H & M Hennes & Mauritz AB (publ) (OTCPK:HNNMY) Q2 2022 Earnings Conference Call June 29, 2022 8:00 AM ET
Company Participants
Nils Vinge – Head of Investor Relations
Helena Helmersson – Chief Executive Officer
Adam Karlsson – Chief Financial Officer
Conference Call Participants
Fredrik Ivarsson – ABG
Charlie Muir-Sands – BNP
Adam Cochrane – Deutsche Bank
Rebecca McClellan – Santander
Richard Chamberlain – RBC
Daria Nasledysheva – Bank of America
Georgina Johanan – JPMorgan
James Grzinic – Jeffries International
Sarah Butler – The Guardian
Dana Telsey – Telsey Advisory Group
Anne Critchlow – Société Générale
Jie Zhang – Alphavalue
Operator
Hello, and welcome to the H&M Conference Call Six-Month Report for 2022. For the first part of this call, all participants will be in a listen-only mode during the speaker presentation, and afterwards there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.
Today, I’m pleased to present Nils Vinge, Head of Investor Relations. And I will now hand you over to our speakers. Please begin.
Nils Vinge
Thank you. Hi, everyone. Thank you all for joining us today, and welcome to this telephone conference about the H&M Group’s Six-Months Results, 2022. With me today is our CEO, Helena Helmersson; and our CFO, Adam Karlsson.
We will start with a short summary of the second quarter. After that, we will be happy to answer your questions. You’ll find the six-month report on hmgroup.com, Investor Relations.
Now, I’ll hand over to you, Helena.
Helena Helmersson
Thank you, Nils. H&M Group’s strong development continued during the second quarter. Well-received collections led to further increase in full-price sales and decrease in markdowns. The physical store remains much appreciated by our customers, with sales increasing substantially during the second quarter, while online sales continued to perform well. This once again shows the value of having both physical and digital channels, which strengthen and complement each other. We are therefore continuing the integration of our sales channels to offer customers a smooth and inspiring experience.
At the same time, we also continue with our store optimization to make sure that we have the right store in the right place. Our customer offering is well-positioned, and we are fully focused on meeting customers’ ever-increasing expectations of affordable and sustainable fashion when, where, and how they choose. As you will know, we started the year by communicating our 2030 goal, when we are to double sales, while at the same time halving the carbon emission. Profitability is to exceed 10% over time. To achieve these goals, we focus on three growth areas. First and foremost, H&M, which is one of the world’s largest fashion destinations, with several billions of visits years, in-store and online, across the world.
We are continuing to develop the customer experience by further broadening the assortment and services for H&M. And while doing this, we strengthen our existing relationships with our customers, and also attract new ones by offering them unbeatable value with the best combination of fashion, quality, and price in a sustainable way. H&M is now accelerating its expansion in region, North and South America, with focus in Latin America, where a large number of leases have been signed for new stores. Our second growth area is portfolio brands and business ventures. And during the second quarter, we saw a strong sales development, especially for COS, & Other Stories, and ARKET.
In addition, the majority-owned Sellpy and ecommerce platform for secondhand sales also continue to perform well with double sales in the second quarter. Sellpy is available in 24 markets in Europe, and is a good example of how we continuously work on developing new circular business models, and how investments in sustainability provide H&M Group with long-term business opportunities. Our third growth area is investments and partnerships. We continue to invest through our investment arm, CO:LAB. And in a short time, these investments have created significant value, both financially and also in the existing operations.
For example, by improving the customer experience, and enabling innovation in sustainable materials. Two companies that we have invested in are Renewcell and Infinited Fiber Company. They are now scaling up, and thanks to our early investments, we have already starting using their innovative and sustainable materials in our collections, as well as securing additional access for many years to come. We also continue to invest in other areas, particularly within tech, the supply chain, and sustainability.
Looking ahead, most of the restrictions related to the COVID-19 pandemic essentially seems to be over, but there are still many challenges. Disruptions and delays in the supply of goods remain, but are gradually mitigated. At the same time, we are seeing substantial inflation. We are deeply concerned about the war in Ukraine, and sympathize with all those affected. The consequences for our business are continually being evaluated. We are actively looking at various options to find solutions that give consideration to customers and colleagues, as well as the impact on the business as a whole. We have long experience in dealing with challenges in the global economy, and we are currently carrying out extensive work to prioritize initiatives, redistribute resources, and to ensure continued good profitability.
Now, it is more important than ever to be flexible and take quick decisions to navigate in a rapidly changing world. Customers should always feel confident that all the Group’s brands provide the best combination of fashion, price, quality, and sustainability. We see good opportunities for profitable long-term and sustainable growth as we have strong customer focus, fantastic and committed colleagues, close relationships with business partners, and a robust financial position.
Thank you very much for listening. And we’re now happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Fredrik Ivarsson from ABG. Please go ahead.
Fredrik Ivarsson
Thank you very much. Hi, everybody. Two questions for me, please. First one, on the external brands that you led on to the H&M platform during the year, if you could talk a little bit about the learnings, and also maybe whether it is a driver for the increase in stock in trade or if that’s not a significant impact at this point.
Helena Helmersson
Right. And yes, so we have been testing now to bring in more brands on H&M.com, and that is one of the initiatives to broaden our customer offering. So, far, the results we have seen from the customers is very positive. So, looking at selling across brands seems to give a lot of value, but so far it’s a little bit early to draw some final conclusion. So, we’re following the development in Sweden and Germany carefully. But so far, it seems to be much appreciated by our customers.
Adam Karlsson
And on the stock side, it has now materially impacted at this point. As Helena said, we’re testing, and testing fairly small in two markets.
Fredrik Ivarsson
Perfect. Thank you. And the other, on the portfolio brands, you gave us the growth pace, and have been doing so for a while. But can you give us a sense for the actual share of sales? I believe it was like 7%-8% back in 2018.
Helena Helmersson
Right. We don’t give exact numbers per brand or ratio. But, of course, we’re really happy to see the progress when it comes to both H&M brand, but also the different portfolio brands. And here, we’re highlighting the brands that is kind of showing fantastic results when it comes to sales this quarter.
Fredrik Ivarsson
Perfect. Thank you.
Operator
And the next question comes from the line of Charlie Muir-Sands from BNP. Please go ahead.
Charlie Muir-Sands
Yes. Good afternoon and thank you for taking my questions. I’ve got three, but I’ll give you, briefly one in turn. The first is with respect to the CapEx guidance, I think the start of the year you talked about SEK10 billion, but you’ve only spent about SEK2 billion so far, and yet your gross store openings plan doesn’t seem to have really changed. I wondered if you still stick to that SEK10 billion view?
Adam Karlsson
No, we are revising that down. And right now, we’re looking at 20% to 30% cut, perhaps, due to the circumstances, of course, that have happened. But we still remain focused on reaching the 2030 targets, and so there is just a delay in the investments, but — and connected to that, I think it’s important to mention the push we’re doing in Latin American now.
Charlie Muir-Sands
Yes, thank you very much. The second question relates to input cost pressures, which you’ve indicated in the statement remain negative. I wonder if you can clarify, do you expect those to become incrementally more negative as we go into the second-half. And how should we think about your most recent pricing actions being in terms of offsetting that?
Adam Karlsson
We have, throughout the quarter, been successful with having a very strong offering, and that has led us to increasing full-price sales, which have mitigated some part of this, the negative input factors. We believe that that sort of overall journey will continue. But we also see that some of the negative factors are slightly worsening as the currency effect has sort of turned against us to a great extent now, lately. So, all in all, in think on the sort of material and transportation side, it’s fairly stable, but the currency side is the uncertainty right now.
Charlie Muir-Sands
Thanks. And one final brief one, if I may, with respect to the June current trading, thank you very much for sharing that number. And I think you flagged that the comparative base eases, at least on a one-year view. I don’t know if it’s fair to compare with 2019 given all of the disruption of COVID over the last couple of years, but it does look like, compared with that year, June has been a lot softer than was implied in April and May. Are you seeing any signs of a softening consumer, or do you put that down to the weather or are there any other particular factors we should bear in mind?
Adam Karlsson
No, we attribute it, the absolute majority to — in 2019, a weak sort of spring, and a very strong start to the summer. So, we have both years actually here, in 2021, tough comparative figures due to the sort of pent up demand when stores opened again. And in 2019, we had a very strong weather-driven demand during early June.
Charlie Muir-Sands
Many thanks.
Operator
And the next question comes from the line of Adam Cochrane from Deutsche Bank. Please go ahead.
Adam Cochrane
Hi, good afternoon. Two questions, if I can. In terms of looking at the OpEx profile, how do you think about managing the OpEx sales rations into the second-half if the consumer environment is slightly weaker but we’ve still got inflation running through the cost base in terms of people costs, et cetera? And then secondly, in terms of the long-term growth ambitions compared to balancing the short-term profitability, I notice, for example, that you closed down the Treadler sourcing opportunity, which I think some people thought was quite exciting. Could you just talk about how you’re balancing short-term versus long-term priorities, please?
Adam Karlsson
Starting on the OpEx side, I think here we can say that we’re bringing with us some of the learnings from the COVID and the pandemic here. Some of the effects, particularly on the rent side, will continue throughout the Autumn here, that we have more flexibility, higher share of the sales-based and turnover-based rents, and a good sort of setup with it comes to our agreements with our landlords and partners on the real estate side.
On the — how we run our stores, we do have a lot of learnings from also the COVID period, where we look to find more customer experience enhancing features, such as self-checkout, and so forth. So, that is part of our ambition, to both combine them, a higher customer experience with also running the stores in an efficient and modern way.
Helena Helmersson
And when it comes to long-term versus short-term, you know what we are setting up to achieve when it comes to the 2030 targets on growth, profitability, and CO2 emissions. And, of course, related to that is both growing our core, like we just explained, the H&M brand, and portfolio brands, and so forth, but it’s also about looking to new initiatives where we see that there is a need on the market, and where we see that we have strength. Treadler was such an initiative, where we know that we have a lot of competitive strength when it comes to sustainability and supply chain. And we have learned so much of developing that business and doing a business that is more business-to-business.
However, when looking into the progress, it has not been as expected. We have not been able to grow as fast as we would have wanted. Meaning that, right now, it doesn’t seem that the market is there to the extent that we thought when it comes to sustainable supply chain. And that’s why we, in the midst of prioritizing different initiatives, and that we, of course, have to do even more due to the environment and what happened in countries around us. We then decided to not continue with that. So, we have a lot of learnings, and we will for sure try out new business models also moving forward.
Adam Cochrane
On the OpEx point, if I could just follow-up, is it fair to say that you’ve got a number of efficiency measures that you feel confident that you can improve your OpEx sales ratios in the second-half of the year despite a more conservative consumer backdrop?
Adam Karlsson
Yes, but — as I was alluding to, we do have a number of initiatives ongoing to ensure that we always focus on shifting our time and resources toward creating a good customer experience. So, we are trying to automize as many of the manual processes as possible, and this, we believe, will support both us, from a customer experience point of view, but also with the intention to, in an inflationary environment, to mitigate the parts of the cost increases.
Adam Cochrane
Okay, thank you.
Operator
And the next question comes from the line of Rebecca McClellan from Santander. Please go ahead.
Rebecca McClellan
Yes. Good morning. Good afternoon. Sorry. Just in terms of stocking trade. I think, it was 19.2% on a rolling 12 month at the end of 2Q ’18. What would that have been if you exclude goods in Russia and goods that were intended for Russia?
Adam Karlsson
We quantified also in the Q1 report that at that time with the exchange rate and the ruble rate at that point in time. The stock in Russia was about SEK1.1 billion. Since then, the ruble has appreciated a lot which now gives us a sort of stock value in Swedish sector of just north of SEK2 billion and that is the absolute majority of the stock with relation to Russia. But there is a portion that we’ve had to move around and to adjust for the destination of as we had also garments bought for Russia that we now have diverted to other markets in primarily Europe.
Rebecca McClellan
And presumably, that will go into the summer sales because it’s sort of spring summer inventory?
Adam Karlsson
It is the same inventory as we have, so it’s difficult to say exactly how that will play out, but it is sort of incremental over what we had initially planned for this market. We are a little bit more cautious on the market outlook for the third quarter, but it is too early to say because it’s just more of what has been a strongest quarter and so forth. So, it’s difficult to assess the exact effect.
Rebecca McClellan
Okay. Thank you very much.
Operator
Next question comes from the line of Richard Chamberlain from RBC. Please go ahead.
Q – Richard Chamberlain
Thank you. Thanks for taking the questions. A couple from me, please, first of all, can I ask a question on China? What are your plans now for your store number, store footprint? Is it your intention now to focus much more on online sales in that market? That’s my first one.
Helena Helmersson
Overall, looking at China, we’re still in a complex situation and not obviously on the levels that we would have wished for. But we believe adopting in the market as such, and we are now working hard with making sure that we have a locally irrelevant also assortment and experience and we’re in dialogue with different stakeholders and looking at the physical stores versus digital sales channels. This is also a market where we believe in both, so obviously we are optimizing our store portfolio in this market, looking at the situation that we’re in, same as we’re doing in all other markets, but we truly believe that it will be a combination also here of physical stores and digital sales channels.
Richard Chamberlain
Okay. Thank you for that. And can I just ask one as well on these tech initiatives? But I think you called out as costing SEK500 million in Q2, what should we expect for those in the second-half? And do you have a kind of equivalent cash flow figure for those investments? What is the sort of cash expense, if you like and what was that sort of prior to the pandemic? Thank you.
Adam Karlsson
Well as our digital business increases, and most likely will continue to increase. The investment in tech and tech is part of pretty much everything we do and all of our processes; you can expect an increased level of digital investments compared to 2019. So, we believe that the level of somewhere around SEK500 million above last year is a fair assessment of the rest of the year as well. And on the cash flow side we have as we are sort of testing more and we are also seeing the tech as part of our just running operations, the majority of it will be taken off the result as of right now.
Richard Chamberlain
Okay, sounds great. Thanks very much.
Operator
The next question comes from the line of Daria Nasledysheva from Bank of America. Please go ahead.
Daria Nasledysheva
Hi, this is Daria from Bank of America. Thank you very much for taking my questions. I have two, the first one, would you be able to give us some more color around development of store based and online revenues this quarter. You said, online continues to do well, but what does this mean in terms of like year-on-year growth, is it still positive? And my second one would be, if you could please comment, if you’re seeing any changes in consumer behavior at all, because I know you’re closely monitoring the situation, obviously, in light of inflationary pressures and pulling consumer confidence. Thank you very much.
Adam Karlsson
Okay. If you look at the online/offline, first of all, there is no offline and where everything is online, I will say because the digital and the physical are being integrated and customers want both. So, by separating the different channels, doesn’t really add any value. What we’ll see is that the shift continues. If you start from pre-COVID levels, of course, there is a much bigger e-commerce business than pre-pandemic, so to speak. Whereas this year now when customers finally can get out and meet physically, and we see that they love to get back to stores. Of course, we have seen a fantastic recovery in physical stores, and of course, still a good development online, but not as good as last year.
Helena Helmersson
And when looking at customer behaviors and sentiments of course, we’re following that carefully. Right now, we cannot see a big impact only looking at the inflation and the buying power. We see that customers really appreciate our customer offer. On the other hand, of course we are a great option for affordable and sustainable fashion. So, obviously this is also a period in time for us to strengthen our position further, we should also remember that there are different factors affecting customer behavior right now. Of course, one part is the inflation, but also the fact that restrictions have been lifted in many of the markets and it seems like customers really like to socialize again, go to physical stores again, dressed in colorful fashion and having fun with their friends. So, there’s kind of different forces right now, but all-in-all, we see that they appreciate what we offer.
Daria Nasledysheva
Thank you very much.
Operator
The next question comes from the line of Georgina Johanan from JPMorgan. Please go ahead.
Georgina Johanan
Thank you. Thanks for taking my question. I’ve got three quick ones, please. I’ll ask them one-by-one. And the first one was with regards to the external factors into Q3 and I think you mentioned that material and transport was stable. Do you mean that the drag is similar year-on-year to that seen in Q2? Or do you mean that because of annualization that is now actually a stable impact on the gross margin year-over-year. I know impact sorry year-on-year.
Adam Karlsson
No, what we meant is that the situation is not further worsening. That is what is on the sequentially on sort of the commodity side and the transportation side, but of course, still inflated compared to a year back and in addition to that and we have a slightly more negative currency situation. So, sequentially, not worsening, but sort of stable on an elevated level compared to last year.
Georgina Johanan
Okay, great. Thank you. My second question was just with regards to the price increases that you’re putting through, can you just comment on how are consumers reacting to those please, if you’re seeing any volume impact, and sort of plans for pricing — you’re still planning the same level of price increases going forward as previously?
Helena Helmersson
Well, looking at how to mitigate the inflation, of course, we have to adjust our prices as well. We do it in a rather dynamic way looking at customer sentiments per market and also our competitive position, obviously, and trying to do that on different product types in different markets. What is most important for us of course, when we do this is to make sure that customers can still trust us to have the very best value for money. And with that, I mean that’s combination of fashion, price, quality, and sustainability. And so far it’s been the feedback from customers is definitely that we still have that position and hopefully, we can strengthen that position further. So, we’re following the developments as closely as we can to make sure that we do this in the right way.
Georgina Johanan
Thank you. And my final question was just, and you hopefully called out the loss from Russia and Belarus and Ukrainian in the second quarter and should we assume a similar level of loss in Q3 and Q4? Or is that perhaps fading as you’re taking sort of more mitigating actions in those geography spaces?
Adam Karlsson
We have a — had fairly a flexible cost base in Russia. So, we quite immediately could sort of adjust cost. So, I think this level is a good assessment also how it could look forward-looking.
Georgina Johanan
Very helpful. Thank you very much.
Adam Karlsson
But just — I think a clarification on the gross margin is of course, the input factors of what we buy right now that is not sequentially worsening, but of course, we saw a worsening during the early spring and that then of course, coming in and starting to affect the solid margins right now. So, that we see that these sorts of input factors are starting to stabilize, but that is for what we buy now that will then be sold later so to say. So, that’s a clarification regarding the sequential effect on the external effects.
Georgina Johanan
Thank you.
Adam Karlsson
And reminding of the U.S. dollars is the primary driver not well of input costs going further, move forward.
Operator
And the next question comes from the line of [Rose Schubert from Retail Week] [Ph]. Please go ahead.
Unidentified Analyst
Hi, hello. Thanks for taking my question. I just got one for you. I’m just wondering how you’re feeling about the prospect that a number of your key markets will be heading into recession sometime soon. And how are you preparing for that? And if you’re looking back to the previous financial crisis, for any kind of lessons there?
Helena Helmersson
Right, yes. We have a long experience of also dealing with ups and downs. Now we’re in a recession and we see a lot of cost inflation and of course, we are in a rather extreme situation looking at the industry as a whole or several industries. We see this also as the way to strengthen our position because we stand for value for money. And again, the combination of fashion, quality, price and sustainability, it’s very clear that there is a demand for affordable and sustainable fashion. So, we actually think that we can strengthen our position further and this is exactly what our customer’s need.
Unidentified Analyst
Okay. Is there any specific lessons you’ve taken from last time?
Helena Helmersson
Well, for example, when adjusting prices like we have to do as well doing that in a very dynamic way, so meaning that we’re doing it differently in different markets and being even closer to customer sentiments and feedback and making sure that we’re competitive on each market is a good way forward and a great learning from before that we treat each market a little bit differently.
Unidentified Analyst
Okay, perfect. Thank you.
Operator
And the next question comes from the line of Dmitry [indiscernible] [from Chorus] [Ph]. Please go ahead.
Unidentified Analyst
Yes, congratulations on a strong set of results, and thank you for taking my question. Most of them have been answered. So, I’ll just post two quick questions, please. So, firstly, on June trading, you mentioned that you obviously had a very strong base of comparison last year. I’m just trying to, you know, project in upcoming months because I think you also had some very strong trading post June 2021. So, I was just going to ask, if you think you’re likely to experience these hard comparison bases in the full quarter or perhaps in later months as well or whether you are still aiming for or growth in H2.
And then, my second question is on overall store count. I think this is your fourth or fifth quarter where the overall store bases is coming down. I think you’ll close 19 stores in Q2. We discussed about online offline in one of the previous questions, but should we read that there further optimization to do and overall state and that the overall number is likely to keep declining to some extent as digitally strengthening. Thank you.
Adam Karlsson
Okay. If we start with the comparison base from last year, the intention with the comment we did was to say that June last year was extremely strong because at that time, we reopened close to 1,000 stores and people came back from I don’t know it was the first or second or third wave last year. So, the comparator base was very strong 24% whereas June and July were 6%, so, softer comparison. That’s all I can say, because we don’t guide on top line. When it comes to store counts —
Helena Helmersson
Right, I can elaborate a little bit on that. Obviously, as we’ve spoken a little bit about looking into the second quarter, we see a strong recovery in the physical stores. And we see the strength of having both digital and physical, I would say that the recovery in physical is even stronger than we predicted. However, looking into the optimization during this year, where we think we will end with a net of minus 178 stores that still remains, so looking into the closures we have done and are doing in some of our mature markets that strategy we think it’s still very wise, because during the pandemic, obviously we have also seen the strength of the online store. So, that strategy remains done, and moreover we continue of course looking into the neck next year and how to optimize the portfolio and those plans are still in the making.
Unidentified Analyst
Thank you. That’s very helpful. Thank you.
Operator
And the next question comes from the line of James Grzinic from Jeffries International. Please go ahead.
James Grzinic
Thank you. Yes, good afternoon, everybody. I just had a couple of clarification questions really. I guess, Adam, can you perhaps help us understand given what you’re saying on input? And I appreciate difficult to give us specifically a like-for-like inflation in spring summer. But would you expect the rate of price rises, you have to put through into winter to define gross margins to step up considerably relative to spring, summer. Anything you can give us on that front would be very helpful? And secondly, in that context, are you seeing anything competitively that, that you think would make the process more difficult or easier in the coming month?
Adam Karlsson
Well, on the first question, we are sequentially adjusting prices and we’re doing it as Helena said before, differently on different market, being very close to listening to the customer and also ensuring that, that the customer always can feel secure to find the best offer with us, but we are sequentially increasing prices to mitigate some of the inflationary pressure. On the difficulty of doing it, I’m not sure I fully understood the question, but of course, the important theory is to be very, very close to the customer to ensure that we overtime, increase the perceived value and that we always can offer a stronger customer offer than the competition. That’s our overall goal.
James Grzinic
Yes, I guess to follow-up on that. Are you seeing competitors moving more rapidly on prices, which means that your own process has made simpler going forward and appreciate you have to continue to put through a price rises? And I was just wondering whether you can tell us, whether the scale of that exercise needs to increase considerably, given what you’re saying on the inflection inputs.
Adam Karlsson
Yes, we have I mean, competitors are increasing prices and we’ve seen that, that they have done so throughout the spring. So, that is sort of in the overall industry and we are doing our best to ensure that we work as efficiently as possible to not having to put the full cost pressure on the consumer and we believe that is a strength to ensure that the customers will always find that the best offer with us. But of course we have seen that, that competitors have increased prices throughout the spring.
James Grzinic
Okay. Thank you.
Operator
The next question comes from the line of [Nick] [Ph] [indiscernible] from Citi. Please go ahead.
Unidentified Analyst
Hi, good afternoon. Thank you for taking my questions. I have three, and I’ll ask one-by-one, if I may. Firstly on stock, with the 20% impact from forward orders freight, and Russia and also the 7% FX impact. Is it right to think that you have less units of inventory, excluding those impacts and relative to this time last year, just trying to get a sense for your stock positioning going into the next quarter? Thank you.
Nils Vinge
Yes, that’s correct. So, a number of pieces we are down below last year, yes.
Unidentified Analyst
So, is the contract gross margin portion just about the difference between current inflation and your willingness to pass it on and desire to maintain your value equation is that the kind of the root of the caution for the next quarter?
Nils Vinge
Well, it’s always about having, making sure that you always have the best offering and the trust by consumers, we’ll hand and elevate the profitability.
Unidentified Analyst
Of course, no, I guess my point is you obviously have less units of inventory. So, your marked down risk presumably would be conventionally lower on that basis.
Nils Vinge
It’s not that simple, but I see what you mean, but on the other hand, as Adam said, we are a bit cautious. First of all the comps last year we reduced markdowns quite a bit in Q3 last year. But this year, we also have the Russian inventories that is floating around that could cause a risk for more markdowns, but not necessarily.
Unidentified Analyst
Okay, nice. Thank you so much. Then secondly, just to clarify on Rich’s question, if I may, are you saying that the SEK500 million run rate of SG&A costs that relate to tech and other initiatives that, that continues for the foreseeable future?
Nils Vinge
It’s difficult to say the foreseeable future, but with the of course the growth of our digital business, that tech is becoming an integral part of all of our business processes is likely to see that, that we are not getting down to the level sort of pre-pandemic that we will be on a slightly higher level. So, it’s a fair assessment of at least how 2022.
Unidentified Analyst
Okay. Thank you.
Nils Vinge
Just a reminder that Nick, that it’s not just the cost, it’s also created value. So, you get the whole equation.
Unidentified Analyst
No, absolutely. I fully understand that it’s enabling what you’re doing. I do understand. And then lastly, if I may, just to follow-up on Adam’s question on SG&A inflation, are you able to give a very broad indication or sense of what proportion of cost inflation you’re able to mitigate with efficiencies or by making choices? I guess in the second half. Thank you.
Nils Vinge
Not, I think maybe to the level of detail that they expect, but I think as we mentioned, we have learned a lot during the last couple of years and we see that particularly on the store state with the adjustments down to the store portfolio and the strong lease structure that we have — that we will continue to bring benefits with us into the water to offset some of the cost inflation.
Unidentified Analyst
Okay. That’s helpful. Thank you so much.
Operator
The next question comes from the line of Sarah Butler from The Guardian. Please go ahead.
Sarah Butler
Hi, thanks for taking my question. I just wanted to clarify on something that others have asked about and not see inflation coming through in the autumn. And can you give — I know you’ve said that you’re going to adapt that for different markets, but can you please give an average of what price rises will be seen on the shop floor and just to clarify exactly what is driving that and for the [indiscernible]? Thanks.
Helena Helmersson
We prefer not to give that number on the shop floor simply because it looks different in different markets and on different product types. As I explained earlier, it’s a more dynamic way of working with it of adjusting prices. Always balancing and the customer offer customer sentiments, being competitive and, of course, also having our profitability goal in mind, so that we would take steps towards that. So, again, of course, we have to adjust certain prices, but it looks different in different markets.
Sarah Butler
And you can’t give an average for across all of those and taking into account all of those matters?
Helena Helmersson
No, we prefer not to do that simply because it looks a bit different in different places in the world and on the different markets.
Sarah Butler
Okay. And sorry, and just on the key thing that’s driving it for the Autumn, would that be the CapEx — sorry, the exchange rate or is that the other factors that have come through on materials and transport, is that still feeding it for the autumn?
Adam Karlsson
It’s all of the above. All the external factors are negative, and that’s why we see this inflation. And not just us, I mean everyone sees it, and of course we need to try to mitigate that. But as Helena said before, the most important for us is that customers should always trust that they could find the best offering at H&M.
Sarah Butler
Okay. So — and do you expect the price rises to carry on into the spring for customers as these — as your cost inflation gradually feeds through?
Nils Vinge
We don’t want to speculate on the future, but as Adam said, we already see that some of the spot prices on raw materials and price are starting to come down, including cotton prices on spot prices.
Sarah Butler
Okay, thank you very much. Cheers.
Operator
The next question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.
Dana Telsey
Hi, good afternoon. Can you please expand on the progress of supply chain easing, what you’re seeing there, and how you expect it to improve go-forward? And then lastly, on real estate, on the store closures, is it globally? Is it concentrated in any one particular region? And do you have a target store size that you’re looking to open go-forward, how do you compartmentalize the real estate dynamic? Thank you.
Adam Karlsson
Starting on the supply chain side, we, during last autumn, needed to sort of adjust our purchasing path to ensure that we hit the intended in-shop week to sort of truly meet the customer demands with what should meet the customer when. So, during late-autumn, we prolonged our purchasing lead times. And we’re now starting to see that with those prolonged lead times we’re actually starting to get garments to some of the destinations earlier than intended, which is for us a signal that we, hopefully, throughout the autumn will start to adjust back then to better tailor to the new situation and continue to have the high precision that we’re after. So, and slowly but surely, seeing some positive signals of the disruptions and disturbances, the easening and hopefully then continuing so after the summer.
Helena Helmersson
And when looking into store closures, as you know, we’re both opening new stores and closing in some mature markets. And for this year, that means a net that is on minus. Looking into different markets, when we say mature markets the biggest portion is within Europe. And then we see possibilities and opportunities to also open stores as we go. We work with this very dynamically, and that’s why we have been also making sure that we can be even more flexible. So, for example, looking into lease agreements, we have more flexibility also to adjust as we go to see the development. Of course, we have never seen such a big shift as we’ve seen during the pandemic when it comes to, also, many customers going online. But again, now we see that many customers want to meet us both physically and digitally. So, that means that we don’t have a target store size in mind, but more that we adjust as we go, and we make sure that we can be flexible.
Dana Telsey
Thank you.
Operator
And the next question comes from the line of Anne Critchlow from Société Générale. Please go ahead.
Anne Critchlow
Thank you, and thanks for taking my questions. I’ve got three, and they’re all product returns from online. So, I’ll ask them one by one. First of all, please, could you remind us whether you offer free online returns everywhere or whether you charge in some countries?
Nils Vinge
We do have — if you are a member in our loyalty program, we have free returns.
Anne Critchlow
Thank you. And have you seen returns rates rise, and if so, where are they versus the pre-pandemic level?
Adam Karlsson
Returns have started to normalize, but not at the level as they were before the pandemic. But the consumer behavior has started to slightly go back to pre-pandemic behavior, so to say.
Anne Critchlow
Okay, thank you. And then finally, is it fair to say that a very high percentage of returns goes back through your stores?
Adam Karlsson
Yes, and it’s very different in different markets. And that’s why one of the best opportunities we have to really combine the channel. So, some stores, that they really function really well as sort of the combination of both selling, but also being pickup and returning locations. So, see that different stores and different locations throughout the world. But in some stores it’s a very high portion.
Anne Critchlow
And then just as a quick follow-up, what sort of countries do you see a very high proportion?
Adam Karlsson
Well, it’s depending. And, of course, it’s where we have the higher store density, so in the more mature markets; here we can see that we have stores with high shares of [indiscernible].
Anne Critchlow
Okay. Thank you very much.
Operator
The next question comes from the line of [Steven Cherny] [Ph] from World Sports Activewear magazine. Please go ahead.
Unidentified Analyst
Thank you. In the context of H&M’s ongoing commitment to make garments that are sustainable as well as affordable, what is your reaction to the request from the Norwegian consumer authority that you reassess your use of the Higg Materials Sustainability Index to help present products as sustainable? And similarly, what is your reaction to the decision from the Sustainable Apparel Coalition to pause its use of the same index as a consumer-facing transparency program? Thank you.
Helena Helmersson
Well, of course, we are aware of the pausing of the Higg, and we have been involved in that for more than a decade. To my knowledge, it’s the biggest collaboration that we have ever seen to move the needle when it comes to the industry moving towards a sustainable one. It’s been a collaboration with different companies, but also academia experts and NGOs. And this is now being paused, so we’re following that development to see how to proceed. However, I would like to highlight that this is one out of many initiatives to move the industry towards a circular and sustainable one.
Now, we have been investing and working hard and leading the industry towards transparency and traceability for many, many years. This is one of the initiatives, but there’s also other traceability and transparency initiatives that we’re continuing with great excitement and engagement. So, when it comes to Higg, let’s see how that develops. But for sure, we see a future where we’re guiding customers better so that they understand how to make more sustainable choices.
Unidentified Analyst
Thank you. And the request from Norway?
Helena Helmersson
Again, we’re following that development through the Higg index who has those types of dialogues. So, all we know for now is that we’re pausing it for now.
Unidentified Analyst
Okay, thank you.
Operator
[Operator Instructions] We have another question from the line of Jie Zhang from Alphavalue. Please go ahead.
If your line is on mute, can you please unmute yourself so we could hear you?
Jie Zhang
Can you hear me now?
Nils Vinge
Yes.
Jie Zhang
All right, thank you. So, good afternoon. Thank you for taking my question, just the one from my side. And could you give us an update on your Click & Collect and online return in-store services development, and how many markets you offer those services, for which brand those services are available, please? Thank you.
Nils Vinge
Well, we are increasing the rollout as we speak. It’s currently available in 20-plus markets. And it’s covering the absolute sort of biggest market when it comes to turnover and number of customers. And we intend to continue this rollout during 2022.
Jie Zhang
So, for all H&M Group’s brand or only for H&M brand?
Nils Vinge
No, we are sequentially also rolling it out for other brands. But what I mentioned now was for the H&M brand with 20-plus markets [front] [Ph].
Jie Zhang
Thank you very much, very helpful.
Operator
And as there are no further questions, I will hand it back to the speakers.
Helena Helmersson
Well, thank you all very much then for participating in the conference call. And we wish you all a very nice summer.
Operator
This concludes the conference call. Thank you all for attending. You may now disconnect your lines.
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