Earnings Transcript for HM-B.ST - Q2 Fiscal Year 2020

Operator: Thank you all for standing-by. Ladies and gentlemen, welcome to today's Six Month Report for 2020 Conference Call. Our presentation for today will be followed by a question-and-answer session. [Operator Instructions] Please be advised, call is being recorded as well. And I would now like to hand the conference over to your speaker your CEO, Ms. Helena Helmersson. Thank you.

Helena Helmersson: Hi, everyone, and thank you for joining us today. Welcome to this telephone conference about the H&M Group's six months and second quarter results 2020. With me today is our CFO of Adam Karlsson and Head of Investor Relations in Nils Vinge. After a short summary of the second quarter and current developments, we will be happy to answer your questions, and you would find the six months report on hmgroup.com investor relations. The COVID-19 pandemic continues to impact people, communities and companies around the world. As we continue to gradually reopening our stores, we do it in line with authorities, physicians. The safety of our employees and customers remains our highest priority. It is encouraging to see that, sales are starting to pick up even though market conditions are still challenging. There is no question about that. Our sales recovery so far has been better than we expected. We see that our assortment is being well received, just like it has been well received online throughout the pandemic. Before the outbreak, we performed strongly. It was the result of our improvements and long-term investments to meet the digital shift in fashion, retail and create the best offering for our customers. This combined with the fact that, we have acted quickly to counter the negative effects of COVID-19 and that we are accelerating our transformation, convince me that, we will come out of the current situation stronger. At most, around 80% of our stores were closed in the second quarter and in the markets where stores were open, the mall was significantly subdued. We had already beforehand communicated that the quarter would be loss making. And thanks to a range of decisive measures in areas such as rent, marketing and staffing, costs were considerably reduced. However, it was not possible in such a short time to compensate for a space decline of 50%. The net result was minus SEK5 billion. Thanks to rapid adjustments to product purchasing and buying plans, we managed to reduce inventory somewhat in the second quarter, compared to the same time last year. However, if there is an oversupply of spring products throughout the industry and the market remains weakened, we expect markdowns in relation to sales to increase in the third quarter. We continue to adjust costs to counter the negative impact of COVID-19. Since end of April and early May, we have gradually been reopening stores as restrictions have been eased. Consumer confidence has generally been subdued to start with, but the pace at which sales are recovering varies a great deal between markets. In the period of the 1st to 24th of June, sales decreased by 25% in local currencies compared to the same period last year. During the pandemic, it has become clear how important the interaction is between digital and physical channels to meet customers' needs. When the majority of our stores were temporarily closed, we focused on redirecting product flow to our digital channels which have remained open in all the time in nearly all our online markets. Online sales increase strongly during that period and have continued to develop a very well since we began reopening the stores. We can already see that the pandemic has caused changes in customer behavior that will accelerate the digitalization of our industry. To meet this future we will continue adapting the organization and improve our ways of working to become more flexible, fast and efficient. As we are accelerating our digital development, we continue optimizing the store portfolio and integrating the channels. Our leading sustainability work will also contribute to strengthening our position and help ensure a long-term positive development of the H&M Group. Thank you very much for listening, and now we're happy to take your questions.

Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Fredrik Ivarsson from ABG Sundal.

Fredrik Ivarsson: First, one on the OpEx reductions, you've obviously managed to lower SG&A by 25% in Q2 and you guide from minus 10% in Q3. My question is, should we expect part of these reductions to be rather permanent than temporary? That's my first question.

Adam Karlsson: When guiding for both the second and third quarters, we give an estimate of what we believe is the short-to mid-term flexibility in our costs. So, it's actually a wide range both from sort of the more long-term slower and less flexible costs to the really short-term actions we can take when it comes to staffing and stores and so forth. So, it's a combination, but it's more related to short to mid-term flexible costs.

Fredrik Ivarsson: And second one is on consumer behavior. And maybe if you could give some color on what your first takes from the markets that you recently opened up are? And also, maybe apart from the acceleration of the migration from stores to ecommerce, how do you think that the pandemic will change brick-and-mortar retail?

Helena Helmersson: Right, when we look at customer behavior, we do see that we have increased the customer base online. And many of our customers that have been store customers are now multichannel customers, which of course it's encouraging. Now when opening up, we do see that we gradually, of course, improved the sales, and it's a little bit better actually than we thought in our scenarios and still the digital channels are going really well. So going forward, of course, it's all about to meet the customer wherever they choose to go. So it's very much about the flexibility, where we do believe that digitalization is kind of being accelerated and more customers will also choose to meet us in those channels. What's important when talking about online and physical stores is of course the integration between channels and this is where we focus our, and accelerate the transformation then going forward. And now the change of customer behavior is the awareness around sustainability which is also very evident where of course our sustainability work. Well, we hope to engage and collaborate even more with customers around that going forward.

Operator: The next question is from the line of Daniel Schmidts from Danske Bank.

Daniel Schmidts: Couple of questions from me then, obviously, looking at Q2 operating leverage on fixed costs and COGS was a big burden, given the drop in sales of 50%. How do you view that going into Q3? And have you done anything when it comes to the fixed cost base in COGS, making it more flexible in any way compared to how it was a couple of months ago?

Adam Karlsson: I mentioned previously in the guidance, it's more related to what we short-term can be flexible with flexible with them. And in the same way, as our SG&A, there are a variety of flexibility levels also in costs that we have under the COGS, so to say. So not a black and white answer, so to say, but it's a variety of fully flexible and more long-term flexible costs.

Daniel Schmidts: Just trying to get to, are you in any way more flexible going into the summer than what you were during the spring? Or is it about the same operating leverage that we should expect? Of course, depending on the sales stuff, that the impact will differ, of course, but has there been any change? Do you see what I'm getting out?

Adam Karlsson: Yes, but with sales increasing, then of course, the negative leverage in itself will be way less than.

Daniel Schmidts: Absolutely, absolutely

Adam Karlsson: But as time evolves, we're also addressing some of the costs that might be more made the long-term flexible. But I think we should focus more on the negative leverage generated by hopefully highest sales level done for the third quarter.

Daniel Schmidts: And then just looking at the sales performance, the start of Q3 and of course, you have very different comps in June because June last year was very strong. Can you say anything about sort of the reopening schedule, the way you see it or do you have any sort of visibility on that?

Helena Helmersson: Well, right now, most of the stores are open. We have 350 stores that are still closed. It's really hard to predict what will come. We see some major markets that we focus on now to open stores, hopefully, but there are also restrictions when we open stores due to the safety for staff and also for our customers with a bit of limited opening hours. So for how long that will kind of hold this really, really hard to predict. We really just try to be flexible and welcome the customers and stuff back as per authorities and recommendations and try to meet the customers wherever they want, so hard to predict.

Daniel Schmidt: All right, I understand, one of your main competitors were all saying that they expected most of their stores to be opening key markets by the end of this month, but I guess you're also basically on that track. Okay and then the final question is in terms of consumer behavior changing and online, there's been a few others saying that sort of return rates are coming down as more men are entering online clothing. Are you seeing any way a similar pattern?

Adam Karlsson: We have seen a positive tendency in the more customers of course finding us through the digital store. And throughout this quarter, we've had a strong online selling and that may then result in overall returns. And there are differences between the customer groups and customer behaviors, but we haven't sort of detected that's one of the key drivers in this quarter. So, there are lots of dynamics changing, but to that example, we haven't seen clear evidence.

Operator: Thank you. The next question, it's from Richard Chamberlain from RBC Capital.

Richard Chamberlain: A question for me please, on the purchasing outlook, I think in the statement you're talking about the external factors improving a little bit from somewhat to slightly negative. And I just wanted to confirm, is that comment mainly to do with currency? Or were there other significant factors driving that comment?

Adam Karlsson: Well, the majority is related to currency, and then of course, we can predict that the underlying pressure on volumes in our purchase markets is also highly volatiles. So, there we have some bit of uncertainty, but our guidance here is primarily due to the currency effects, and somewhat I believe that the capacity pressure in some of our production markets will be slightly less then.

Richard Chamberlain: And just one more please on the U.S. market and it's obviously been one of the more challenging markets over the last a few months. And I wonder if you can give an update on recent trends in particular plans with store openings and closures in the U.S. market?

Helena Helmersson: We're really following the development and its right that U.S is one of the most challenging markets when it comes to reopening, and of course also there were trying to follow recommendations going forward. Today, we have 120 stores closed in the U.S., and on top of that, it's been other turbulence also regarding Black Lives Matter, of course. So hard to predict when this will change. But of course, we're hoping for reopening real soon with the necessary safety measures.

Operator: Our next question is from Nicolas Champ from Barclays.

Nicolas Champ: I have two. First of all, you -- just to your store expansion plan for this year. Could you please be a bit more specific and specify which countries in which markets you decide to close most stores and in which countries you decide to open less stores? And the second question is about your cost structure. Did you complete your negotiation process with the landlords? I mean, could you be -- please be a bit more specific about the potential upcoming as savings that could arise from this renegotiation with landlords going forward? And if possible, specify the level of proportion of flexible rates that currently represent -- now represent your rental chart please?

Nils Vinge: Okay. For the first question, when it comes to store openings and closures, it's actually we look at every market-by-market. But of course, as we said before in the established markets, mainly in Europe, we see more closures than in the other new markets where we see more openings.

Adam Karlsson: And on the cost structure question, the greatest part of the saving is due to the opportunities we have with the flexible and turnover based rent. So that is the main components of our rent saving. And that will of course continue when and if sales continue to be dampened. And then we had a very good dialogue with many, many landlords regarding more short-term adjustments also to more fixed components of our rents and that dialogue will continue and we believe that the market is trying to get through this situation together, and we are in good dialogue and some of these dialogues will be permanently affecting the rents. But the absolute majority of the effect is connected to our turnover-based rents.

Operator: Okay, we will take our next question it's from Simon Irwin from Credit Suisse.

Simon Irwin: So in rough terms, your COGS are down about SEK16 billion on where you might have originally expected them to be in the quarter. And yet your inventory only went up by about SEK3 billion. So, can you talk a little bit about kind of how you've managed to reduce your inventory levels so fast, given that presumably you only started planning around inventory reductions in March and whether this reflects total commitment or just inventory on the balance sheet i.e. other commitments which you've slowed down in terms of taking delivery later?

Adam Karlsson: We have, as Helena mentioned, really, really worked on the flexibility and took decisive measures already when we saw indications of all, of this situation in early spring. So we are very pleased with the effects that we've gotten. And that's also very close collaboration with our, the internal teams have worked super hard in mitigating the negative effects adjusting purchase plans and ensuring that we are in a healthy position in going into quarter three. There has been some limited disruptions in the supply chain particularly Bangladesh and India, these are now resolved, so we don't expect a big backlog into third quarter.

Simon Irwin: And can you just talk a little bit about the kind of composition of inventory and how you're kind of trading it through? I mean, do you think you cloud, and you will trade through most of your spring/summer inventory through this summer and clear it in sales? Or would you expect to be holding something through to next spring next year?

Adam Karlsson: We divided into a couple of different buckets, the majority and here we also guide for it in the report that we will most likely need to take more reductions throughout quarter three to reduce the levels of spring garments so we ensure a strong composition competition into the system. But then we also had the opportunity to spare some garments that are more long-term that we believe that we don't have to activate throughout this summer but rather bring these more or actually less seasonal garments out to our stores and the online channel throughout the autumn. So there are a number of different activities ongoing, but the majority is that we, of course with the flexibility reduced purchasing. And then, we will activate slightly more than the last year throughout the summer here to improve and get the interview awesome in with a good stock competition.

Simon Irwin: And then just one final question. Can you tell us, what was your exit rate in China? Are you now back in positive territory?

Adam Karlsson: Sorry, say it again.

Simon Irwin: What is the exit rate for China? You gave us the slightly overall quarterly sales for China in the report that, that you now back trading positive year-on-year in China?

Nils Vinge: We're not fully back yet, but there are some markets where we're actually doing better than last year, but China is still not back fully. Of course, day by day or week by week but not the overall future still below last year in China.

Operator: Our next question is from the line of Niklas Ekman. This is from Carnegie.

Niklas Ekman: Yes. Can I ask you a bit how you've been planning for autumn connections, given your comment that sales are performing better than you have thought? How quickly can you adjust and in terms of sourcing just to have a well balanced inventory for this autumn if same are now truly recovering?

Helena Helmersson: Right, of course, we need to buy with a different kind of speed for a bigger part of the assortment now than what we've done before and we are super impressed by seeing the collaboration and also the changed way of working to get this kind of flexibility. So, we do see that's of course in this case since it's been quite unpredictable that late decision is really favorable for us. Largely we can manage that through working in different ways and together with our suppliers.

Niklas Ekman: Okay, great. And coming back to the cost issue going forward, if you look at costs per store in 2021 and do you expect those to be tangibly lower than the corresponding costs in 2019?

Adam Karlsson: It is of coursevery much related to our sales prediction or actually how the sales will develop. And we're working as we always do, to try to be as efficient in how we operate the stores but without compromising on the customer experience. So with the uncertainty of how stores sales will develop, we of course, as Helena said in the same way as we trade flexibility in buying. We also work hard to create flexibility in the cost structure to mitigate the potential effects of this situation.

Niklas Ekman: Okay, thanks. And also, you've mentioned here in the results that you're looking at additional financing. Could you give any indication of the size of issuing -- issuance of new bonds here? And would that replace current debut? Or are you planning to increase your debt situation?

Adam Karlsson: We are changing the focus a little bit now from securing short term liquidity into ensuring that we have a long-term plan. So what we are now creating is another tool to put in the toolbox to ensure that we have a good access to capital if needed. So it is a way to secure that we can make these judgments as we go ahead and ensure that we have the needed financial flexibility going forward. So it's not decided on when and it's not decided on levels. But this is something, we will evaluate once we are all active and this program is in place.

Niklas Ekman: But is it a tool to increase your debt or it's just a different balance?

Adam Karlsson: It's to widen the access to capital so to say. So, it's not to increase debt per se, but it's rather to have more tools in the toolbox.

Operator: Thank you. Our next question it's from the line of Charlie Muir-Sands. Thank you. You may ask your question.

Charlie Muir-Sands: Two for me please. The first one is, I wonder, if we could just clarify you obviously talked about the trends remaining strong in online as the source have reopened. I wonder, if you could just clarify whether you actually seeing the same kind of rates of growth or acceleration of how little bit of moderation in the pace of growth stores we opened in the online channel? And then the second one is, would it be close to as given indication as to how much government supports was provided to your cost base in the second quarter whether you anticipate similar scale or perhaps scale less than the third quarter?

Helena Helmersson: Trends online we talked a little bit before. And we are encouraged by seeing that even though when the typical stores are reopening, we still see good selling in the online channel, which is of course really good. And again, we see that we have increased our customer base, and that quite many of our customers that used to be customer in our physical store is now multichannel customers. And again, instead of only focusing on the growth in one channel, we think flexibility is key. That means that meeting the customers where they choose to go is really what we are focusing on. And that is why the integration and the flexibility of the channels is the most important part.

Adam Karlsson: And regarding the second question, regarding the government support, we estimate at about a fifth of the cost reduction here in the second quarter can be attributed to cost reductions related to government support.

Operator: Our next question is from the line of Anne Critchlow.

Anne Critchlow: I've got two questions. The first one is on the current trading. And I think you've been positively surprised. So just wondered in which markets or regions you're now seeing [Indiscernible] and where the best surprises have been? And then on the second question…

Adam Karlsson: We lost you there. Could you rephrase the question please because we lost you?

Anne Critchlow: Sure, sorry. So regarding current trading, I wondered which markets or regions you're seeing sales growth in because I think you've had to surprises. So just wanted where they were? And then the second question is on RFID tagging. And when we went to the London store last year, I think you were going as tags in -- which had the RFID chips in tagged. And not all products were tagged at that point, but I just wondered where that project was? And what's your [Indiscernible] to do with RFID tagging?

Adam Karlsson: Connected to the RFID, it's still an important part of the plant to ensure that we have the availability of the right comments in the right store. So that the product is still in the middle of the rollout phase and we just add the China now during the spring and we see positive effects of having the RFID tags on our product. So we're keeping the rollout plan and we see the positive effects of it from a size availability and customer experience point of view.

Helena Helmersson: Today, we have RFID at 20 markets. And if I talk a little bit about the sales and what we have seen, of course, we all felt that it was really unpredictable. So we worked with several different scenarios in parallel. And it's quite hard to just pinpoint a few countries or regions, because overall, we would say that when reopening the stores, we've had a slightly kind of better saves in the physical stores than we thought. However, we have to be really humble for what's coming the next coming weeks and months because it's still very unpredictable and it's vary so much from market-to-market. So, it's difficult to see patterns but of course encouraging to see overall sales figures as we reopen.

Anne Critchlow: Could you highlight any countries where you're seeing positive sales growth?

Helena Helmersson: We could -- I can mention a few markets like Korea, Japan, Norway to mention a few.

Operator: Our next question it's from the line of Rebecca McClellan. You may ask your question.

Rebecca McClellan: Firstly, could you sort of develop slightly where, at what stage you're kind of integration is and how you want to take that when you hope to achieve sort of your optimal integration? And secondly, does the recent experience change your sourcing strategy with different markets that you might be sourcing from the need for more rapid sort of lead times, et cetera?

Helena Helmersson: When it comes to the channel integration, I don't know being ready -- I think this is really an ongoing work for a long time ahead. But of course, we have taken a lot of measures already and this has been a transformation that has been going on for some time that we now accelerate further. And part of that agenda is then the customer experience. So whether you choose to go to the online store or the physical store that it should be like an integrated experience and then we have different examples on visual search. We have finding store we have scanning by clicking collect returns in store just to mention a few projects that we are, we've been trying out for some time in many markets and rolling up further. And the other part in the integration, which is really important and has been highlighted in this crisis is the supply chain, and the importance of being flexible them between channels. And then we're happy to see that we already have done some investments. For example, the omni distribution central in [Indiscernible] as to mention, one, and where we can enable that, that transformation, we will also accelerate going further.

Rebecca McClellan: So, for the [Indiscernible] distribution center, basically, it can, it's, it can distribute to both online and offline, but this is a rare example now. It's only in the UK that you've got that capacity at present, is that right?

Nils Vinge: We're more or less different solutions, but this has been it's not just about the warehouse as such. It's more about thinking about the system behind and throughout the entire supply chain.

Helena Helmersson: Also of course order orchestration between the parts of the network which is crucial to be flexible.

Rebecca McClellan: Thank you.

Helena Helmersson: Then we had the question on sourcing market and in this crisis when we have been forced to kind of take flexibility to a different level. And as I mentioned before, the main part and reason for us being able to take much faster decisions and kind of be faster as such is different ways of working. And so, I will draw their highlights best then, specific and major changes when it comes to the sourcing market mix.

Operator: Okay. Next question is from Michelle Wilson. Thank you.

Michelle Wilson: Two questions for me please. The first one just clarifying on the I'm selling and admin cost guidance for Q3. Is that all volume related the 10% year-on-year reduction in costs? And if so, what assumptions be made around sales for the quarter to get to that number? And also you mentioned in the release this morning and the government grants that accounted for about, I think it's best for the drop-in cost over Q2. Is the assumption that all of those government grants will drop out over Q3? Or where we still have grown the grants over the period? And the second question, just on the store estate. So you slowed the rollout program or adapted the rollout program in 2020, but we've seen one of your major peers take a more significant restructuring in light of acceleration of channel shift driven by COVID. Is that something that's been undertaken by H&M? Is there any sort of review of the store estate going on or have you already reviewed your restorative state and you're comfortable with what you have?

Adam Karlsson: To start with the OpEx guidance then for, or SG&A guidance for third quarter, it is our best estimate of how stores will continue to reopen and of course when they reopen. We are right now at 93% open. There is a big volume component into the saving, when we open of course stores needs to be up and running close to what they were before. So volume is of course important here, but we're also prioritizing really, really hard to ensure that we do everything we can to meet the get the uh, the cost effects. So primarily opening stores reduced system and the flexibility and cost, but of course, underlying we're working very, very hard to secure that we have a strong cost structure to back this up. Second question government grants. Yes, exactly. We believe it's too early to say the conditions are changing along the way, but we believe that the third quarter will be less impacted by government support in second quarter. So we believe that majority is now in second quarter. But as previously said, this there's still uncertainty and changing conditions.

Helena Helmersson: When it comes to stores, of course, we put a lot of focus on the store optimization. We did that also before we do it continuously. But in the crisis, when we also see that more customers have been introduced to digital channels, and this is highlighted even more and optimization of the store portfolio that means that some of the mature markets we would probably see more closures while we also have newer markets where we will keep on growing. Again, I want to highlight the importance of the integration of the channels, of course, and the flexibility in that. But also we have flexibility with the landlords when it comes to physical stores so that we could re-negotiate roughly one-fourth of all the store contracts, a yearly.

Operator: Next question is from Andreas Lundberg. Thank you.

Andreas Lundberg: Yes, thank you. Good morning everyone. I am Andreas Lundberg with SEB. On your supply chain, more long-term from this pandemic, what do you think, what kind of changes of your geographic distribution do you foresee, if any, can complement the manufacturing or your own warehouses, et cetera?

Helena Helmersson: We've touched on that a little bit before. But again, when we see the sourcing markets, that is kind of continuously reworked to see how we can best suit with the customer offer on the business deal a mix of price, fashion, quality and sustainability. So again, I would more highlight to work in different ways. You see different tools in different ways that can make us more flexible and fast to act on customer demand. Then a major kind of shift in in sourcing markets.

Andreas Lundberg: So you still expect, let's say 80% of sourcing will take place in a shell. So three years from now?

Helena Helmersson: Well, again, it's a continuous work. But we don't see a major shift.

Andreas Lundberg: So what area for change do you think will be permanent for your business from this pandemic?

Helena Helmersson: And then I would mention first of all, the organization as such, where we have great learnings in how to be more efficient, fast, flexible. So that's more linked to our teams our ways of working and organizational structures. Secondly, it's obviously that this has accelerated digitalization. So, to be able to meet the customers where they choose to meet us, we are quite certain that it will be it really important for us to accelerate our own digital shift when it comes to confidence and also when it comes to certain developments. So as you know, we've done a lot of investments in the past that we have also reorganized that part internally to be able to kind of be more customers focused and do more with less. So that is a good. And again, the agenda on integrating the channels who supports linked to the digitalization. Another permanent part that we are foreseeing is around sustainability, where customers are more aware of the importance of both social and environmental questions. And as being a leader in the industry when it comes to this makes us feel that we simply want to collaborate even more and engage even more with our customers in these questions. We want to deliver even better ourselves to make sure that we have more resilient business. For example, you might have seen that we just launched the Higg index as a test, where we also on a garment can show sustainability scoring.

Andreas Lundberg: Thank you and actually a quick one. From how many of your stores can customers pick up online orders as of now?

Adam Karlsson: We don't have a specific number, but of course it's something we are looking into, but that's on my returns. That's another this is of course a very important opportunity to having the integrated model with the stores and online, whereas stores would serve as a logistical hub, so to speak. So you can pick up products and picking stores number thrown in the stores and so on, but we don't have a specific number of at the moment.

Operator: Thank you. Our next question is from the line of Caroline Weinbach. You ask your question.

Unidentified Analyst: Hello. Thanks for taking my question. I'm Caroline Weinbach from [Indiscernible] [Despegar] in Germany. Germany being your biggest markets and you mentioning closing a lot of stores -- or closing more stores in established markets. Can you be in any way to be more specific on your plans regarding store closures in Germany? And if that's not the case, then can you at least get an idea of how many stores you might be closing in established markets? Thank you.

Adam Karlsson: We, as Helena mentioned previously constantly revise our plans for the store network. And throughout the last couple of months, we've seen that this dynamic is just changing even quicker with a lot of active at rent renegotiation, changing the landscape and also the customer behavior shifting. So it's a little bit too early to say anything about the ‘21 and onwards. But of course, we need to ensure that we have a store network that is linked to how the customer wants to meet us. But it's too early to say anything about specific countries, but continuous revising the plan.

Operator: Okay. Next question is from Adam Cochrane from Citi. Thank you.

Adam Cochrane: A question for me on online profitability, given the significant increase in online sales performance over the period, and to a degree that the fixed cost nature of some of the online IT costs and warehousing and things. Have you seen that if you were to allocate the costs to online and stores, have you seen an improvement in online profitability over this period? And with that, as you sort of saw mentioned collected store with stores being shot, have you seen any change in behavior in terms of customers being delivered to home rather than to the store, and it doesn't have any difference in cost profile for H&M.

Adam Karlsson: In the same way that obviously the store profitability has been negatively affected by the volume decreasing. We can see the opposite in a positive way for the online channel that increased volumes over time will increase profitability. But, on general level, we see this as a totality when we look at our profitability development. But all in all of course volumes comes with scale, and with scale comes efficiency. So we've seen a positive trend when it comes to efficiency and profitability online channel throughout this period.

Adam Cochrane: And would you expect as far as stores reopen the increase in online profitability, assuming all of those online sales don't reverse? There is no real reason why that online profitability shouldn't stay at higher levels. And then on the store-based profitability, as you see volumes come back, and as you see rental renegotiations and things, the -- it should have a positive impact on the overall group profitability, everything else being equal?

Adam Karlsson: Yes. Agree.

Adam Cochrane: In terms of the home delivery versus collective store, are you seeing any different trends in online that the impact that -- how the profitability profile might evolve?

Adam Karlsson: Say again, please repeat the question, sorry.

Adam Cochrane: So, I'm assuming that when a customer picks an order up at store, it's slightly more profitable for you than if you deliver it to their home given the $80 million H&M club members probably get some degree of free delivery that you have to bear the cost of? Whereas if it goes into your store, it's generally a more profitable metric for a retailer, as the stores have been shopped and as they're reopening. Are you seeing the growth of or recovery in the number of orders being picked up from store as the stores reopen? Or is it a permanent change that people say you know what, getting into hive is better than going in store?

Adam Karlsson: We tried to be and this is also very market specific regarding how customers are used to and want to pick up their parcels. Because obviously last mile deliveries is quite a substantial part of the cost connected to our online business. So, we believe that if we can integrate as Helena said that the experiences we have a positive upside in having deliveries to stores and welcoming the customers to that experience as well. So we see the picking up parcels in stores something positive going forward.

Operator: Thank you. Our next question it's from the line of Chiara Battistini. Thank you.

Chiara Battistini: Hi, sorry, actually, my questions have already been answered. Maybe if I can add a follow-up question on your cost and fixed component of it, I'm sorry, I missed it. But could you actually clarify how much of your cost of goods sold is fixed so that we can think about this also in the upcoming quarter?

Nils Vinge: First of all, maybe I should clarify. They're not fixed as such, but of course in a quarter like this with a sudden drop of 50% of course, most costs are pretty fixed in the very short term. But I would -- I mean me we have a sizable organization connected to buying, sourcing, shipping IT all of that connected to the costs which is a great asset for us. Of course, that's a way for us to ensure that we can control the products and make sure that they are sustainably produced from an environmental and social perspective. And also from an efficiency perspective, so typically, this is a great asset. But of course, in a quarter like this it becomes -- it gives a pure mathematical good leverage on the on the gross margin. But we don't -- we prefer not to give exactly the size of it. But the indirect of course, you can back out that it's pretty sizable.

Chiara Battistini: Thank you. And we should expect, of course to a lower a lesser extent, we should still expect an address from this in Q3 then on top of the markdown cost?

Nils Vinge: Of course, but sequentially from Q2, of course, hopefully, we should see an improvement.

Chiara Battistini: Yes, perfect. Thank you very much.

Operator: Thank you. Our next question is from the line of Geoff Ruddell. You may ask your question now.

Geoff Ruddell: Just one very quick question please, and a quarter ago, you were flagging that you expect to make a loss in Q2. You haven't made any comments in the moment. So can we assume you're expecting to make a profit and Q3?

Adam Karlsson: We have sort of gone from one type of uncertainty when we looked into the second quarter was regarding how long should this lock time -- lockdown period last then. And now, we have some more answers on that side, but, but obviously we go into another type of uncertainty how will customers respond to having a government ease restrictions and so forth. And what I'm alluding to is that, the profitability estimates are so much depending on the top line and we don't get to do that within a precision right now, then so difficult to say, it's all about how now the trading will develop and we've indicated parts of June now. And of course we will hope that this will continue in a positive direction, but still with high uncertainty.

Geoffrey Ruddell: So you're not sure yet whether you'll make a profit in Q3?

Adam Karlsson: We tend not to give any estimates here. We focus on ensuring that colleagues and customers are safe, that we follow the regulations and then believe that we have a strong offer. So we do our best to ensure that the trading improves as we look into the summer.

Operator: Okay. Our next question is from Niklas Ekman. Thank you.

Niklas Ekman: Thanks. Just a quick follow-up, if I may. I'm curious about markdowns overall in the industry. Have you seen any dramatic changes in how your competitors have behaved? You seeing a lot of peers are struggling with markdowns, or does that seem to be balanced in the way that you have managed your inventory?

Helena Helmersson: It's hard to compare with others, but obviously there will be a lot of commercial activities and that we see already now, when it comes to coming to a place where we have a better mix when it comes to competition of stock, and that goes for us and obviously also for others. So we just focused on getting to a better mix through great and creative kind of commercial activities in all channels.

Operator: Thank you. And we have the next question is from Magnus Raman.

Magnus Raman: Just wanted to come back to the prospects ahead of the autumn winter season, you mentioned here being careful in the sourcing, making late decisions, and perhaps we could expect similar competitors that act in a similar fashion. At the same time we see now a rapid pickup in demand. You mentioned here that sales in we open source have been coming in above your expectations. So I'm just thinking, wouldn't this make for a picture of ahead of the autumn winter season, when it comes to balance supply demand, being much more favorable than one we see to the summer?

Adam Karlsson: The most dramatic effects that we took or the actions we took were related to summer and the more seasonal garment. So we believe that the purchase of the assessments can sort of ease out throughout the autumn. And we have had a very big focus on ensuring the best possible composition here with a lot of uncertainty when it comes to absolute levels. But we are confident that the autumn will bring improved composition week by week and month by month today on the long-term.

Magnus Raman: Right, and then on online and online delivery, we saw that one of your key competitors ran delivery from close door so that spring here and they've been reporting very strong online sales numbers. So I guess that has been a way to be able to meet very strong demand that that's been in the marketplace during these special circumstances. But I just wanted to ask what your plans are in terms of online deliveries? Do you see potential to deliver out to stores or do you see that efficiency and profitability is best delivering sort of dedicated from online fulfillment out this.

Helena Helmersson: While we are looking at kind of different ways to meet customer demand, and of course focus last on availability, and of course also delivery time, and the mix of speed and cost kind of mixed to that. So, I would say we have different tools in how to do that, but big investments have gone into the availability part of the role and will be accelerated also going forward.

Nils Vinge: And then regarding -- go on.

Adam Karlsson: Yes, go ahead, Nils.

Nils Vinge: Regarding your specific question about pick from stores; as I said previously, that's of course something that we look into and we are trying, but that should be seen in the whole picture where as Helena said, availability is key, but of course balance of cost and efficiency.

Magnus Raman: And just finally, maybe on the online deliveries, actually, I think I had it shorter in terms of those times. Thank you very much.

Adam Karlsson: Okay, thank you.

Operator: And there are no further questions now.

Helena Helmersson: Thank you all very much for participating in this conference call. And we just wish you all a very good day.

Operator: Thank you. That concludes our conference for today. You may all disconnect. Thank you all for participating.