcome, we will continue to drive the long-term investments, both into marketing, but also into the product offering by both investing in quality and making sure that we have price position in every market.

So those actions will continue into quarter 4. When it comes to the marketing investments, roughly, it will be on the same level as we saw in Q3, also in the fourth quarter.

And as I said in the opening statement, we still see that there is a cautious customer out there, and we use markdowns as a way to activate the customer when we see a need for it, and that's the reason why we are guiding for a slightly higher increase in markdowns.

If I can maybe just start on the question, Daniel was asking about on the FX, please? It seems to me -- please explain, I don't know if I've got it wrong, it seems to me that you're also capturing balance sheet movements, particularly on working capital, et cetera, into FX into EBIT.

I'm curious why that is recorded in the EBIT when I think some of your competitors actually do it below the line, please?

Joseph here. So we do have currency translation effects, as shown in our other comprehensive income.

What we show in that part is the external exposure that we have, for instance, to our suppliers, and the movement in those contracts. There, we also have FX hedging in place.

So you can see also the opposite movement in the same statement. When it comes to the translation effects that go through our P&L, this is on the intercompany receivables and payables.

We revalue to the current fixed rates. So we see unfavorable effects from those movements in our P&L in the quarter.

We, of course, then also have the translation effects of booked revenue and costs, which end up with lower amounts in SEK with a stronger Swedish krona. And that affects different lines in different ways.

We have shared before that we have a bit higher share of Swedish krona in our cost base. So we have a bit smaller effect of translating those compared to the top line, for instance.

So that is a negative effect for our margin, but also on the level of profit at the bottom line.

But I guess what I'm trying to understand is I fully understand the income and expenses when you're translating it back to the P&L. But liabilities and receivables, have they always been within your operating profit movement as well?

They have, yes.

I'm just checking. Yes.

Okay. Okay.

That seems to be a little bit different to some of your competitors. Okay.

Secondly, maybe just in terms of the stepped-up marketing, how you are assessing the return on investment? And you're definitely signaling Q4 a sustained step-up in marketing.

Is that something to think about as we head into '25 as well? Or this just stays in the base and this is sufficiently enlarged marketing?

The marketing efforts are focused on strengthening the H&M brand long term, and they include both campaigns, but also investments into the physical store experience, event marketing, influencer marketing and where we are ramping up a wider effort of marketing efforts than we have done in the past. The first indications in seeing a buzz in social media seeing such traffic is -- we see is really positive.

We will continue to monitor the effects during the rest of this year. And of course, the long-term ambition is to see a positive sales traffic increase from our marketing efforts.

And then as we come in towards next year, we will evaluate and assess the impact and the return on traffic and bottom line effect of the marketing investments to assess how we would move into 2025 and how we best invest and reinvest the savings we get from cost reductions towards the customer and strengthening the brand.

Okay. Last one, I guess, is -- and Dan, you've talked about good cost control.

The big structural program you had, SEK 2 billion, is now largely behind us. Are there any plans to replace it with anything else?

If not, how should we judge your efforts here over the coming quarters?

We are raising the bar for H&M and increasing the efforts to strengthen the product offering, to strengthen the customer experience, both physical and digital and to build a stronger brand, and that's what we are investing towards. While doing that, we make active choices to stop efforts that we don't see are contributing either to stronger brand or profitable sales growth.

And that's what we still see. We have started to make that work happen, and we have shifted costs from nonproductive efforts to efforts that actually strengthen the customer offer.

And that, we will continue to do. And we will continue to focus on a very strict cost control and finding costs that we can reduce to be able to reinvest back to the customer and into the customer offering.

Two questions from me, please. The first one is, you stated in the release that you're monitoring developments in the Red Sea and the global freight market and you're taking action to manage disruption in the supply chain.

It sounds like you're seeing, as you'd expect longer shipping times, but I wondered if you're managing to offset that with shorter production times now so that your speed to market isn't impacted. Just wondering if you can comment on what's happening with production times and what you're seeing there.

Adam here. I mean, you're right.

We continue our efforts and increase our efforts to become even more flexible in our supply chain. But on a short-term basis if something happens of this magnitude this sudden, it's very difficult to compensate that.

But the overall trend is that we are becoming more flexible and more responsive. But as we mentioned in the report, this is a sort of an incident that we can't, with this short time period, completely offset them by other actions.

And so we continue to monitor the situation. We believe it's affecting the stock levels with about SEK 2 billion that we need to sort of have the goods within on our hands a bit longer than expected, but the long-term trend is that this, over time, then will be mitigated by actions to make the supply chain more flexible.

Okay. Great.

And my other question is on pricing. I just wondered how comfortable you guys are now with your relative pricing in major markets.

I know you've called out the U.S., for instance, in the last sort of year or 2 as a market. I think you needed to become -- you felt you needed to become more competitive in.

I mean, do you see a need for more price investment going forward or a more relative price investment going forward to sustain the better top line trend that you're seeing recently?

This is Daniel. We continuously monitor the situation in each market to make sure that we have a competitive offer and that is, of course, dependent both on the spending power in each individual market, but also the competitive situation.

And that's an ongoing work. We have in the third quarter, going into the fourth quarter, made investments in a more competitive price positioning.

So the growth that we see is volume-driven growth because we have acted on price. We believe that we made the major corrections now, but we will continue to monitor the development.

And we still see an important need to invest into the private offering, both when it comes to price positioning, but also into quality and material selections. So -- but the major shifts, we have done.

A couple of questions from me. The first question I got relates to the performance in September and the launch of your new ranges.

Would you be able to shed any light on how you look at the weather impact, maybe the easy comparables compared to the bit that's been driven by the success of your own launches, whether that's -- looking across different markets where there's been different weather patterns? I just wanted some -- anything you could give to us some reassurance that the stronger trade is -- has a large bit to do with the new products and marketing, et cetera, that you've put out there?

Okay. This is Daniel again.

First of all, when looking at September, we see a very well received fall collection from the customers. We've had a high sell-through, especially on the updated womenswear range where we have had single pieces selling out within hours, but overall, a very good reception from customers of the fall collection.

We see, as we mentioned, a positive conversion tendency that more customers that come into stores decide to purchase. And we see a good positive buzz in increased search volume around topics concerning H&M, but also a good buzz on social media, good reach on our -- through our social media channels, which we take as an indication and more excitement around the H&M brand, which makes us confident when we look ahead.

Combined with that, of course, we have low comparables and a positive weather effect in September. We see September in a similar way to June, where June had a negative weather effect.

September is boosted by early fall shift in the Central European market. So we, from our side, assess it's a combination of both, but even regarding the weather effect, September makes us confident that we see receipts on the updated strategy moving ahead.

So you wouldn't be able to say that in countries where there's less of a notable weather impact as a global company in different markets that you can say even where there wasn't a weather impact, our sales took a step up, is that fair to say?

Adam, this is Joseph. We do see that we have good performance driven by our collection and the customer experience and our marketing initiatives, then the level of year-over-year development is, of course, also related to the big weather impact of last year.

So in the markets where we saw the biggest weather impact last year, in negative terms, we see the biggest positive reversal now. So yes, we do see some variation.

But overall, a positive receipt.

And in terms of how much -- so the new stuff is selling really well. How much old inventory have you still got to go through?

I'm assuming that when you're talking about increased markdown coming in the fourth quarter, is that related to some older inventory that you have to clear through if the new stuff is selling really well?

A big learning from -- Adam here, a big learning from Q3 last year that we believe that we didn't set us up for a good fall start. We were a bit tight on the inventory on certain categories.

So now we have adjusted that, and we believe that we have a very, very strong stock composition that can then support and drive selling throughout the autumn here. So yes, we believe that we are well set up with the buying and particularly, as Daniel said then, have been able to back the increased demand on the core customer, the latest fashion customer, with the right amounts of stock and buying.

And that, we believe, we have a much stronger setup right now than we did out of Q3 last year.

This is Daniel. Looking at the performance in end of Q3 and coming into Q4, we see that where we have made the biggest shifts in assortment, we see the most positive tendencies.

So we are accelerating the pace of improvement throughout the assortment teams to get more renewal, more fashion events, a more elevated assortment since we see that, that is resonating really with the customers. But the stock composition is -- we're happy with.

And one final one for me. If we take the positive view that this is all going well and will carry on for the next months or hopefully longer, do you now have the setup in your sourcing that you can replenish?

So you talked about sell through. I think, I've seen some stock outs on some of the websites and things.

Can you replenish those products much more quickly and efficiently now with your near shoring, maybe with the use of airfreight, so that you can maximize the sales of those best-selling lines?

This is Daniel. Yes, we have better capabilities to be able to replenish both through different ways, but also through near-shoring capabilities.

So we are able to react quicker and we are reacting quicker than -- it depends on what category of products as well. When it comes to jersey, we have a higher speed of reaction time whereas it comes to heavy woven, we need more time.

So it's also a little bit dependent on the categories and how quickly we can react. But overall, we are able to react quicker to the increased demand that we have seen than we've had compared to a year ago.

I just wanted to come back on the topic of pricing that we talked about earlier. It looks like some of the new ranges have launched with higher ASPs as part of your elevation strategy.

And I just wanted to understand how -- if that's correct, how you square that with the investment in price in Q3 and Q4 you've mentioned to become more price competitive? Is there sort of solve to that, that you're basically happy to stretch your architecture across a much wider range of price points in the past?

And if that's at all correct, are there any risks that you see with doing that?

This is Daniel. We are doing both.

We are investing in price to make sure that we have very competitive value for money offering across our different categories. What we see is with the improved elevated assortment, we can offer a wider range of prices, and we've seen that being really well received.

The risk is, of course, that we don't protect the low entry price categories, and we stay very focused on both increasing the range while protecting the entry price points, and that's where we spend part of the investment. Another part of the investment goes into the elevated material products' ways of producing the new updated assortment to be more relevant and that offers us a wider price range than we had in the past.

And the sort of net-net that you're assuming for autumn/winter is negative ASPs, is that correct?

Adam here. Yes, we see that.

And as Daniel said, we are investing in value across the price range. So it's not to be seen as a price increase or decrease, but rather that we widened the price range and we invest in value in all price categories.

So that's our strategy. But the overall will be a slight negative for the autumn.

And is that by a couple of percent? I think that's sort of roughly what you were talking about earlier this year.

Is that a good guide for ASPs?

Yes. All this coming together, these investments in the product, the improvements in what we do in the physical and the digital experience and also the investments that we do in market, which in Q4, we expect to even be a little higher than in the third quarter.

We are setting up for a strong impact here for the customers. And we are confident that we -- the signs that we have here show that we are on the right track here, going in the right direction.

So you've removed the target or ambition to get to 10% margins this year. Is it an ambition to get to 10% in 2025?

10% margin is our long-term ambition. Double-digit profitability is our long-term ambition, and we decide to not guide specifically for 2025.

Understood. And then I suppose in response to the kind of world of fashion getting faster and faster and being more and more responsive, why do you still think it's kind of needed to have these collections and the collection launches?

Would it not be better to move to a kind of greater replenishment and responsive product cycle?

This is Daniel. Very relevant question.

We do offer news every day. We brought new products into the store every day.

Calling it a collection is a way to gather the drops to be able to package and communicate to the consumer in an attractive, exciting way where we can guide, curate and excite the customer. But we offer news and renewal into stores and online every day throughout the year.

We don't have single collection drops. And we can also react on good performing products to drop it in again on a one-by-one basis.

Perfect. And then just the final one is on near-shoring.

Are you able to give a percentage of products that is now sourced in a nearshore capacity?

Adam here, yes, it's increasing. And particularly, we speak a lot about the women's fashion customer here.

We have a very high percentage. And we attribute parts of the success of that core customer and the assortment right now to our improved ability to be responsive.

But we focus to use that lever primarily there, and then we learn and we will deploy it further. So without giving a percentage, it's high on the women's fashion categories.

Two from me, please. First of all, just to follow up on the previous answer, please.

Where you talk about the nearshoring being a high proportion for the women's fashion categories, should we understand that the new collections, which are obviously performing very well, that they have been sourced through proximity markets? Or they are still coming from Asia with lead times of several months, please?

This is Daniel. It's a mix.

We use different -- we choose the supplier depending on sort of evaluating speed, quality and cost. So it's a mix also for this.

I think the opportunity is rather to be able to repeat and quickly act on good receipts with nearshoring as all done, it's being developed at first in close, proximity markets. But it's a mix in the collection that you see currently.

Great. And then second question was also a follow-on just regarding the 10% margin target.

I think you've previously said that, that 10% was really all about what level of sales you could achieve. And next year, for example, if we were to see a mid-single-digit level of sales growth, could we, therefore, expect to be a 10% margin?

Or actually, is the marketing spend and so on coming in higher than previously planned to drive that top line, please?

Adam here. Yes, you're right.

We need to see and focus on sales growth, and that will be a key lever to reach our 10% margin. As Daniel previously stated, we have, in our view, closed the initiated cost and efficiency program, but the 100% focus on taking out nonproductive costs and move it towards resources that positively affect the customer remains.

So we believe these two things are linked, that we can shift costs from things that doesn't add value to the customer. If we move resources to what adds to the customer proposition, we will drive sales and hence that will speed up our journey towards the long-term margin target.

But that's the journey that we're on, and then we'll continue.

And then just final one. In terms of markdowns, I'm sorry if I misunderstood earlier, but where you talk about increasing -- slight increases in markdowns, is that the same as the price investments that you're talking about?

Or is that something over and above? Because I guess why I'm just a bit confused is if I go online and look at your Studio collection at the moment, so new drops, I can see a product at full price in the U.K.

this morning. The exact same dress is already on sale in the U.S.

So is that about how you're capitalizing the customer in the U.S.? Or does that mean that the U.S.

is performing less well at the moment? Like how should I sort of interpret that?

Adam here. Zooming out a bit, we believe, as Daniel said, that there are certain markets where we have a consumer that still needs to be activated.

And we believe that we can emphasize like back-to-school or fall fashion or autumn activities by inviting the customer with strong deals on our current fashion. So that's how we sort of actively use the incentive of marking down products.

But generally, we don't place sort of marketing and activities different from a strategic point of view. It's rather that the calendar looks very different also in different markets.

School starts differently and there are other more local events and circumstances that allows us then to play it a little bit more relevantly per market that may end up as differences.

And if we take the specific example, if it's the Studio collection being dropped today, that should not be reduced. So either -- we are not aware of a specific example, but that's not part of the strategy.

And, Joseph, to just add on the technical question you had there on where lower white prices, so to speak, end up in the reduction money that we guide for, and it's not. That is a separate effect on the gross margin.

So what we're capturing in the markdown guiding is the tactical activations and also our sales and discounts.

Let's start with freight cost. Can you remind us when you typically renegotiate your annual contract with freight carriers?

And how should we see your freight cost evolve over the coming quarters, Q4 and maybe also next year, assuming they remain at the current level?

Adam here. We -- it's not a fixed date in time, but we do really normally do 1-year tenders.

And that is done throughout the spring and -- meaning that the second half, we will get the new rates. So what we see and what we guide for now in the external factors is slightly elevated rates on the international sea freight.

And then we have a more opportunistic sort of buying of airfreight when we see that needed. But the international sea freight is the majority.

This is what we don't explain in the external factors and what can be expected throughout the autumn. So spring process then affects the autumn based on the tenders we do.

Understood. Second question is about sourcing.

I mean after the riots in Bangladesh and more broadly speaking, the pressure on wages in some countries, I mean, do you plan to change geographic -- your geography in terms of sourcing of country where you source products? I mean, namely, for instance, maybe scale down exposure to Bangladesh and increase sourcing in other countries for instance?

This is Daniel. We continue to work strategically with our sourcing network, where we take both geopolitical risk, the speed, cost, quality into consideration.

And that's an ongoing work where right now, we have a heavy focus on increasing the nearshore capabilities, which was also creating more flexibility in our supply chain.

Last one is about marketing expenses. I mean, is it fair to assume that the vast majority of the increased marketing expenses were spent for the H&M brand?

I mean I just wanted to better understand the sales decline at the portfolio brand. Is it also partly related to lower marketing spending during the quarter, for instance?

No and yes. Adam here.

The majority of the increased marketing is attributed to the autumn and the launch of the fall campaign. And here you have a timing effect.

Of course, we need to take some of those costs already in Q3, and that's why we also stated in the report that the sort of customer effect appears with the start of the fall collection. So it's a timing effect here.

If we speak about the portfolio brands, we see that they have a somewhat -- a mixed performance. They have a higher dependency on some markets that were more negatively affected by weather, for example.

They are less spread out in the world and also have very high comps from last year, but it's not a marketing-related question.

I had 2 quick ones. I guess the first one.

Given the timing of when the 10% margin target was set when SEK/euro was closer to 10, was it meant to be an ex-FX number? Because, of course, we had the tailwinds of big SEK devaluation versus euro that are starting to reverse now?

I appreciate that this was a target that was inherited by you, but I'd like to hear your thoughts on that and then I have a second one, please.

Adam here. I was part of that back in 2021.

There's a lot of things that has happened in the world that is different from when we set the target. Currencies are moving in different parts.

We have other external events, of course, with the war here in Europe and other things affecting overall ability to sell and drive our business. So with that said, currency tactics was not part of the target setting.

It was more showing us internally and also giving a signal that we believe that there is more in our business model that we can reach through a strong value proposition, strong selling and by distinct cost control. So that was sort of the underlying reasoning behind the target.

And we still believe when we look back that it has been net positive for us to have it. It has sharpened our focus, and we now have the ability to move costs from what we call an unproductive, that's a bit of a -- yes, however you use that word, but towards resources that actually contributes to customer perception and value.

This is Daniel. I want to enforce that we stay committed to the long-term goal of double-digit profitability.

I feel both confident and committed to that target. The key will be to start to grow sales, and that's what we remain focused on.

And that is where we have been, and we will continue to invest in strengthening the product offering and building an exciting physical and digital experience as well as strengthening the H&M brand. And that is the plan that we are committed to.

Very clear. The -- I guess, to some extent related question that I had.

When I step back and think about you originally said you could get to 10% this year. I presume it's been a sales shortfall that is negating that ambition.

I appreciate that the long-term ambition is still very much there. Can you perhaps identify where exactly the -- your hopes for sales were, I mean, whether from a regional perspective, demographics, was it the macro?

Why were sales weaker than you saw, I presume, 9 months ago?

It's a combination, I would say so. Sales has been not where we needed them to be, but we also have seen external effects like primarily the currency exchange rate changes affecting us more negatively than we thought, also with increased macro effects on -- or increased costs for freight and for materials and so on.

So it's been a combination of the two. When it comes to the sales, looking at the third quarter and the start of September, we see that where we have made a significant change in the assortment offering and where we are elevating, we are more -- we are less weather dependent.

And we are able to excite the customer better than in the past, which is really positive. And that shift, we want to double down on and even stronger than before, and we think that would strengthen the sales trend.

Then when looking on a geographical level, we see that we've been struggling, as we talked about before in the U.S., of reaching our ambitions and the numbers we needed to get the full sales growth to come together. So that's the reason that we would highlight specifically.

Understood. That's very helpful.

And just one clarification of what you just said. That elevation part of the offer, does it come with a materially different gross margin relative to the base of the offer, just so we get an understanding of the mix impacts of that?

Joseph here. Yes, like we have shared here, we are making investments into the product, into the customer experience and into the marketing initiatives that we do.

And there will be some margin investments connected to product that will, yes, affect us moving forward.

I've got two questions. First one, if we could get back to the gross margin, you guided for negative markdowns and also negative external effects as we headed into Q3, but still the margin was quite stable or even up a little bit.

So can we get some feeling for the magnitude as we look into Q4 of these effects? I guess I'm trying to ask, is the headwind from these two accelerating or decelerating in Q4?

Adam here. We believe that the trend will slightly accelerate throughout the Q4.

What we haven't so much spoken about, but we called out a little bit last year, was the shrinkage pressure, for example, that also affects some of our cost structures. And that has been starting to reverse.

So there are a lot of factors affecting the totality here. But from a trend perspective, we assume that the negative effects from external factors will remain and then we will continue to do what we see the so far successful value investments into the product.

That's very clear. And last one from my side.

On the online platform, which you have been, I guess, trying for a while now, when you compare the new one to the old one, do you see any big differences in terms of unit economics, like average order value or conversion or whatever, that could help us?

This is Daniel. We have been piloting, evaluating and testing the new experience for a while, but just recently been rolled out.

It was rolled out during September to the key markets, as we mentioned. So the decision to roll it out on a larger scale is, of course, based that we see that the indications from our validation tests towards customers is having a positive effect.

We see it mainly in the time that customer spends with us and the indication that it will support us with organic traffic. Then as we roll out new platforms, there is always a lot of learnings when it comes to how we drive conversion and transactions.

So there is an ongoing process of optimizing the experience, but we took the decision to roll it out because we believe it will support growth moving forward.

And Joseph, to add on a bit, I think it's -- we are convinced that a customer who uses the new app to experience the products will definitely see the fashion, the ideas with really good images and when using the app also together with in the physical stores to see them, the products easily in the app, I think that's very positive for the overall experience. So it will be positive for both the physical store experience and the digital experience.

Daniel mentioned before that for 2024, you plan to open 100 new stores and close about 200. Can you say something more about where you will open these stores, where you will be closing them?

And for Norway, in one part of this, if you will open some here or if you will close some here?

So as a general answer, we are part of scrutinizing and making active choices what benefits the customer the best. We are also optimizing the store portfolio.

We see mainly that we open stores in emerging markets and growing markets. And the consolidation or store closures are mainly taking place in immature markets and where we don't have good unit economics on specific locations and not are able to meet the customer demand or have the right customer demand where we have locations.

So that's the logic where we're opening and closing. When it comes to the total effect, as we mentioned, we closed 200 stores, we opened 100 and we see more or less a neutral impact on sales.

So the stores that we are opening are stronger than the ones we are closing, and that's part of our strategy to build a strong portfolio. For Norway, I don't have the specific numbers on hand.

What we're really excited about for Norway, though, is the launch of the Beauty flagships that we have done during the year where we have received really good feedback from customers, a great traffic and a very high engagement from a young female customer, which is an important target audience for us. So we're excited about that development in Norway.

You also mentioned before that you will upgrade some physical stores, you mentioned, for example, Paris, London, Stockholm. Will you be upgrading the stores in Norway as well?

Why or why not?

We are working through the store portfolio to build a relevant competitive, inspiring, exciting store portfolio where we can really sort of invite the customer to the H&M brand universe. And we have started to prioritize the efforts on key global cities that has the biggest impact on the customer and on a geographical footprint.

So we do it with clear focus on key cities as the ones I mentioned, and we see that we will extend that into more markets. When it comes to Norway, we have done quite a lot of work on updating the Oslo store portfolio.

So we feel we have a strong presence in Oslo, including the addition of the Beauty flagship stores. So currently, we feel we have sort of a strong portfolio to build on in Norway, especially in the work done in Oslo.

So I have a follow-up on the store question actually. So you said that Q4, you expect the impact to be neutral.

But can you just shed some color on what to think about store growth in '25? You opened 100 stores this year, is the closure done?

Or will you sort of have a flattish or downward trend on stores next year as well?

Simen, this is Joseph. We'll happily answer that question when we present our full year report and come back to guide on next year.

The evaluation will continue. We're creating a strong pipeline for the best retail locations in the world where we can open stores, but we are also looking where we can find productivity gains through optimizing our portfolio.

So that evaluation work is ongoing, and we'll present an outlook for the next year when we present the next quarter.

That's clear. And then there was some news out on Brazil earlier this week.

And in that article it was stated that you apparently are going to source directly from local producers there. Can you just give us some more color on this?

Is this sort of a plan with nearshoring ambition when you plan to enter Brazil next year?

First of all, we're really excited to enter Brazil. It's an important market where we will open both, physical store and online.

We will open the first store in São Paulo towards the end of 2025 and that we are tremendously excited about. We are exploring and have an ambition to source slowly, but we have not yet any committed plans.

But we are exploring the opportunities, and it's one important part of our setup in Brazil. So that's work ongoing, but we are happy to come back and share more information about that when we come closer to the opening date.

That's clear. And then just a final one on the follow-up on the Q4 gross margin.

So I'm not sure if I read that correctly, but should we expect the margin to be down, is that what you tried to say or flat, just to clarify?

Joseph here. There are many factors impacting the gross margin.

Like we have called out and to try to summarize those, we have the economic factors, which will continue to look challenging year-over-year, primarily driven by freight cost. We sea freight rates and airfreight rates being above last year's levels.

Then we have the investments in the product offering with markdowns to activate the customers with value investments all over the full range of the assortment and also with pricing adjustment, expecting the average sold price to be slightly lower year-over-year. And then, of course, we continue to work with our improvements as well.

Adam mentioned shrinkage. And we, of course, continue to work with our Tier 1 and Tier 2 suppliers to find more productivity there.

It's actually Paul Rossington here. Just a couple of questions.

Firstly, you've got the wind down costs for Afound in the results. Is there an ongoing OpEx reduction that we should be thinking about -- technical reduction in the cost base that we just need to add in?

Is there anything material there to think about? And then the second, and it's quite straightforward.

Can you just give a couple of examples of what are the unproductive costs that you're actually taking out of the P&L? Just those two questions, please.

Adam here. I believe that we have seen over the last 2 years that we have -- not have a clear structure in all parts of the organization.

We've seen that we've had layers and that we have structures that we believe are hindering quick and swift nonbureaucratic decision-making. So that is what we call out as nonproductive resources.

And we want them to shift them into investing towards the customer, just to sort of frame that discussion. In the OpEx questions, there are no other major parts.

We call out Afound because that was a decision done in line with focusing on the core business, and that was a onetime cost that we believe -- it's good to see the magnitude of in the report for your reference.

Actually, one quick follow-up. I know you've said on the buyback today, you've updated guidance on that today.

Have you considered at any point, looking at a longer-term buyback policy as opposed to kind of the more ad-hoc policy that you have currently?

Adam here. We had, for the 2 first years, sort of a nominal value attributed to the buyback.

So what the Board seek approval from the AGM and got the approval were -- was this more flexible mandate and that we can use more flexibility to adjust the capital structure. So we believe we have the tools in place and the approval from the AGM needed.

And the Board then actively assesses the capital structure based on the target interval that we discussed previously this year.

Rauli from Inderes. Most of the things has been well covered, but one more from me related to the 10% margin target.

So is your view now basically -- given the investments and the offering and the higher marketing expense, you basically need a higher level of sales to reach the 10%? Is that correct interpretation?

Like we said when we went into the year, that increased sales was a prerequisite to achieve the targets, that was reiterated in quarter 2. And that's also the reason why we now see that's unlikely that we will reach the target for 2024, given that we haven't seen the sales increase.

So our full focus is on driving sales growth because that's where we are confident that we will move towards our long-term target of double-digit growth, and that is around investing in an attractive relevant product offering. It's about elevating the physical and digital store experience, to inspiring the customer needs to double down, on strengthening the H&M brand to create the buzz around the brand again.

And that's where we're steering the investment towards. And that in turn would lead to sales growth, and that is what we need to achieve the double-digit profitability.

Joseph here. To build on just quickly on the question you asked specifically around marketing.

We, of course, have stepped up now the long-term marketing investments to really create a strong impact for the brand during this autumn, and we will evaluate the results from this. But there are no current plans beyond this autumn to continue with marketing investments going into next year.

But like I said, we will evaluate the effects from this autumn and then see if we want to continue that or not.

That's clear. What I was trying to ask exactly was that if you thought like a year ago that certain level of sales would enable you to reach 10%, is that level now higher than before.

I understand that. Obviously, it's some growth, but you think you need now more growth than before.

I mean not think -- we think that we have -- and that's hopefully also clear in the report that the core operations developed well. We have strong cost control.

We have factors against us in cost increases, in salary inflation and other things, but the core operations continues to run well, and we believe that we have the fundamentals in place to leverage that core engine to through drive growth, then improve profit levels looking ahead. So it remains.

We don't call out a specific level. But as Daniel said then, we are not seeing the needed growth levels for this year compared with the currency effects we see it to be challenging to reach the target this year.

Just a follow-up from me. Just coming back to the refurbishment of stores, could you say anything about -- I think you said that you had a sort of a strong reception.

But could you say anything about the pace of stores that are opening again, that has been refurbished? Is that now really heading in September?

Is that more towards the end of calendar year? And is that having a meaningful effect on the September number if they are open -- if they started to be open again as we enter September?

No. Sort of the first question, yes, we are opening up stores.

That's been on the refurbishment, but not all stores have been closed. There are a few locations that we decided to close that are especially important for the brand, where we make a major rehaul or touch vertical transportation and so on when it's hard to offer a good competitive customer experience during rebuild, but the majority of stores are still open during rebuild.

They are open gradual fourth quarter, but they have not had a material impact on September sales performance.

And even if they now more and more are going to be open as we go to the end of this year, it's not -- that is not where you see a meaningful impact on sales, is that correct?

Adam here. We previously said that the rebuild has a negative drag of about 0.5%, but we will continue to rebuild all the stores.

So I think we can expect that to be sort of neutral year-on-year. But of course, some of these big, big stores that we open in these key fashion locations are important for us.

So we look forward to those openings now throughout the quarter.

Just what we have seen coming out of September is high engagement around the stores that we have opened. We believe that we have in those 8 cities that I mentioned really elevated experience for H&M, which has created a good positive buzz, but the impact on sales is back to what Adam said.

Just a quick one. You mentioned the negative effects on the gross margin in the quarter in Q3.

What were the positive drivers?

Gross margin in Q3? Adam here.

For example, what we saw that was a slight improvement year-on-year on shrinkage levels and other parts throughout the supply chain. So that was one positive effect that we saw year-on-year in Q3.

But more long term effect, we have -- that was one. But I think overall, of course, is the overall improvements we do in the supply chain to mitigate all of these disturbances.

So we've had a program ongoing for quite some time with improvement efforts of consolidating, working closer to our key partners in production and so forth. And that is, of course, the majority of the underlying improvements that helped us to mitigate the other negative effects then.

But on top of that, we also saw some shrinkage improvements here.

Thank you all for listening. We wish you a great day ahead.

Thank you.