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Hennes & Mauritz B F (HMRZF.PK)

Q2 2013 Earnings Call

June 19, 2013 08:00 am ET

Executives

Nils Vinge - Investor Relations Manager

Jyrki Tervonen - Chief Financial Officer

Karl-Johan Persson - Managing Director

Analysts

Chamberlain - Bank of America

Simon Bowler - Exane

Anne Critchlow - SG

Erik Karlsson - AKO Capital

Wayne Cooperman - Cobalt

Jamie Merriman - Bernstein

Charlie Muir-Sands - Deutsche Bank

Christodoulos Chaviaras - Barclays

Simon Irwin - Credit Suisse

Rebecca McClellan - Santander

Nicklas Fharm - SEB Equities

Richard Edwards - Citigroup, London

Dana Telsey - Telsey Advisory Group

Paul Rossington - HSBC Global Research

Omar Saad - ISI Group

Presentation

Operator

Thank you for standing by and welcome to the Six-Month Results for 2013 Conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question and answer session, (Operator Instructions).

I would now like to hand the conference over to your speaker today, Nils Vinge. Please go ahead, sir.

Nils Vinge

Thank you. Welcome to the telephone conference on the occasion of H&M's six-month results 2013. I have our CFO, Jyrki Tervonen with me and will be happy to answer your questions after the presentation. You will find the presentation slides for this telephone conference on hm.com. Please look at the slide second quarter 2013.

It's been a challenging period for fashion retail in many markets. H&M sales grew strongly in Asia. For example, in China, Hong Kong and Japan, but in total group sales were not satisfactory. This was mainly due to the tough macroeconomic climate that continued to affect market conditions in many countries as well as unfavorable weather in March, Large part of April in several of our large markets.

Group sales increased by 5% in local currency in the second quarter. On comparable units, sales increased by 4%, compared to the same period last year. The continued strengthening of the Swedish Krona against most sales countries' currencies led to substantial negative translation effects both on sales and results.

Translated into SEK, sales including VAT amounted to SEK 36.9 billion, just illustrate the size of the effects. Sales would have been SEK 1.8 billion higher using the same exchange rates as last year. Reported net sales in SEK amounted to SEK 31.6 billion in the second quarter, unchanged compared to last year.

Gross profit was 19.3 billion, corresponding to a gross margin of 61.1%, compared to 61.7% in the second quarter 2012. Largest reason for the difference was increased markdowns. The high stock-in-trade going into Q2 in combination with unusually cold weather during the spring led to higher markdowns than planned. Markdowns in relation to sales had a negative effect on the gross margin of 90 basis points compared to Q2 2012.

Meanwhile, the combined effects from external factors such as cotton prices, cost inflation and the U.S. dollar was more or less neutral on purchases for the second quarter, compared to the corresponding period the year before.

If you look at the next slide, you can see how the gross margin has developed since the year 2000. Seeing in the longer perspective, the gross margin in the second quarter this year is still at a good level.

Please return to the slide second quarter. Looking at costs, SG&A increased by 5% to SEK 13.3 billion. In local currency, the increase was 10%. The increase was entirely due to the expansion into our investments in IT and online as well as & Other Stories in new fashion brand.

Although, most of these large and long-term investments have not yet generated revenue, we see and that's why it is necessary in order to build an even stronger H&M. At the same time, tight cost control is very important and cost control remain good throughout the group also in the past quarter. Costs in comparable stores decreased compared to the second quarter last year.

Operating profit amounted to just about SEK 6 billion, corresponding to an operating margin of 19%. Profit after finance margins was SEK 6.1 billion, compared to SEK 7 billion last year. Profits were negatively affected by increased markdowns long-term investments and substantial negative currency translation effects. After a tax rate of 24%, net profit amounted to $4.7 billion that equals earnings per share of SEK 2.81, compared to SEK 3.15.

And, now looking at some other key figures, please turn to the slide key data. Stock-in-trade increased 12% in SEK and 16% in local currency compared to the same time last year. The increase is mainly explained by the expansion, but also by the fact that sales did not increase as much as we had planned.

The inventory level as of 31 of May was higher than planned, mainly due to the cold spring, but the composition of the stock-in-trade is satisfactory. Cash flow from current operations was SEK 11.2 billion up from 10.7 billion. The increase is mainly due to lower tax payments early in the year.

Investments in terms of CapEx rose to SEK 3.4 billion from SEK 2.6 billion and consisted mainly of investments in new stores, but also in IT and logistics. The financial position of the group remained strong. Liquid funds amounted to SEK 9.1 billion, compared to SEK 13.5 billion. Return on equity was 45% compared to 48%, last year.

Now some words on our expansion. Please turn to the slide, expansion. Our global expansion continues. Earlier this year, we ramped up expansion to around 350 stores net for 2013 from previously planned 325. We have opened more than one store per day this spring. We opened 98 stores in the second quarter and we closed 8. Today, we have more than 2,900 stores globally.

Read the rest of this transcript for free on seekingalpha.com