H & M Hennes & Mauritz AB (publ) (OTCPK:HNNMY) Q4 2022 Earnings Conference Call January 27, 2023 8:00 AM ET
Company Participants
Nils Vinge – Head, IR
Helena Helmersson – CEO
Adam Karlsson – CFO
Conference Call Participants
Richard Chamberlain – RBC
Georgina Johanan – JPMorgan Chase
Rebecca McClellan – Santander
Nick Coulter – Citigroup
Adam Cochrane – Deutsche Bank
James Grzinic – Jefferies
Hannah Boland – Telegraph Media Group Limited
Simon Irwin – Credit Suisse
Anne Critchlow – Societe Generale
Nicolas Champ – Barclays
Operator
Good afternoon. My name is Nadia, and I’ll be your conference call operator today. At this time, I would like to welcome everyone to the H&M Conference Call Full Year 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
Hi, everyone. Thank you all for joining us today, and welcome to this telephone in connection with H&M Group’s full year report 2023 (sic) 2022. With me today is our CEO, Helena Helmersson; and our CFO, Adam Karlsson. We will now start with a short summary of the fourth quarter and full year, after that, we will be happy to answer your questions. You’ll find the full year report at hmgroup.com Investor Relations.
Now I’ll hand over to you, Helena.
Helena Helmersson
Thank you very much, Nils.
So we started the year having left the worst of the negative effects of the pandemic behind us. Then war broke out in Ukraine and we quickly decided to post sales in the countries effect. And later on also decided to wind down our business in Russia and Belarus. Russia was an important and profitable market for us, so our decision to wind down the business there has had a significant negative impact on our results.
The hikes in raw materials and freight costs combined with the historically strong U.S. dollar led to substantial cost increases for purchases of goods. We have increased prices but rather than passing on the full increase to our customers, we chose to strengthen our market position further.
On top of this, there were increased energy costs, as well as a one-time charge for the cost and efficiency program. That was initiated at the end of the year. The combined effect of these factors amounted to a negative impact on profit in the fourth quarter totaling around SEK5 billion compared with the same quarter last year.
Although 2022 was a turbulent and characterized by negative external factors, our sales increased by 6% during the year. Customers are showing that they appreciate our offering and customer preference is increasing among women.
The external factors that have had a negative impact on our purchasing costs are gradually reversing and are expected to become positive for our results in the second half of 2023. Purchasing costs are already lower for the orders being placed now compared with the same time last year. In addition, the second half will also see the positive effect of the cost and efficiency program that will drive growth and is expected to provide SEK2 billion on an annual basis.
Our long term 2030 goals remain in place, including a double digit operating margin for full year 2024. To achieve these goals, we are focusing on three growth areas. First and foremost, H&M, which is one of the world’s largest fashion destinations with several billions of visits yearly in store and online across the world. We are further improving the assortment and the customer experience both in store and online.
In order to meet our customers ever evolving expectations, we are continuing to strengthen, develop and broaden our offering with more products and services. By engaging our customers in various ways, we are strengthening the existing relationships with our customers, but also attracting new ones globally by offering them unbeatable value with affordable fashion in a more sustainable way.
The new financial year has started well with strong sales development during the holidays. Sales development between the 1st of December and 25 of January increased by 5% in local currencies compared with the same period last year. Excluding Russia, Belarus and Ukraine, the increase was 9%. This was mostly driven by H&M women’s wear and costs which continue to perform well.
We are focusing our expansion on increasing sales across all our channels. We have made large long term investments with a focus on digital. Online sales continue to develop well and around 30% of sales are online, which is at the same level as last year.
With our digital expansion, we are attracting both existing customers to more channels, as well as new customers who can meet us, when, where, and how they want. At the same time, the physical store remains much appreciated by our customers. And we are continuously optimizing the store portfolio to make sure that we have the right store with the right format in the right place.
We see clearly that customers want to shop both online and in store and we are continuing to grow with omni-channel sales. 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 convenience and inspiring experience.
In 2022, H&M opened its first stores in Ecuador, Kosovo, North Macedonia and via franchise in Cambodia, Costa Rica and Guatemala. We are also accelerating expansion in India, as well as in the North and South America region with a focus on Latin America, which continues to perform well. H&M is also scheduled to open its first store in Albania during the first half of 2023 and Ecuador will be a new online market for H&M from the start of 2023.
Over the past year, we have made several investments in H&M s lifestyle brands, which covers sports, beauty and home. H&M Move, a broadened sports assortment is our latest addition and have been very well received by our customers worldwide since its launch in August.
We are also growing our beauty and home offerings. In 2022, we continued to develop H&M beauty with good results both in store and online. In 2023, we will launch the first flagship stores for H&M beauty into European markets. H&M HOME also continues to perform well. In 2022, we opened seven standalone home stores and six additional markets will have H&M HOME concept stores in 2023.
In parallel, we continue to develop all our portfolio brands and business ventures. This is our second growth area. And during the fourth quarter, we saw strong sales development for our portfolio brands such as COS and ARKET with an increase of 22%.
Our third growth area is investments and innovative partnerships. We continue to invest through our investment on CO:LAB and in a short time, these investments have created significant value, both financially and in the existing operations.
Sellpy, which we are the majority owner of is a good example of how we continuously work on developing new circular business models. And how investments and sustainability also provide H&M Group with long term business opportunities. Sellpy continues to grow rapidly with sales expecting to pass SEK1 billion during 2023 and is already one of the biggest players in secondhand fashion in Europe.
We also continue to invest in other areas, particularly within tech AI and a supply chain. An important part of our supply chain is our logistics systems. We currently have several global initiatives involving new highly automated logistics centers with a focus on innovation. Two examples of this are our new logistics centers in Canada scheduled for completion in the first half of 2023 and also one in the Czech Republic, which is scheduled to open at the end of 2025. This will create additional capacity, flexibility and speed between sales channels, as well as improved availability.
Looking ahead, the external factors are still challenging, which we are humbled by. But things are moving in the right direction. Despite the tough situation in the world around us, the H&M Group stands strong with a robust financial position, healthy cash flow and a well-balanced inventory.
Sales in the new financial year have started well. Combined with our investments and efficiency improvements there are very good prerequisites for 2023 to be a year of increased sales and improved profitability. Therefore, our previously communicated goal of achieving a double digit operating margin for full year 2024 remains in place.
Thank you all very much for listening. And now we’re happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question today goes to Richard Chamberlain of RBC. Richard, please go ahead. Your line is open.
Richard Chamberlain
Thank you, afternoon, everybody. So I’ve got two questions, please. Well first of all, I just wondered if you can talk about your plans for sourcing more product in the Americas region, how you’re getting on with that, and the sort of timeframe we could be talking about for sourcing more product from the Americas, more toward nearshoring and so on in that region? Thank you.
Helena Helmersson
Sure, and when looking at the sourcing map, as you, you know, we are continuously reviewing our reworking that the bigger shift that we’re working on right now is more nearshoring. Concretely, that means that we are increasing the sourcing mainly from Europe. But also we’re exploring production also in the Americas primarily than in Latin America. But the bigger shift that is happening right now is the increase in Europe. So let’s see where the exploration work in Latin America leads us.
Richard Chamberlain
Okay, thank you. And then the other one is, on Page 9, I see you state that sales on the second-hand platform Sellpy, obviously up very strongly last year expected to exceed SEK1 billion in this year and you’re planning to consolidate that business as from Q1? Can you give us a sense of how much profit that company makes at the moment and so — help us with the modeling for this year?
Adam Karlsson
I think when modeling it you can consider that as profit neutral for the group for the year, right now. We will consolidate it, but it will not have a material effect on profitability for the year.
Richard Chamberlain
Thank you.
Operator
Thank you. And the next question, it goes to Georgina Johanan of JPMorgan Chase. Georgina, please go ahead. Your line is open.
Georgina Johanan
Thank you. I’ve got a couple of questions as well, please. Just the first one on the gross margin, appreciate that your common factors will be — external factors will be very negative in Q1 as well. Just to clarify understanding, should we expect a similar rate of decline year-on-year in the first quarter, as we saw in Q4, 2022, please?
Adam Karlsson
As we comment in the report, the sum of all external factors are peaking now and on 2022 and into 2023. But on top of that, we also have some year an effect in fourth quarter that will not be comparable into first quarter. So we believe that some of the fundamental external factors will remain very negative, but potentially not to the full extent as this reported right now for the fourth quarter.
Georgina Johanan
Are you able to provide a magnitude of one-off year end effect or year-end effects, please?
Adam Karlsson
No, no, no, not right now. We don’t quantify those effects, but if you think of it as – think of it as a safe way, most likely, it’s the bottom now with a peak hopefully. And things are going in — the direction is going in the right way as we said, but of course the inventory right now. Most of the products are bought when the dollar peak, so to speak for – at historical heights.
But going forward, the products we buy now as we state actually have a lower purchasing cost compared to last year at this time for comparable products. So that’s why we dare to be brave and point out that we will improve during the year and stay with a target of the profitability target for next year as we’ve talked about more later progress.
Georgina Johanan
That’s helpful, thank you. And my second question, which was a follow on, I guess. Was appreciate what you said on the gross margin, but obviously with Q1 tending to be a sort of somewhat smaller quarter in absolute terms, but yet you’re seeing some gross margin pressure. I mean should we be expecting sort of a meaning – a profit in Q1 or is close to breakeven sort of a more sensible assumption at this stage?
Adam Karlsson
As you know, we don’t provide guidance and forecast like that. So we just give you the background and the external factors so to speak and the shape. But then we can’t be so granular to say exactly how much. And so I leave it to you to make to your best assumptions, but it’s definitely, as we said before, a very challenging external factors also for Q1 definitely.
Helena Helmersson
Then we do see — as you saw in the report, the start of sales in this first quarter, we do see that it looks good, especially if we look at H&M ladies cost just to give a few examples. So that is a pretty good signal, of course.
Georgina Johanan
Thanks you very much.
Adam Karlsson
Correct. Also just to add also – be cautious I’m always cautious because Q1 will be the last quarter and we have Russia in the basis for comparison last year before we forced and winded down the operations in Russia. So that’s still in the basis for comparison from last year.
Georgina Johanan
Thank you.
Operator
Thank you. And the next question goes to Rebecca McClellan of Santander. Rebecca, please go ahead. Your line is open.
Rebecca McClellan
Yes hi. Good afternoon, can you hear me?
Adam Karlsson
Yes.
Helena Helmersson
Yes.
Rebecca McClellan
Yes, hi. So on the December and January trend, plus 5% or plus 9% underlying. Is that similar for both months or is there – or was there a change of — for the growth rates from December into Jan? And secondly, what is the price ASP contribution to that growth?
Adam Karlsson
Well, looking at some of the December effects were driven by positive trading days and calendar effect. So we saw a relative to January, a slightly stronger December. But all in all, it has been a fairly sort of – given that it has been consistently strong throughout the period. And we don’t give a complete guidance on the price increase and how much that has – sort of driven the selling. But we have over the autumn increased prices and still maintained our position to ensure that the value proposition is still complete for us compared to competitors.
Rebecca McClellan
Thank you.
Operator
Thank you. And the next question goes to Nick Coulter of Citigroup. Nick, please go ahead. Your line is open.
Nick Coulter
Thank you. Hi, good afternoon. Thank you for taking my questions. I have two, please. Firstly, could you give a sense of the elements relating to Russia in the fourth quarter income statement? I guess – to sales, gross profit and SGA, fiscal would get a flavor there please? And how does – how or does that interplay with the elements of the SEK2.1 billion exceptional in the third quarter, please? That’s the first one. Thank you.
Adam Karlsson
Well, as we mentioned, there are two components to the effect of the wind down of operations in Russia. And one is a one-time closure cost related provision we did in the third quarter amounting to SEK1.7 billion, SEK1.8 billion. The rest that we mentioned in the report is about a SEK2 billion sort of drag on the operational profit for the year than with the negative delta year-on-year based on less trading and having the stores in Russia closed. And for fourth quarter specifically, that amounted then to close to SEK600 million, also stated in the report. So that’s pretty much the picture we can give at this time.
Nick Coulter
But it looked like you sold pretty – quite a lot in the fourth quarter. You cleared down quite a lot. So you’ve obviously had a decent amount of sales and just – interesting how that flowed down the income statement, if that’s possible, please?
Adam Karlsson
We saw that we had a strong reopening end of August and into September. But then we gradually started to close stores. And with that gradual closure of course, we needed to take more discounts over the month in order to clear out the stock and time that’s with the closure of the stores by 30th of November. So not material impact on the profitability from a positive perspective during fourth quarter.
Nick Coulter
Okay. Thank you. And then secondly, would it be possible to talk a little more around your targets or ambitions to near sourcing on a global basis, please? And are there any milestones we should have in mind? Thank you.
Helena Helmersson
Right. To repeat a little bit, but we are driving a bit of a shift of course, still working hard with our sourcing in Asia, but shifting some also to do more near shoring. And then the biggest step is to increase it in Europe. And the reason for why we do that is first of all, that we do see a need to even though lead times have been reduced to do it further especially on the parts of the assortment that is more high fashion. So simply to be even quicker to react to upcoming trends and customer demand. We do see that benefits of being even faster and also using tech data and AI to, for example, quantify to be more precise. Then of course, it’s also a benefit looking at the exposure of currencies to also spread the risk benefit.
Nick Coulter
Yes. That’s very helpful. And should we – in five years’ time, should we think that you’ll have a 50/50 split between near and far sourcing or how far do you think the shift will go?
Helena Helmersson
No. We don’t have any goals like that. I mean, this is an enabler for us to be even more responsive to customer trends. So we are now implementing those plans that we have set and we will evaluate them as we go.
Nick Coulter
Okay. Thank you so much.
Operator
Thank you. And the next question goes to Adam Cochrane of Deutsche Bank. Adam, please go ahead. Your line is open.
Adam Cochrane
Good afternoon, guys. A couple of questions please. In terms of your proposition to customers, you talked about not fully passing through the input cost inflation to the consumer. Do you think that the consumer takes a while to notice the fact that your price position is improving compared to other companies, and then that the sales growth that maybe you saw in the first bit of the current financial year, is customers starting to reflect that?
Helena Helmersson
I mean, difficult to say, we do our best to look at customer feedback and the sales analysis. But so far, it seems like we’ve taken the right decision when it comes to working quite dynamically with this. And with that, I mean to raise prices a little bit differently on different markets to secure our competitive advantage and that we can truly keep our promise to deliver the best value.
And knowing the customer sentiments and looking at the collections and how they are received, we could say that overall, it seems that we are competitive. But I mean, this is something we have to follow through out definitely and work with it as we go, again, the most important part is also that we see that some of the external effects looks much better in the end of the year, so that we look upon this more and more long term.
Adam Cochrane
Thanks. And the second question is one that I suppose, Neil is asking me to ask about your double digit margin. How do you view the moving parts from where we are here to a double digit margin over the next 18 to 24 months. How would you try and help us classify what’s the most important part, sales, gross margin, recovery, operating costs reduction, how would you think about those bit?
Helena Helmersson
Right, I can start and then Adam, feel free to fill in. But this is really about pulling the brake an accelerating at the same time. So of course, it’s about implementing the cost and efficiency program that we have spoken about, so that we become more efficient, but also faster and more flexible. And then it’s also about having discipline when it comes to our focus areas because we do see that those give us results, both when it comes to sales, but also profitability.
And with that, I mean, how we work with assortment, how we also keep on digitizing our supply chain and integrate it when we work with assortment so that we can become more precise and accurate to meet customer demand. And of course, also when it comes to the customer experience, both digitally, but also how we continuously improve and update and optimize our store portfolio.
Adam Karlsson
And exiting 2021 and into 2022, we were on a rolling 12 basis close to 8.5% EBIT margin. So we believe that we should be sooner than later be able to get back on that track with more stable sales and trading environment. But the key of course enabler will be the normalized gross margin and that is what now without giving a forecast, but some of the external factors are pointing at that we could see towards the end of the year.
So Helena mentioned that we need to be disciplined in all of our cost actions, follow through on the selling, but also of course having a normalized gross margin to ensure that we can continue that path. We were on a year ago.
Adam Cochrane
I’ll just squeeze one last one in on sustainability. It’s important part of your business. There’s, been a few issues with the marketing and the advertising of sustainability over the last 12 months. Given it is one of your key strengths. How – are you going about telling your customers now about your better sustainability credentials given some of the challenges that we’ve got in the market?
Helena Helmersson
Yes, that’s of course really important. So with the transparency, to our customers, but also to create even more awareness and make sure that it’s really one of our competitive-edge in the customer offer. And right now, there’s a lot of legislation going on. We have been in the lead for a very long time in this question in the industry and also collaborated with many others. There has, not been any legal frameworks in the past.
And we decided to not wait for it, but to come together with other academia, competitors and others in the industry to start and be more transparent to our customers. Now as more legislation is being shaped, of course, that is scrutinized. So we need to come together to share our learnings with those also creating the new legislation, but also of course for us to come together and see how we can adapt and improve.
So we truly think it’s great with more frameworks and more legislation around this, because that also means that we will have an even clearer competitive edge.
Adam Cochrane
That’s great. Thank you.
Operator
Thank you. And the next question goes to James Grzinic of Jefferies. James, please go ahead. Your line is open.
James Grzinic
Thank you and good afternoon all. I had two quick questions. I guess the first one, just a matter of specifics for Q4. Can you just ask what you did with your marketing budget in the past Q4 year-on-year? How that shifted to set some of the one-off dynamics that you talk to in terms of that base of delivery?
And the second one, is around, I guess, continuing on Adam’s question, there’s, about 600 basis points of margin rebuild over the next two years that you’re pointing to from the clean base of [DV folio] you just reported. Would it be fair to assume given what you’re saying that about 400 basis points of that comes from gross margin and the balance is really coming from sales per square meter and OpEx efficiencies?
Adam Karlsson
Starting with the last question, we are given then the external factors seeing opportunities to come back to more normalized gross margin levels. And if you look back a couple of years that is approximately the delta you’re seeing in at least in fourth quarter. So that is the answer to the second question. And the other parts will come from the cost and efficiency program then in combination with the operating efficiencies throughout the sales structures.
James Grzinic
Sorry Adam – so two-thirds, one-third split gross margin and the rest is broadly seems fair?
Adam Karlsson
I think we’ll not go exactly into the details, but the majority of it will come from a more normalized gross margin as we’re in an extreme situation right now. So that’s a fair assessment absolutely.
James Grzinic
Great, thank you.
Adam Karlsson
And the first question, sorry, I missed it.
James Grzinic
Yes, I was wondering what happened to your marketing budget in Q4 year on year?
Adam Karlsson
It is still slightly elevated compared to the year before, but not to the extent as previous in the year. We had big launches of new concepts move and other things throughout the year, so that drove marketing early in the year – and still on a slightly elevated level, but not to the extent of previous quarters.
James Grzinic
Great, thank you.
Operator
Thank you. And the next question goes to Hannah Boland of Telegraph Media Group Limited. Hannah, please go ahead. Your line is open.
Hannah Boland
Hi there. Thanks for doing this. Just it would be good to get a bit more color on what you’re seeing among customers at the moment. And whether you are seeing people kind of choose cheaper items and whether kind of people are trading down at all. And then just be good to get a bit more detail on pricing as well. I think you kind of mentioned that you might have raised prices further. What could that look like for customers and – when should they expect potential further increases?
Helena Helmersson
Thank you. Well, we’re of course trying to follow customer sentiments as close as we can. As usual, we see that fashion is, I mean, also now when we bring in new and more high fashion spring garments that is very well received. But of course, doing that for great value of money is really, really important. So that’s why we try to be even clearer also with the customer offer and the customer proposition also from a price point of view.
We follow competition very closely to secure that we are competitive. And moreover, we also see an increased awareness of course when it comes to sustainability. So we do believe we have a great position when it comes to value for money and also offering products that are more sustainable. And of course, this is something we have been following really closely since we have also increased prices on certain product types.
A little bit differently on different markets. And since we also see that the external effect will gradually improve. We don’t want to raise too much prices to then lower them again, because we have a promise that we’ve made to the customers that we should deliver the best value for money. So we do think that we have managed this in a wise way and we follow continuously the customer feedback on that.
Adam Karlsson
Just to add on what Helena said also what we see again, it’s not just the price. It’s always the value proposition and I think the success of cost and market also shows that which are in higher price levels than the H&M brand.
Hannah Boland
Great, thank you.
Operator
Thank you. And the next question goes to Simon Irwin of Credit Suisse. Simon, please go ahead. Your line is open.
Simon Irwin
Hi there, a couple of questions for you. Could you just talk about the – going back to external factors? If you ex out the FX, can you just talk through the moving parts that you’re seeing in terms of raw materials, labor and freight as to kind of when – are you seeing local dollar costs coming down on a landed basis ex FX and kind of which parts of that equation you’re seeing the movement in?
And then I can just ask a question on the 2020 10-year ambition to double sales. Where is that going to come from? I mean sales have been – sorry, store numbers have been falling for the last three years or so. So are you basically kind of going to achieve this ambition by doubling the share of e-com or will you get back to growing store numbers at some point in the not too distant future?
Adam Karlsson
And if we start with the sort of moving parts and excluding FX. And we have been seeing a raw material price increase over the last couple of years and on the backdrop of COVID with high demand and disturbances in the supply chain. Since sort of mid-autumn or late autumn, we’ve seen that the raw material prices and particularly and the corporate prices have started come down on a year-on-year basis, which is kind of, of course, mostly favorable going forward.
From a sequential point of view, this will affect and the orders we will place during the spring. And as Helena mentioned, we already start to see the year-on-year effects coming down. Other than that, we also see that international freight and transport costs are likely to come down. That has also somewhat a delayed effect. So we expect, if these spot rates are consistent with the current levels to be positively affecting us from end of second quarter and into third quarter.
And then of course, we do see some solid cost inflation in some markets, but we believe that that is a lesser negative effect seeing and the positive other effects that we’ve been thinking about the raw material costs coming down and the international trade costs also potentially coming down on cost.
Helena Helmersson
And then yes sorry.
Simon Irwin
Helena, you go ahead.
Helena Helmersson
Okay. So I was just going to comment on the 2030 growth targets. And you’re correct we are keeping that even though of course it was set in a different concept, before the war. But we do think that it’s possible and that’s what we’re going for. And we are driving growth plans within three areas and first one and the most important is the H&M and the second one, portfolio brands and business ventures.
And the third one is growing through investments and partnerships for some of them. We have our investment on CO:LAB that has been investing very strategically with creating a lot of value. But of course, the biggest part is from H&M. So I will talk more around that. The growth will come from our focus areas linked to improving customer offer, customer experience and also – digitizing the supply chain.
And this will help us also to grow in comparable stores and also of course digitally because that will of course help us also to be more accurate, more precise. And meet customer demands to an even greater extent. So there’s a lot of improvements going on in store portfolio and within the assortment stress, it is also linked to tech and supply chain. Other than that, we’re also broadening our offering.
And you have probably also seen that even though it’s in [Kirkland] during 2022, we’ve been able to invest in broadening our offer. We’ve done it both, and some for ladies, but also in lifestyle brands such as H&M Move the sports assortment. And also beauty, we’re broadening and also H&M HOME. And then we have other businesses such as Sellpy that we spoke about before, which is another example.
And besides that, we also see, of course, the opportunity to grow geographically. First of all, we focus on region America’s especially Latin America. There’s, also great potentials in India, for example. And as you saw in the report, we will have a net closure of 100 stores, that’s the best estimate for 2023. So gradually, that is coming down. So, of course, we will – we also see great opportunities to grow in number of those areas.
Simon Irwin
Great, thank you very much.
Operator
Thank you. And the next question goes to Anne Critchlow of Societe Generale. Anne, please go ahead. Your line is open.
Anne Critchlow
Thank you. Hello, I’ve got three questions, please. The first one is about the trial you’ve been running for online returns and charging for those. Are you considering rolling that out?
Helena Helmersson
Yes, we have decided to roll that out. So we had good results on that tests, so if I remember correctly, it’s roughly 10 to 15 markets in the next step, and then we will take it from there.
Anne Critchlow
Thank you. And the second question is about and the marketplace sales that you have on H&M. please, could you give an update about the number of brands and countries and how that’s going?
Helena Helmersson
Right, and so we have that now on six markets and we are collaborating with around 70 external brands and of course, we also have our own portfolio brands in there. So really interesting to see the cross shopping since many customers want to mix and match from different brands.
So we are partnering up with other brands that are also strength the pure offer from an H&M perspective. So it’s still in trials, I would say, and we’re assessing it as we go, but positive response from customers, I would say.
Anne Critchlow
Thank you. And then finally, just a reminder please on the H&M incentive program and whether we need to budget for it 10% of the PDP increase being awarded to staff in the fourth quarter?
Adam Karlsson
Hopefully, yes.
Anne Critchlow
Okay, cool. It’s still running, right. Thank you very much.
Operator
Thank you. And the next question goes to [George Nowicki] of [indiscernible]. George, please go ahead. Your line is open.
Unidentified Analyst
Good afternoon. Thank you for taking my questions. Well, actually some of them have already been asked, but I have few more. So first of all, there’s if I have quicker and follow-up on Sellpy. The turnover target you’re giving us for Sellpy, is that net or gross meaning before or after returns SEK 1 billion?
Adam Karlsson
It’s gross, it’s gross.
Unidentified Analyst
Gross. So meaning that it’s actually only 50% of that is the actual turnover, considering the return rates?
Adam Karlsson
Okay. It’s doesn’t me. It’s the gross merchandise value, but it’s of the return. So it’s the – in that sense, then the net effect on selling of the returns.
Unidentified Analyst
So it’s the net.
Adam Karlsson
Then it’s the net yes then it’s the revenue absolutely, yes.
Unidentified Analyst
Okay, okay all right. The second one would be, how happy are you with the development of your biggest market, Germany?
Helena Helmersson
Well, overall, we have seen in Germany also from customer sentiments that to some extent it’s been challenging. However, we see when looking at our performance, it’s according to the market as a whole or slightly above.
Unidentified Analyst
Okay so meaning which in Germany did you reach the level of 2019 already?
Adam Karlsson
We’ll have to check that and come back. I don’t have that at the top of my head.
Unidentified Analyst
Okay, okay all right. Next one would be China, which was a big thing during the last telephone conference. We had – how is everything going there at the moment?
Helena Helmersson
Yes, roughly same answer as last quarter. So still challenging, but slowly it’s going in the right direction. So we keep on working hard with making sure that the customer of brand experience is really relevant. And of course, we’re still in dialogue with multiple stakeholders. So slowly, we’re taking steps in the right direction.
Unidentified Analyst
But all the stores are open and you – are you back on the big platform as well?
Helena Helmersson
All stores are open. There’s, some restrictions to opening hours due to COVID. But other than that, it’s open and you can also find the offer on Tmall.
Unidentified Analyst
Okay all right. Thank you.
Operator
Thank you. [Operator Instructions] And our next question today goes to [Chloe Mills] of William Reed Business Media. Chloe, please go ahead. Your line is open.
Unidentified Analyst
Okay. And I just wondered if you could give any more detail on the performance in the U.K. or did you see more return to stores in the U.K. over Christmas and last year?
Adam Karlsson
We have seen a strong development in many markets and particularly in Northern Europe over the last quarter. And U.K. is one of them where we have had strong trading. Don’t have the specific numbers for the last month here, but it’s been a generally strong trend.
Unidentified Analyst
Okay, thank you.
Operator
Thank you. And the next question goes to Nicolas Champ of Barclays. Nicolas, please go ahead. Your line is open.
Nicolas Champ
Yes, good afternoon. Thanks for taking my questions. I have two. The first one is you plan to close down a further net 100 stores this year? When do you expect to resume a net positive store opening program and also – when do you expect to complete the rationalization of your store network?
And the second question is, would you consider that you are currently growing market shares in the different markets, I mean, based on recent performances compared to some of the listed competitors. It tend, to suggest that you underperform some of these listed players, but perhaps you have more accurate data to share with us. So which are the markets where you are performing and are you considering you are getting market share? Thank you.
Helena Helmersson
Okay. So first question then and number of stores and when start to increase again. We don’t have that kind of dates because we kind of continuously assess when it comes to consolidations and also opportunities to open new stores, but as you have seen throughout the past few years, minus or net minus of 100 stores is much less than the past few years.
So we’re coming to a place when our store portfolio becomes more and more optimized. So of course, our aim is to start to grow with opening new stores also again and come to a plus. But we don’t have a date for that yet.
Nicolas Champ
And perhaps in which markets do you plan – sorry, in which market do you plan to close down more stores, I would say, and which market do you plan to open new stores this year?
Helena Helmersson
Yes, I would say mostly then on the mature market. So looking region wise, it’s more in Europe than other places in the world where we still have some closures to do and again important then to look at the integration of physical stores and digital channels. Then we have the question on market share.
Adam Karlsson
And when it comes to market share it always difficult to – how you define the markets and so on. And of course, it varies from market-to-market because they’re different competitors and so on. But overall, we see that we are performing according to the market or above in most markets, especially the most important markets for us like in U.S. and Germany.
Nicolas Champ
Okay, thanks.
Operator
Thank you. And we have a follow-up question from Georgina Johanan of JPMorgan Chase. Georgina, please go ahead. Your line is open.
Georgina Johanan
Yes, thank you. Two follow-ups actually please and the first one, I think you just touched on it, but I just wanted to ask about your overall performance in the U.S. more recently given I know you’ve made some meaningful changes in that market. But also the backdrop has been a little bit more mixed there than in Europe. So any color would be helpful?
Adam Karlsson
Yes, so we continue to do well in the U.S. and the U.S. is now the most – the biggest market for us, which is interesting of course, driven also by the strong U.S. dollar. But I just spoke to our country manager yesterday. He was quite pleased about the performance. But there is still a lot do – a lot of potential and very positive sign as we get in the customer service that more and more especially women who prefer H&M more compared to other competitors.
Georgina Johanan
Thank you very much. And my second question was just a follow-up to what’s been asked around the nearshoring. Just to understand, because my understanding had always been of course sourcing from Europe on a kind of like-for-like basis was more expensive than sourcing from Asia and particularly now that freight rates have normalized somewhat? I mean should we be building in kind of an incremental cost for that as you bring more sourcing sort of profile or would you expect that to be offset by a better markdown trend, for example?
Adam Karlsson
The last bit of your question is referring sort of to the potential we see. Helena, I mentioned the higher relevance, the short the decision lead times and the more accuracy in our buying will offset the potential higher purchase cost. And then in a year like this, of course, with the fluctuations of the currencies and also transport cost being very, very high. The negative impact is very, very limited.
But in a more normal sort of external environment, we believe the closeness to the customer and the shorter decision lead times will clearly lead to higher selling more relevance lower markdown trends.
Georgina Johanan
Great, that’s very helpful. Thanks very much.
Operator
Thank you. [Operator Instructions] And we have a follow-up question from Simon Irwin of Credit Suisse. Simon, please go ahead. Your line is open.
Simon Irwin
Yes, could I just ask about the dividend? You have a stated policy of a 50% payout. Obviously, the payout for 2022 is well above earnings. And from what you’re guiding, it doesn’t sound as though you’re going to deliver SEK6 of EPS in the current year? Can you just kind of talk us through the decision to keep paying the dividend despite your – supported policy of paying out 50%?
Adam Karlsson
Well we have during the last year been very, very consistent and disciplined regarding our capital allocations strategy. And when making this assessment, we always consider that. We always consider the capital structure targets. That we then communicate as less that in relationship to EBITDA where we have a sort of a ceiling level that we are well below.
We also consider, of course, the investment needs and we are now guiding for investment levels on similar levels to pre-pandemic levels. And it also needs to be considered that we don’t have the store expansion as we did pre-pandemic. So we believe that we have sufficient funds to invest. And then last but not least, of course, we have a responsibility to ensure that we manage the owners’ money in a responsible way and then dividend is a natural part of that. So we believe we have a strong capital allocation strategy that we follow and then – sort of stand behind the recommendations from the Board.
Simon Irwin
Okay. Thank you very much.
Operator
Thank you. We have no further questions. I’ll now hand back to Helena Helmersson for any closing remarks.
Helena Helmersson
Well, thank you everyone for participating in this conference call and we wish you all a great weekend.
Operator
Thank you. This now concludes today’s call. Thank you so much for joining. You may now disconnect your lines.
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